3663 / What should an individual consider when choosing whether to convert retirement funds to a Roth IRA or to a Roth 401(k)?

Editor’s Note: The 2017 tax reform legislation eliminated the ability of taxpayers to recharacterize Roth IRA conversions for tax years beginning after 2017. Taxpayers were entitled to recharacterize 2017 conversions through October 15, 2018.

Prior to 2018, one important characteristic of a Roth IRA conversion was the taxpayer’s ability to undo the transaction through a recharacterization transaction that moves the funds back into the traditional account, eliminating the tax liability that the initial conversion created.¹ This option was unavailable if the individual chooses to convert to a Roth 401(k).

If the taxpayer’s account performed poorly in the months after the conversion took place, or if the taxpayer otherwise found that he or she was unable to pay the tax bill that results from a Roth conversion, the taxpayer had until October 15 of the year following the conversion to recharacterize the funds. The tax reform changes to the recharacterization rules placed Roth IRAs on par with Roth 401(k)s, where once the conversion takes place, the taxpayer is required to pay the associated taxes regardless of any events that occur post-conversion.

A taxpayer who converts to a Roth IRA is able to escape the IRS’s required minimum distribution (RMD) rules so that the funds in the account are permitted to grow tax-free over a longer period of time. Taxpayers who use Roth 401(k)s are often required to comply with the RMD rules when they turn 73 (72 for 2020-2022, 70½ prior to 2020), possibly reducing the account’s growth potential if the taxpayer does not need to access the funds.² A taxpayer who plans to use a Roth account as a wealth transfer vehicle may also prefer the Roth IRA because the entire account value can be passed to heirs upon his or her death.

Taxpayers who anticipate that they will need access to the funds before retirement should also consider how the application of the “five-year rule” could impact the tax-free availability of these funds. To access the funds, a qualifying event must have occurred and the Roth must be at least five years old before a qualified distribution is permitted. However, if the taxpayer has multiple Roth IRAs, only one of the taxpayer’s IRAs must be five years old before a tax-free withdrawal is permitted.³ With a Roth 401(k), the particular account must be five years old or a penalty tax will apply.⁴

Importantly, for high-income taxpayers, post-conversion contributions may be limited or blocked entirely because of the income limits that apply to Roth IRA contributions (but not to Roth 401(k) contributions).

In 2025, the ability to make contributions to a Roth IRA begins to phase out for married taxpayers with income over $236,000 ($150,000 for single filers). In 2025, Roth IRA contributions are completely blocked for married taxpayers who earn over $246,000 (married) or $165,000 (single)

In 2024, the ability to make contributions to a Roth IRA begins to phase out for married taxpayers with income over $230,000 ($146,000 for single filers). In 2024, Roth IRA contributions are completely blocked for married taxpayers who earn over $240,000 (married) or $161,000 (single).⁵

Stronger creditor protection rules also apply to Roth 401(k) accounts. While Roth IRAs are protected under state law, the rules that apply in some states offer much less in the way of creditor protection than can be found in others. Roth 401(k)s are always protected by ERISA-mandated federal creditor protection rules regardless of where the taxpayer lives.