How Can You Convert a 401k to a Roth IRA? Rules, Limits, and Tax Implications for Expats

In this guide, we’ll explain if you can convert a 401k to a Roth IRA and which steps the process includes. We’ll also outline the tax implications and rules associated with the conversion, important factors to consider before the transfer, and alternative options that may suit you better, depending on your circumstances.

Can You Convert a 401(k) to a Roth IRA?

The answer is—yes, you can transfer employer-sponsored retirement savings you accumulated in a 401(k) to a Roth IRA you set up independently. You can convert the entirety of your fund or a portion of it.

The process of conversion consists of moving funds from a traditional 401(k)—an account that holds pre-tax contributions—to a Roth IRA—an account that holds post-tax contributions. The converted amount is subject to income tax in the year of the conversion.

While a rollover is any type of transfer between qualified retirement accounts, a conversion specifically implies a transfer from an account funded with pre-tax dollars into one funded with after-tax dollars.

Should You Convert a 401(k) to a Roth IRA?

Converting a 401(k) to a Roth IRA allows you to have more control over your retirement savings. Roth IRAs also provide benefits like:

• Tax-free withdrawals of contributions at any age.
• Tax-free distributions of investment earnings after turning 59 ½ and maintaining your IRA for five years.
• No minimum amount you must withdraw every year.
• A wide selection of investment options.

For these reasons, a conversion may be suitable for US expats who left a job that provided 401(k) contributions and don’t plan on obtaining employment within the US in the future.

Additionally, as employer-sponsored plans like 401(k) don’t allow personal contributions, they’re not suitable for expats who no longer work in the US.

Roth IRAs, on the other hand, allow you to maintain the growth of your pension pot while living abroad—as long as you have US-sourced or foreign-earned income that is taxable in the US.

If you use the foreign earned income exclusion (FEIE) for the income you earn abroad, and you don’t earn any income in the US, you can’t contribute to an IRA. If you exclude only a portion of foreign-earned income, you can make IRA payments.

Note that if you convert a 401(k) to a Roth IRA, you won’t be able to roll the funds to another US employer-sponsored plan in the future. You must also have sufficient means to cover the tax your converted funds will be subject to, which is your marginal income tax rate and ranges from 10% to 37%.

Still, the conversion may be worth it if you:

• Want to leave tax-free funds to your beneficiaries: Roth IRAs allow your beneficiaries to inherit the funds tax-free.
• Expect to be in the same or higher tax bracket in the future: A Roth conversion is taxed at the rate that applies at the time of the rollover.
• Plan to retire in a state that has an income tax: Some states tax only traditional IRA withdrawals.

Factors To Consider Before Converting a 401(k) to a Roth IRA

Before you decide whether you should convert a 401(k) to a Roth IRA, evaluate the following factors:

1. Eligibility and contributions
2. Tax treatment and withdrawals
3. Investment options

Eligibility and Contributions

If your employer offers a 401(k), and you meet the enrollment criteria, you’re eligible for contributions. Your employer can also offer to match your contributions fully or partially up to a limit.

If you open a Roth IRA, you can contribute to it as long as you earn an income, regardless of your age. Unlike a 401(k), you can open a Roth IRA on your own by choosing a provider and submitting the necessary documentation.

A 401(k) and a Roth IRA have different contribution limits. The contribution rules for a Roth IRA in 2025 are:

1. The total annual contribution threshold for all your IRAs combined is up to $7,000 or $8,000 if you’re 50 or older.
2. To make a full annual contribution, your modified adjusted gross income (MAGI) must be lower than $150,000 for single filers or $236,000 for joint filers.

If you opt for a 401(k) to a Roth IRA conversion, the transferred amount won’t count toward the Roth IRA annual contribution limits because the converted funds aren’t considered a contribution.

A 401(k) has higher contribution limits—it allows yearly personal contributions of up to $23,500 or $31,000 if you’re 50 or older, while employer contributions are limited to $46,500. Those older than 50 can also make additional contributions with the following thresholds:

Your total yearly 401(k) contributions can’t exceed $70,000 or $77,500 for those who are 50–60 years old. Those who are 60–63 can contribute up to $81,250.

Tax Treatment and Withdrawals

A major difference between a Roth IRA and a traditional 401(k) is their tax treatment. While withdrawals from a Roth IRA are tax-free, withdrawing funds from a 401(k) is subject to income tax.

You can start making withdrawals from a 401(k) once you reach the retirement age of 59½ unless you qualify for exceptions. Otherwise, early withdrawals are subject to income tax and a 10% penalty. A 401(k) also requires you to take the required minimum distributions (RMD) after you turn 73.

A Roth IRA allows you to make tax-free and penalty-free contribution withdrawals. There are no RDMs with Roth IRAs, but investment earnings can be distributed tax-free only after you turn 59½ and have had an account for five years (unless an exception applies).

Investment Options

While both accounts allow you to invest retirement funds, a 401(k) limits your investment options to the ones your employer has chosen. The number of investments also depends on your employer.

With Roth IRAs, you have more investment flexibility, which means you can choose assets that fit your risk tolerance and retirement goals.

To choose a retirement plan with investment opportunities that align with your future plans, consider speaking to a financial adviser like those available at Titan Wealth International. They can ensure a global diversification of your cross-border investments and recommend the most tax-efficient rollover option.

How To Convert a 401(k) to a Roth IRA

You can only convert your 401(k) funds to a Roth IRA if they’re vested; if they fully belong to you. The contributions you make to a 401(k) are vested immediately, but the employer’s contributions are subject to a vesting period of 3–5 years. If you leave the company before the vesting period is over, you may lose some or all of the employer contributions.

Converting an entire 401(k) to a Roth IRA can result in a high tax charge, so you may consider converting smaller portions to distribute the taxes you’re due across multiple years.

There are two available conversion methods:

1. Direct conversion
2. Indirect rollover

Direct Conversion

Converting a 401(k) directly means transferring funds from one account to the other without an intermediary account. Your 401(k) administrator makes a direct conversion to a Roth IRA, and you pay tax on the transferred funds when you file a tax return.

If your traditional 401(k) doesn’t allow direct conversions to a Roth IRA, you may do an indirect rollover to a traditional IRA, which has the same tax treatment as a traditional 401(k), and then a conversion to a Roth IRA.

Indirect Rollover

With an indirect rollover, you receive the 401(k) funds, and you must deposit them into a traditional IRA within 60 days. If you miss the deadline, the funds you received are treated as an early withdrawal.

An indirect rollover also includes a mandatory withholding tax of 20% on the converted amount. The IRS returns the 20% once you file an annual tax return, but only if you deposit the full amount, including the withheld sum.

If your rollover amount is $20,000, you’ll get a $16,000 cheque due to the 20% withheld. This means that you must add $4,000 from your own funds. Transferring only $16,000 would result in the remaining $4,000 being treated as an early withdrawal.

Both direct and indirect transfers to a Roth IRA must be reported to the IRS through Form 1099-R and Form 1040. For indirect rollovers, you must only report rollover funds if you failed to transfer them within 60 days.

Consulting a financial adviser when moving funds between accounts with different tax treatments can provide the necessary guidance and ensure tax efficiency and proper filing.

Can You Convert a 401(k) to a Roth IRA Without Taxes?

You can’t convert a traditional 401(k) to a Roth IRA tax-free because their contributions are taxed differently. A transfer of funds between retirement plans is only tax-free if they’re both funded with either pre-tax or post-tax dollars.

You can, however, convert a Roth 401(k) to a Roth IRA without taxation. Note that your employer still has the option to contribute to your account with pre-tax funds. In this case, the matching contributions would go in a separate traditional 401(k) plan.

What Is the Best Time To Convert a 401(k) to a Roth IRA?

The timing of the transfer will impact how much tax you’ll owe and how long your retirement funds will grow tax-free. This is why you shouldn’t do the conversion in a year when your taxable income is high—for instance, when you receive a large investment payout or a big bonus at work. Converting 401(k) funds would add more income to your tax bill and possibly push you into a higher tax bracket.

Depending on your circumstances, you should consider doing the conversion in the following situations:

1. During a year with lower taxable income
2. Earlier in a year
3. Later in a year

During a Year With Lower Taxable Income

The ideal time to convert to a Roth IRA is when your taxable income is low as this will minimise tax liability. This is typically the year after you retire.

You should also convert the funds before you start receiving Social Security to further reduce taxation. Social Security distributions may be subject to income tax, which can increase your taxable income and rate. However, there’s no specific age at which you must take these benefits.

While it’s advisable to do a rollover after you retire, delaying a transfer for too long may also prevent you from moving funds to a Roth IRA. This is because you must take the required minimum distributions (RMDs) from a 401(k) as cash after age 73. However, you can still roll over distributions exceeding the RMD.

If you’re living abroad, converting your 401(k) to a Roth IRA may trigger tax in your country of residence. Some jurisdictions—such as Spain or Germany—do not recognise Roth IRAs as tax-exempt and may treat the conversion as taxable income. Before converting, check if your local tax rules align with US treatment to avoid double taxation.

Earlier in a Year

Another strategy when converting a 401(k) to a Roth IRA is to do the rollover earlier in the year, allowing for an extended period to pay the taxes you owe since they won’t be due until next year. For instance, if you convert funds in February 2025, you’ll have to pay tax on them on 15 April 2026.

Later in a Year

If your plan is to withdraw earnings from a Roth IRA as early as possible, a conversion later in a year can be optimal due to the five-year Roth IRA rule. The five-year waiting period starts on 1 January of the year you convert funds, regardless of when the rollover is finalised.

Should You Consider Alternatives to Converting a 401(k) to a Roth IRA?

Moving money from a 401(k) to a Roth IRA may not be suitable under the following circumstances:

• You’re unsure about your future tax situation.
• You don’t have sufficient funds to cover the taxes associated with the conversion.
• You expect to be pushed into a higher tax bracket because of the amount you’re converting.
• You expect to be in a lower tax bracket in retirement or plan to relocate to a state with no income tax.

If any of these factors apply, you may consider rolling over your 401(k) to a traditional IRA. However, these accounts include several limitations when compared to Roth IRAs: