While financial advisors often praise Roth IRAs for their tax-free distributions in retirement, AARP warns Americans that changing from (rolling over) a long-held traditional 401(k) to a Roth IRA warrants caution, because securing that future tax shelter requires swallowing a potentially substantial tax bill today.
“That doesn’t necessarily mean you should abandon a Roth conversion,” wrote Sandra Block of the AARP. “Just be sure you understand the pitfalls and can navigate around them.”
When an individual rolls over a 401(k) account into a traditional IRA, taxes are generally deferred until funds are eventually withdrawn, allowing the savings to continue compounding tax-free for the future.
“If you don’t roll over your payment, it will be taxable (other than qualified Roth distributions and any amounts already taxed) and you may also be subject to additional tax,” explained the Internal Revenue Service (IRS).
“If you’re getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA,” added the IRS.
Because Roth IRA contributions are funded with money that has already been taxed, qualified withdrawals are completely exempt from taxes and penalties once an account holder reaches age 59½ and satisfies the five-year holding rule.
“Unlike traditional IRAs, Roths don’t require you to start taking required minimum distributions when you turn 73, so you can allow your account to continue to grow uninhibited by taxes,” AARP wrote.
“And if you leave the asset to your children, they can take tax-free withdrawals as long as they deplete the account in 10 years.”
Ashley Akin, CPA at RKO Tax told me about a key mistake people make related to traditional and Roth retirement accounts.
“The most common mistake when dealing with a retirement account is to consider solely the maximum contribution, while ignoring the tax aspect completely,” Akin said. “Traditional and Roth accounts have different implications when it comes to taxation; therefore, depending on personal income and other factors, one should consider which of the two is more suitable.”
AARP: Rolling over 401(k)s to IRAs involves drawbacks
When one pays taxes on the amount of pretax contributions they convert, it is best to pay those taxes with funds outside of their 401(k), according to AARP.
“If you withdraw money from your plan to pay the tax bill, you’ll shrink the account, reducing the amount available for tax-free growth,” wrote AARP.
Even if covering the tax bill is manageable, converting a substantial balance can bump a person into an upper tax bracket, driving up the tax rate applied to the rest of their income.
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Additionally, executing a Roth conversion raises an individual’s adjusted gross income (AGI), which can trigger higher Medicare Part B premiums through income-related surcharges.
“In 2026, the standard monthly Medicare Part B premium is $202.90, but if your AGI exceeds certain thresholds, you could end up paying much more than that,” wrote AARP. “People with modified adjusted gross incomes over $109,000 for an individual taxpayer or $218,000 for a married couple filing jointly will pay anywhere from $284.10 to $689.90 a month.”
“In most cases, the high-income surcharge is based on your tax return from two years ago,” AARP continued. “For example, the 2026 surcharge will be based on your AGI for 2024, so the notice that you’ll have to pay a higher premium may come as an unpleasant surprise.”
Vanguard explains 401(k)-to-IRA rollover benefits
It is also important to remember that rolling over a 401(k) into an IRA offers key advantages that grant people greater authority over their overall financial strategy, according to investment management firm Vanguard.
“Rolling over your 401(k) to an IRA often opens access to a broader range of investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs), supporting better diversification and growth potential,” Vanguard wrote.
“If you have several 401(k) accounts or IRAs, consolidating your retirement savings into one account makes it easier to monitor and manage your long-term goals,” Vanguard added.
“A rollover helps you avoid taxes, penalties, and unwanted withdrawals from your retirement funds when you leave a job.”
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AARP explains Roth IRA conversion Social Security implications
A Roth conversion’s boost to adjusted gross income also elevates the risk that a retiree will owe taxes on a larger portion of their Social Security benefits.
To calculate whether an individual’s Social Security benefits are subject to taxation, I always emphasize the fact that the IRS evaluates “provisional income,” which combines their adjusted gross income, non-taxable interest, and 50% of their annual Social Security payments.
If that figure is between $25,000 and $34,000 for an individual or between $32,000 and $44,000 for a couple, up to 50 percent of Social Security is taxable,” wrote AARP.
“If your provisional income exceeds $34,000 (single) or $44,000 (couple), up to 85 percent of your benefits may be taxable,” AARP added. “401(k) withdrawals you make as part of a Roth conversion count toward those thresholds.”
This article is for informational purposes only and should not be construed as individualized tax or investment advice.
Related: Dave Ramsey warns 401(k), IRA savers on IRS 5-year rule
