Convert 401(k) to Roth: All at Once or Over 4 Years?

David and Carol Hsu, both 61, file jointly and live in Austin, Texas. David just retired from a 32-year engineering career with a $1.0M traditional 401(k). Their only other income for the next four years — before Social Security and RMDs — is about $30,000 from a small pension and interest. They want it all in Roth before David turns 73 and required distributions begin. The question on the table: convert the whole $1M now, or carve it up?

Convert it all in 2026 and their taxable income jumps to roughly $1,030,000. After the $31,500 standard deduction, the conversion runs the full bracket ladder — 10%, 12%, 22%, 24%, 32%, 35% — and the top slice clears into 37% (MFJ income over $751,600). The federal bill lands near $300,000. Spread the same $1M across four years to the top of the 24% bracket, and their marginal rate never exceeds 24%, the total federal tax drops by roughly $90,000–$110,000, and they sidestep the top IRMAA tier entirely. For the Hsus, and almost everyone in their position, spreading wins decisively.

The lump-sum bill: why one year is so expensive

The US tax system is progressive, so cramming a decade of income into one year is the single most expensive way to do anything. A Roth conversion is fully taxable as ordinary income in the year you convert — there is no special rate, no capital-gains treatment, no averaging.

Here is what the Hsus’ $1M one-shot conversion does to their 2026 return, using the verified 2026 MFJ brackets (IRS Rev. Proc. 2025-32). Assume $30,000 of other income, the $31,500 standard deduction, and taxable income of about $998,500 after the conversion:

Roughly $293,500 in federal income tax — an effective rate near 29% on the conversion, even though their “normal” income would have sat in the 12% bracket. More than $213,000 of that bill comes from the dollars taxed at 32%, 35%, and 37%. Those are the brackets a spread strategy never has to touch.

The two cliffs that ride along: IRMAA and NIIT

The federal income tax is not the whole cost. Two MAGI-driven cliffs attach to a giant one-year conversion:

• IRMAA (Medicare surcharge). The Income-Related Monthly Adjustment Amount uses your MAGI from two years prior. A 2026 conversion that pushes MFJ MAGI over $750K lands the Hsus in the top IRMAA tier for 2028: a Part B premium of $628.90/month each (vs. the $185 base) plus a Part D surcharge of $85.80/month each. For a couple, that is roughly $12,700 of extra Medicare cost in that one year, on top of the income tax.
• NIIT (Net Investment Income Tax). The conversion amount itself is not “net investment income,” so it is not directly hit by the 3.8% NIIT (IRC §1411). But the conversion balloons your MAGI far past the $250K MFJ threshold, so any interest, dividends, or capital gains you do have that year get fully exposed to the 3.8% surtax. The Hsus’ modest interest income now carries an extra 3.8%.

The spread: convert to a bracket ceiling each year

The alternative is bracket-fill conversion. You pick a marginal-rate ceiling — commonly the top of the 22% or 24% bracket — and each year you convert only enough to reach it. There is no annual limit on Roth conversions, so the only constraint is the bracket you choose to stop at.

For the Hsus, with $30,000 of other income and a $31,500 deduction, the top of the 24% bracket ($394,600 taxable, MFJ 2026) leaves room to convert roughly $396,000 in a single year at a 24%-or-lower marginal rate. To stay safely clear of the IRMAA tier escalation and keep the effective rate down, they choose a more conservative ceiling and convert about $250,000 per year over four years:

The 5-year spread saves roughly $115,000 in federal income tax versus the lump sum — before counting the ~$12,700 IRMAA hit and the NIIT drag the lump triggers. That saved tax stays invested. The only cost of spreading is time: the dollars not yet converted keep growing pre-tax, and that growth gets taxed when you eventually convert it. For most people the bracket arbitrage dwarfs that timing cost.

The mechanics: rollover first, then convert in tranches

The most flexible setup is to move the 401(k) out of the employer plan and into a traditional IRA you control, then convert from the IRA in slices.

1. Direct rollover to a traditional IRA. Request a trustee-to-trustee transfer (a “direct rollover”) from the 401(k) to a traditional IRA. This avoids the mandatory 20% withholding that applies if the plan cuts you a check. Do not take a 60-day indirect rollover for a balance this size — the withholding and the 60-day clock are needless risk.
2. Convert in tranches. Each year, convert your chosen bracket-fill amount from the traditional IRA to a Roth IRA. Pay the resulting tax from outside funds (a taxable brokerage or savings account), not from the converted dollars — using IRA money to pay the tax shrinks the Roth and, if you are under 59½, can trigger a 10% penalty on the withheld portion.
3. Or convert in-plan, if allowed. Many 401(k) plans now permit in-plan Roth conversions to a designated Roth account. If yours does and you like the plan’s investments, you can convert tranches inside the 401(k) without rolling out. Check whether the plan limits conversion frequency.

One deadline that trips people up: the conversion deadline is December 31 of the tax year, not April 15. Unlike an IRA contribution, you cannot do a prior-year Roth conversion in the spring. Plan each year’s tranche before year-end, and remember that recharacterization was eliminated by the 2017 tax law — once you convert, you cannot undo it.

What most people miss: the pro-rata trap and the backdoor Roth

If you also fund a backdoor Roth — the workaround for being over the Roth income phase-out ($236K–$246K MFJ for 2026) — a large pre-tax IRA balance silently sabotages it. The pro-rata rule (IRC §408(d)(2)) treats every traditional, SEP, and SIMPLE IRA you own as a single pool when calculating the taxable share of any conversion.

Say you roll the $1M 401(k) into a traditional IRA and, the same year, also contribute $7,500 nondeductible and try to convert just that $7,500 backdoor. The IRS does not let you cherry-pick the after-tax dollars. With $1,000,000 pre-tax and $7,500 after-tax in the pool ($1,007,500 total), only about 0.74% of any conversion counts as the tax-free after-tax slice. Your “clean” $7,500 backdoor conversion is roughly 99.3% taxable. The workaround fails.

Two ways to clear the pool so backdoor Roths work clean:

• Leave the big balance in the 401(k) (or roll an existing IRA back into a 401(k) if the plan accepts roll-ins). 401(k) balances are not counted in the IRA pro-rata pool. Do your in-plan tranche conversions there, and keep the backdoor Roth running through a near-empty IRA.
• Finish converting the whole pre-tax IRA to Roth first (via the spread), then start backdoor Roths once the traditional IRA balance is zero on December 31.

The pro-rata measurement is taken on December 31, so timing the full conversion to land before year-end is what clears the pool for a clean backdoor the following year.

The one case where all-at-once wins

The recommendation flips in a genuine one-year low-income window. The math that makes spreading better is bracket arbitrage — you spread because the lump pushes you into 32%/35%/37%. But if you have a year with almost no other income, a large single conversion can sit inside the low brackets all by itself.

Three classic windows:

• Layoff gap year. You were laid off in late 2025, have a severance runway, and 2026 ordinary income is near zero. A $250K conversion fills the 10%–24% brackets and stops — the same brackets the spread strategy targets, but compressed into the one year you happen to have headroom.
• Sabbatical or early-retirement gap. The years between leaving work and the start of Social Security and RMDs (your 60s) are frequently the lowest-income years of your life. That is the natural conversion window even when spreading — and a slightly larger single-year conversion can make sense if you only have one such year.
• Business-sale gap year. If you sold a business and the proceeds were capital gains (taxed at preferential LTCG rates), your ordinary-income brackets may have room a conversion can fill before the next year’s income returns to normal.

Even here, “all at once” usually means “all the room this low-income year offers,” not literally the entire $1M. Pushing past the 24% ceiling into 32% rarely pays, low year or not.

Don’t forget state tax and the RMD clock

The Hsus live in Texas, one of the nine states with no personal income tax, so their conversion costs $0 in state tax — a meaningful tailwind for converting while you are a resident of a no-income-tax state. If you live in California (13.3% top) or New York (10.9%), the conversion is also fully taxable to the state at ordinary rates, which raises the bar for converting at all and makes spreading even more important.

The clock matters too. Once required minimum distributions begin — age 73 for those born 1951–1959, age 75 for those born 1960 or later (SECURE 2.0 §107) — you must take the RMD before you can convert, and the RMD itself cannot be converted. Every year before your RMD age is a year you can convert on your own terms. Waiting until RMDs start means a forced taxable distribution stacks on top of any conversion, eating your bracket headroom.

Key takeaways

• Converting a $1M pre-tax balance all at once drives most of it into the 32%–37% brackets — roughly $293,500 in federal tax (MFJ 2026) — plus a top-tier IRMAA surcharge two years later and NIIT exposure on your other investment income.
• Spreading the same $1M over 4–5 years to the top of the 22%–24% bracket keeps your marginal rate at 24% or below and saves roughly $100,000–$115,000 in federal income tax, before counting the avoided IRMAA and NIIT.
• There is no annual limit on Roth conversions — the only constraint is the bracket ceiling you choose to stop at each year. The conversion deadline is December 31, and conversions cannot be undone (recharacterization was repealed).
• Mechanics: do a direct (trustee-to-trustee) rollover from the 401(k) to a traditional IRA to avoid 20% withholding, then convert in tranches, paying the tax from outside funds. Or convert in-plan if your 401(k) allows it.
• A large pre-tax IRA poisons a backdoor Roth via the pro-rata rule (IRC §408(d)(2)) — keep the big balance in a 401(k) or finish converting it before starting backdoor Roths.
• Do the lump only in a real one-year low-income window — layoff gap, sabbatical, or business-sale year — where a single conversion still lands inside the 22%–24% brackets.

The decision lever is your bracket ceiling, not the calendar. Pick the marginal rate you are willing to pay (commonly the top of 24%), convert exactly up to it every year between now and your RMD start age, and let that ceiling — not a fixed number of years — dictate how long the spread runs.