January 2026

Understanding - Converting/Rolling Over Taxable Funds in a 401(k) or
Other Plan Such as an ESOP into a Roth IRA

Some participants of a 401(k) plan or other qualified plan will wish to move their taxable funds (or a portion) in a 401(k) plan or other qualified plan into a Roth IRA. A person may have various reasons why she or he wants to do this. The person wants any income earned in the future to be tax free when withdrawn. The person may be ineligible to make an annual Roth IRA contribution because their MAGI is too high.

A Roth IRA conversion occurs when funds in a traditional IRA, SEP-IRA or SIMPLE IRA are distributed and moved in to a Roth IRA. This Roth IRA conversion is a taxable event. The Roth IRA custodian/trustee completes box Box 3 and reports the amount converted. The traditional IRA custodian/trustee completes the Form 1099-R to report the distribution. The IRS custodian will prepare a Form 1099-R indicating that the distribution is taxable. The Form 1099-R does not expressly indicate the person made a Roth IRA conversion. The individual will need to include the distribution amount in their income. The Individual completes Part II of Form 8606 to indicate he or she made a conversion.

A quasi-Roth conversion occurs when taxable funds in a 401(k) plan or other qualified plan are distributed or deemed distributed and moved into a Roth IRA. The plan participant instructs that he or she wants a direct rollover into their Roth IRA. This is a taxable event. The individual will need to include the distribution amount in their income.

The plan administrator completes the Form 1099-R in a special fashion. The plan administrator completes box 1 and 2a with the amount being distributed and converted Box 2 is normally completed with a 0.00 when the funds are being directly rolled over into a Traditional IRA. In both cases box 7 is completed with a reason code G (direct rollover).

The Roth IRA custodian completes the Form 5498 for the Roth IRA and shows the contribution as a rollover. Normally a rollover is done so the deemed distribution is not taxable. In this case, the individual must complete his or her tax form (lines 4a and b) and indicate that the amount is included income even it was rolled over because it went into a Roth IRA ( a quasi-conversion). The IRS then can determine the individual made a quasi-conversion. The IRS does not have the individual complete Part II of the Form 8606.

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