What happens to taxes during a rollover from a 401(k) to a Roth 401(k)?

When rolling over funds from a traditional 401(k) to a Roth 401(k), the key point to understand is that the funds are transitioning from a tax-deferred account to a tax-advantaged account where withdrawals in retirement are tax-free. The IRS requires that individuals pay taxes on the amount converted to the Roth 401(k) at the time of the rollover. This is because contributions to a traditional 401(k) are made with pre-tax dollars, while contributions to a Roth 401(k) are made with after-tax dollars.

Since you are effectively taking pre-tax money that has not yet been taxed and moving it to an after-tax account, taxes must be paid on that amount during the rollover process. This means that the individual needs to report the amount converted on their tax return for the year in which the rollover occurs. This tax liability can impact the taxpayer’s income and overall tax situation for that year.

Funds do grow tax-free in the Roth 401(k) once the rollover is complete, but this is separate from the tax implications during the rollover process itself. This is why the correct understanding is that taxes must be paid on the funds during the rollover.