A Roth conversion, which happens when you roll over money from a traditional 401(k) into a Roth IRA, comes with good news and bad news.
The good news is that from now on, that money will grow inside your Roth IRA tax-free and you won’t pay any taxes on that money when you’re ready to withdraw from the account in retirement.
But when you transfer that pretax money from your traditional 401(k) into a Roth IRA, which is funded with after-tax dollars, you’ll have to pay taxes on that money now. That’s the bad news.
A Roth conversion might feel like ripping off a Band-Aid now, but it’ll feel great once you retire. You might want to seriously consider a Roth conversion only if you can afford to pay the tax bill with cash you have saved up. But be careful, because a conversion could add thousands of dollars to your tax bill. If that’s just too much for you to stomach, then stick with a traditional IRA rollover.