What's the tax rate when converting traditional 401k funds to Roth IRA?

The conversion from a traditional 401k to a Roth IRA is indeed taxed as ordinary income in the year you make the conversion. Using your example, if you earn $125k and convert another $125k, that entire converted amount gets added to your taxable income for the year, pushing part of it into the higher tax bracket. So in your scenario, the first part of your conversion would be taxed at 22%, and once your total income exceeds $125k, the remaining amount would be taxed at 32%. This is called "tax bracket creep" and it's why many people choose to spread out large conversions over several years. Regarding the process: You don't have to convert your entire 401k at once - you can do partial conversions. The typical process involves rolling your 401k funds to a traditional IRA first, then converting the amount you want from the traditional IRA to a Roth IRA. Some plans may allow direct rollovers to Roth IRAs, but the two-step process is most common.

After struggling with this exact same question last year, I found an amazing online tool that saved me thousands in taxes. I was trying to figure out how to minimize the tax hit when converting my old employer 401k to Roth, and the calculations were driving me crazy! I discovered https://taxr.ai which analyzes your specific tax situation and shows you exactly how much tax you'll pay on conversions. It let me model different scenarios - like converting $20k per year over 5 years versus doing it all at once. The difference was shocking! For my situation, spreading it out saved me over $7k in taxes. The tool also explained that I didn't need to convert my entire 401k at once (which was my biggest concern). It even generated a personalized strategy that optimized my conversion schedule based on my projected income for the next few years.

Just wanted to update everyone since I posted that question about taxr.ai above. I decided to try it out before my meeting with my financial advisor, and I'm really glad I did! The tool showed me that converting $40k/year of my 401k over 3 years would keep me in the 22% bracket the whole time, rather than pushing me into the 32% bracket with a lump sum conversion. When I brought the analysis to my advisor, he was actually impressed and confirmed the numbers were spot on. The most helpful part was seeing how my specific deductions and other income sources would interact with the conversion amounts. It ended up saving me about $8,900 in taxes compared to the all-at-once approach I was originally considering. Definitely recommend checking it out if you're planning any kind of retirement account conversion!

If you're trying to contact the IRS to get clarification on 401k to Roth conversion rules, good luck! I spent THREE WEEKS trying to get someone on the phone last tax season. Called dozens of times, always "high call volume" and disconnected. Finally found this service called https://claimyr.com that got me through to an actual IRS agent in under 20 minutes. They have this system that navigates the IRS phone tree and holds your place in line, then calls you when an agent is ready. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was able to confirm directly with the IRS that 1) partial 401k conversions are allowed, 2) the tax is calculated as ordinary income based on your total annual income including the conversion amount, and 3) there's no flat 22% rate - that's completely wrong info you found online.

OK I need to apologize to profile 8 above. After my snarky comment, I was desperate enough to try Claimyr because I've been trying to get through to the IRS for MONTHS about my 401k conversion issue. IT ACTUALLY WORKED. I got connected to an IRS rep in about 35 minutes. The agent confirmed that my 401k to Roth conversion would be taxed as ordinary income and that I could do a partial conversion (just the amount I want to convert). She also explained that I needed to roll my 401k to a traditional IRA first, then convert from traditional IRA to Roth IRA (unless my 401k plan allows direct Roth conversions, which mine doesn't). Sorry for being so skeptical. When you've been hung up on by the IRS 20+ times, you get a bit cynical!

One thing nobody's mentioned yet is that if you have both pre-tax and after-tax contributions in your traditional 401k, the pro-rata rule comes into play for the conversion. This means you can't just cherry-pick the after-tax contributions to convert tax-free. I learned this the hard way last year. I had about 30% after-tax contributions in my 401k and thought I could just convert those to Roth without taxes. Nope! Had to pay taxes on 70% of the conversion amount because of the pro-rata rule.

Has anyone used a 401k loan to pay the taxes on a Roth conversion? My financial guy suggested I take a loan from my 401k to cover the tax bill when converting part of it to Roth. Seems weird to use retirement funds to pay taxes on retirement funds??

I went through this exact same situation last year and want to share what I learned from my CPA. The key thing to understand is that Roth conversions are treated as ordinary income and stack on top of your existing income for tax purposes. In your example with $125k salary and $125k conversion, you're absolutely right that you'd get pushed into the higher bracket. The conversion amount would be taxed at 32% since your salary already maxed out the 22% bracket. One strategy that worked well for me was doing smaller conversions during years when I had lower income - like when I took unpaid leave or had higher deductions. I also timed some conversions in January of years when I knew my bonus wouldn't hit until the following year. Regarding the process: you can definitely do partial conversions, not the whole account. Most plans require you to roll to a traditional IRA first, then convert that to Roth. Some newer plans allow direct rollovers but the two-step process is more common. The "flat 22% rate" you read about is completely wrong - that's not how tax conversions work at all. Always calculated as ordinary income based on your total annual income including the conversion.

Great question about timing conversions during sabbaticals! I actually did something similar when I took 6 months off between jobs. There are no minimum distribution requirements for Roth conversions until you reach age 73 (for traditional accounts), so you have complete control over how much and when to convert. The only real limitation is the annual contribution limits, but those don't apply to conversions - only to new contributions. You can convert as much or as little as you want in any given year, which makes sabbaticals perfect for larger conversions since your income will be lower. One thing to keep in mind: make sure you have enough cash set aside to pay the taxes on the conversion since you won't have regular income during your sabbatical. I learned this lesson when I did a $60k conversion during my break and had to scramble to cover the $13k tax bill! The timing flexibility is actually one of the best parts of Roth conversion strategies - you can really optimize based on your specific life circumstances.