401k to Roth Rollover Taxes by State: California vs. the No-Tax Three

By Charlie. FIRE'd early 2025.

A Form-Filing Exercise Priced Like Brain Surgery

Moving money from a 401k into a Roth IRA is paperwork. You fill out a distribution form, you check the box marked "direct rollover," and you report the taxable amount on your return. That is the whole procedure. A motivated adult can do it in an afternoon, and the IRS publishes every rule for free.

The advisor industry has built a toll booth in front of that afternoon. A 1 percent AUM advisor managing a $1 million portfolio collects $10,000 a year, every year, and executing your Roth conversion is one of the things that fee allegedly buys. Ten grand annually for a form. Some shops will also sell you a standalone "Roth conversion analysis," a bound report that runs $2,500 to $4,000, modeling math you can run in a free spreadsheet in twenty minutes.

They are not managing the conversion. They are renting the instructions back to you.

So here are the instructions. This page used to be four separate state pages on this site, one each for California, Florida, Texas, and Washington, all saying mostly the same thing because the federal rules do not care where you live. I killed the four and consolidated the real substance here: the mechanics once, the tax math once, and then the state layer, which for three of the four states is a very short conversation.

Rollover, Conversion, and the Words That Cost Money

The vocabulary matters because the tax outcomes diverge wildly. A "rollover" is moving retirement money between accounts. A 401k to a traditional IRA is a rollover with no tax due, because pre-tax money stayed pre-tax. A "conversion" is moving pre-tax money into a Roth, and the converted amount lands on your tax return as ordinary income that year.

A 401k to Roth IRA move is both at once: a rollover in mechanics, a conversion in tax treatment. Convert $50,000 and your taxable income goes up $50,000. That is the deferred tax bill coming due early, on your schedule instead of the government's, which is the entire point.

Why volunteer for a tax bill? Because once the money is in the Roth, growth and qualified withdrawals are tax free forever, and Roth IRAs have no required minimum distributions for the original owner. For an early retiree staring at decades of withdrawals, paying tax now at a low rate beats paying it later at an unknown one. The trick is controlling the rate you pay, and that is where timing and geography come in.

Direct vs. Indirect: The 20 Percent Trap

There are two ways to move the money, and one of them is a trap. A direct rollover sends funds straight from your 401k custodian to your IRA custodian. The check is never payable to you, nothing is withheld, and the only tax consequence is the conversion income you chose to create.

An indirect rollover puts the check in your hands, and the law requires your 401k plan to withhold 20 percent of it for federal taxes before you ever see the money. You then have 60 days to deposit the full original amount into the new account. The full amount, including the 20 percent you never received.

Run the numbers on a $100,000 indirect rollover. The plan sends you $80,000 and ships $20,000 to the IRS. To complete the rollover you must deposit $100,000 within 60 days, which means finding $20,000 of your own cash to cover the withheld piece. Come up short and the shortfall counts as a distribution: taxable, plus a 10 percent early withdrawal penalty if you are under 59 and a half.

There is no scenario where the indirect route helps you here. Check the direct rollover box. This is the single most expensive checkbox in the entire transaction, and no one charging 1 percent of your net worth is required to find it for you.

The Pro-Rata Rule, With Actual Dollars

The Pro-Rata Rule is where conversions bite people who thought they were being clever. It applies when you convert money out of an IRA while holding pre-tax money in any traditional, SEP, or SIMPLE IRA. The IRS treats all of those IRAs as one pool and taxes every conversion in proportion to the pool's pre-tax share. You do not get to point at one account and say "I'm only converting the after-tax part."

Worked example: say you rolled an old 401k into a traditional IRA years ago and it holds $90,000 of pre-tax money. This year you make a $10,000 non-deductible contribution, planning to convert just that $10,000 tax free. The pool is $100,000, of which 90 percent is pre-tax, so 90 percent of any conversion is taxable. Your "tax-free" $10,000 conversion generates $9,000 of taxable income, and your $1,000 of basis stays smeared across the remaining balance.

Two details save people from this. First, the snapshot for the calculation is your IRA balances on December 31 of the conversion year, so rolling pre-tax IRA money into a current employer's 401k before year-end takes it out of the pool. Second, a direct 401k-to-Roth-IRA conversion does not run through the IRA aggregation math at all; the trap mainly catches people running conversions out of IRAs, which is exactly what a Roth conversion ladder does. If you are laddering, clear the pre-tax IRA decks first.

Form 8606: The Paper Trail That Protects You

Form 8606 is where conversions and non-deductible contributions get reported, and it is the only durable record of your basis. Skip it and the IRS's default assumption is that every dollar you convert is fully taxable, including dollars you already paid tax on once. File it every year it applies, keep copies forever, and reconcile it against the 1099-R your custodian sends.

The form is two pages. The instructions are free at irs.gov. This is the entire "complexity" the binder-sellers are charging four figures to manage.

Two Five-Year Clocks, Not One

The five-year rule confuses people because there are two of them and they answer different questions. Clock one applies to each conversion separately: converted principal must sit in the Roth for five tax years, measured from January 1 of the conversion year, before you can withdraw it penalty free if you are under 59 and a half. Convert in 2026 and that principal unlocks January 1, 2031. Convert again in 2027 and that batch has its own clock ending in 2032.

Clock two applies to earnings: for growth to come out tax free, you generally need to be 59 and a half and have had any Roth IRA open for five years, measured from your first contribution or conversion. Michael Kitces has written the clearest free breakdowns of how these two clocks interact, and IRS Publication 590-B is the primary source. Read the nerd, then verify against the pub.

For early retirees, clock one is the load-bearing rule. It is why the Roth conversion ladder works: convert a year of spending money annually, wait five years, and a steady stream of penalty-free principal starts flowing long before age 59 and a half. It is also why the ladder demands a spreadsheet, because every rung carries its own date.

The State Layer: Where Geography Finally Matters

Everything above is federal and identical in all fifty states. The state layer is the only part of this topic that justifies the words "by state" in the title, so let me be honest about what the four states on this page actually look like: one of them taxes conversions hard, and the other three are the same answer wearing different flags.

California: The Full Ordinary-Income Treatment

California taxes Roth conversion income as ordinary income, full stop, on top of the federal bill. There is no retirement-income exclusion, no special conversion rate, no mercy. The state's brackets run from 1 percent up to 12.3 percent, plus a 1 percent Mental Health Services Tax on taxable income over $1 million, which is where the famous 13.3 percent top rate comes from.

The bracket that actually matters for most converters is 9.3 percent. For a single filer it catches taxable income from roughly $71,000 up to about $370,000, which is precisely the territory where a working professional's salary plus a meaningful conversion lands. Convert $50,000 on top of a decent California salary and the state's cut is $4,650. Convert at the very top and the same $50,000 costs $6,650 in state tax alone.

One footnote worth knowing: you may have seen a 14.4 percent California number in headlines. That figure includes the state's uncapped payroll tax on wages, which does not touch conversion income. For Roth conversions, 13.3 percent is the ceiling and 9.3 percent is the realistic working number.

Florida, Texas, Washington: Three Flags, One Answer

I am not going to pretend these are three different sections. Florida has no state income tax. Texas has no state income tax. Washington has no state income tax.

In all three, the federal bill is the whole bill. Convert $50,000 and the state's share is zero dollars, zero forms, zero planning.

Washington earns one extra paragraph because of its capital gains excise tax: 7 percent on long-term capital gains above an inflation-indexed threshold that has been climbing from $250,000 since 2022, sitting in the $270,000 range in recent years. It does not touch Roth conversions. Conversion income is ordinary income, not capital gain, and the statute explicitly exempts retirement account distributions anyway. A Washington converter pays the federal bill and goes home.

This site previously ran four separate pages implying each of these states had its own strategy. They did not. The pSEO playbook treats "what about my state" as fifty different questions because fifty pages beat one page in a search index. There are two kinds of states for this decision, ones that tax conversions and ones that don't, and three of the four covered here sit in the second bucket together.

The Moving-Van Loophole That Is Not a Loophole

Federal law, specifically 4 U.S.C. section 114, bars states from taxing the retirement income of people who no longer live there. Move from San Diego to Austin, establish bona fide Texas residency, then convert, and California gets nothing. That is the explicit design of a 1996 statute that ended states chasing retirees across borders.

The catch is the word "bona fide." California's Franchise Tax Board audits residency aggressively, and a conversion executed three weeks after a paper move, while your house, doctor, and gym membership all still sit in California, is an invitation to a years-long argument. If a relocation is happening anyway, sequence the conversions after the move is real. Do not manufacture a fake move for the tax delta; the FTB has seen every version of that play.

Run the Numbers: $50,000, Two States, Two Timings

Here is the whole article in one table. A single filer converts $50,000. The variables are the state and whether the conversion happens during a working year or a lean early-retirement year with no other income.

Read the corners of that table. The same $50,000 conversion costs roughly $16,650 for a working Californian and roughly $3,800 for a FIRE'd Texan. That is a $12,850 swing on identical money, and not one dollar of it required cleverness. It required waiting for a low-income year and, optionally, living somewhere without an income tax.

Notice too that timing dwarfs geography. Moving from California to Texas in the working-year scenario saves $4,650. Staying in California but converting in a lean year instead saves about $11,650. The biggest lever in this whole game is the one nobody sells, because "wait until your income is low" cannot be invoiced annually.

Stack the state delta over a full ladder and it stops being a rounding error. A working Californian converting $50,000 a year at 9.3 percent hands Sacramento $46,500 over ten years that a Floridian, Texan, or Washingtonian never pays. Even in a lean early-retirement year at California's lower brackets, ten conversions add up to roughly $12,000 in state tax, real money that buys nothing except the privilege of laddering at home.

When Converting Is the Wrong Move

The contempt here is for the toll booth, not for caution. There are real reasons to convert less, or later, or not at all, and an honest page lists them.

Pay the conversion tax from cash in a taxable account, never from the converted funds themselves. Money skimmed off the conversion to cover the tax is a distribution, taxed and penalized 10 percent if you are under 59 and a half, and it never reaches the Roth to compound. No spare cash for the tax bill means the conversion waits.

Watch your marginal stack. A conversion raises your adjusted gross income dollar for dollar, which can shove you into a higher federal bracket, shrink or kill Affordable Care Act subsidies, and, for those near 63 and older, trigger Medicare IRMAA surcharges two years later. The ACA piece is the one that ambushes early retirees: a fat conversion in a subsidy year can quietly cost thousands in lost premium credits, which is a tax by another name.

And if your current bracket is high and your retirement bracket will be low, deferral is winning already. Converting at 32 percent to dodge a hypothetical future 12 percent is volunteering to pay nearly triple the rate. The Bogleheads wiki page on Roth conversions walks the bracket arbitrage logic well, for free, with no binder.

Questions People Actually Ask

Is a 401k to Roth rollover the same thing as a Roth conversion?

Functionally yes. "Rollover" describes the movement between accounts and "conversion" describes the tax event of pre-tax money becoming Roth money. A 401k to Roth IRA move is both: the funds roll over directly, and the pre-tax amount is taxed as ordinary income that year.

Do I owe California tax if I convert after moving to Texas or Florida?

No, provided the move is genuine. Federal law (4 U.S.C. § 114) prohibits states from taxing retirement income of nonresidents, so conversions executed after you establish bona fide residency elsewhere are beyond California's reach. Expect the Franchise Tax Board to scrutinize the residency facts if the timing looks engineered.

Does Washington's capital gains tax apply to Roth conversions?

No. Washington's excise tax applies to long-term capital gains above an inflation-indexed threshold, and conversion income is ordinary income, not capital gain. Retirement account distributions are also explicitly exempt from the tax. A Washington conversion owes federal tax only.

Can I convert just part of my 401k?

Yes, and you usually should. Partial conversions sized to fill a target tax bracket each year are the core of the Roth conversion ladder. Converting an entire large balance in one year stacks the income into top brackets and maximizes the bill.

How do I avoid the 20 percent withholding on a rollover?

Use a direct rollover, where the check goes custodian to custodian and is never payable to you. Mandatory 20 percent withholding only applies when the plan distributes the money to you personally in an indirect rollover. There is no good reason to take the indirect route for a planned conversion.

What is Form 8606 and do I need it?

Form 8606 reports non-deductible IRA contributions and Roth conversions, and it is the permanent record of your after-tax basis. If you convert, or have ever made non-deductible contributions, you file it. Without it, the IRS presumes everything you convert is fully taxable, including basis you already paid tax on.

Which five-year rule applies to my conversion?

Each conversion's principal has its own five-year clock, starting January 1 of the conversion year, before penalty-free withdrawal under age 59 and a half. Earnings have a separate test: tax-free treatment generally requires age 59 and a half plus five years since your first Roth contribution or conversion. IRS Publication 590-B covers both.

The Bill Is the Same; The Toll Booth Is Optional

Strip away the four state pages this article replaced and the truth is compact. The federal mechanics are universal: direct rollover, conversion taxed as ordinary income, Form 8606, two five-year clocks, and a Pro-Rata Rule waiting for anyone who converts out of an IRA with pre-tax money still in the pool. The state layer is binary: California takes up to 13.3 percent of the conversion, and Florida, Texas, and Washington take nothing.

The levers that actually move money are timing and location, in that order, and both are free. Convert in low-income years. If you live in a no-tax state, state taxes are zero and the federal return is the only form you file. If you live in California and you are staying, size conversions to your bracket and accept the 9.3 percent as the cost of the coastline.

None of this requires surrendering 1 percent of your net worth annually to someone who will check the same checkbox you can check. Model your lean years with the FIRE number calculator, stress-test the withdrawal plan the conversions will feed with the safe withdrawal rate calculator, and if your horizon runs past thirty years, read the 50-year withdrawal-rate math before you size anything.

The IRS gives the rules away. Kitces gives the analysis away. I give the math away. The only people charging admission are the ones who added nothing.