In-plan Roth conversion: moving 401(k) money to Roth without leaving the plan

An in-plan Roth conversion — the Internal Revenue Code calls it an in-plan Roth rollover — moves pre-tax money from your 401(k), 403(b) or governmental 457(b) account into the designated Roth account inside the same plan. The amount converted is taxable in the year you do it. Nothing leaves the plan, you do not need to have left your job, and if the plan allows it you can do this while still working.

It is the least-known of the Roth conversion routes and, for people with large pre-tax balances and a long career ahead, often the most practical. It also carries the most restrictions, because the money stays subject to the plan's distribution rules afterwards. Converting does not unlock it.

This article covers who can do it, what it costs, the two five-year clocks it starts, and when it makes sense against the alternatives.

What an in-plan Roth conversion actually is

Section 402A of the Code governs designated Roth contributions — the Roth bucket inside an employer plan. Section 402A(c)(4), added by the Small Business Jobs Act of 2010, lets a plan with a qualified Roth contribution program allow employees to roll amounts from their non-Roth accounts into their designated Roth account in the same plan.

Originally this only worked for amounts you could actually have taken out — meaning you had reached 59½, separated from service, or otherwise satisfied a distribution trigger. Section 902 of the American Taxpayer Relief Act of 2012 added section 402A(c)(4)(E), extending it to "otherwise nondistributable amounts". The IRS set out the expanded rules in Notice 2013-74.

That change is the important one: since 2013, a plan can let you convert money you have no right to withdraw. Per Notice 2013-74, the newly eligible amounts include elective deferrals in 401(k) and 403(b) plans, matching and nonelective contributions including qualified matching and qualified nonelective contributions, and annual deferrals in governmental 457(b) plans. The federal Thrift Savings Plan is treated as a 401(k) here.

One condition survives from the earlier guidance: the amount must be vested. An unvested employer match cannot be converted.

Three things that have to be true before you can do it

Your plan has to offer a designated Roth account. No Roth bucket, no in-plan conversion. That is a plan design choice, not a legal entitlement.

Your plan has to permit in-plan Roth rollovers, of the type you want. Notice 2013-74 is explicit that a plan may limit both the contribution types eligible and the frequency of conversions. A plan may permit conversions only of otherwise distributable amounts, which for someone under 59½ still working means very little is eligible. Plans do this deliberately: accepting nondistributable amounts forces the recordkeeper to track two sub-accounts with different withdrawal rules. Ask the administrator specifically about nondistributable amounts, not just "Roth conversions".

The plan can withdraw the feature. The ability to make an in-plan Roth rollover is not a protected benefit under section 411(d)(6), so a plan offering it today can stop. If it is central to your plan, do not assume it will be there in five years.

The part people get wrong: converting does not unlock the money

This is the most common misunderstanding, and Notice 2013-74 addresses it head-on.

Where you convert an otherwise nondistributable amount, the converted money and its earnings remain subject to the distribution restrictions that applied before. The IRS's own example: a 401(k) participant who has not separated from service and converts pre-tax elective deferrals before age 59½ cannot then withdraw that amount or its earnings until 59½ or another event described in section 401(k)(2)(B).

So you have paid tax on the money and it is still locked in the plan. You are buying tax-free growth, not access.

A second trap sits alongside it. Because a nondistributable amount is not distributable except to make the rollover, no tax can be withheld from it: Notice 2013-74 confirms no withholding applies under section 3405, and none voluntarily under section 3402(p) either. Its own advice is that you may need to increase withholding elsewhere or make estimated tax payments to avoid an underpayment penalty.

Paying the tax from outside money is the right approach anyway — it is what makes any conversion worthwhile — but here it is the only option. Work the tax out before you convert, not in April.

The two five-year clocks

Roth rules involve two five-year periods doing different jobs. Conflating them causes most of the confusion around conversions.

	Five-year participation period	Five-year recapture period
What it decides	Whether a distribution from the designated Roth account is qualified, and so tax-free	Whether the 10% early distribution penalty is recaptured on a converted amount
Starts	First day of the first taxable year you contribute to, or convert into, that designated Roth account	First day of the taxable year of each conversion
How many	One per plan's designated Roth account	A separate clock per conversion
Also requires	Age 59½, death, or disability	—

On the first: Notice 2013-74 confirms that where an in-plan Roth rollover is the first contribution to your designated Roth account, the five-taxable-year participation period required by section 402A(d)(2) begins on the first day of the first taxable year in which you make it. Converting in the last week of December therefore starts the clock as of 1 January that year — a genuinely useful piece of timing.

On the second: a conversion is not itself a distribution and carries no 10% penalty. But if converted money is distributed within five taxable years, the section 72(t) early distribution penalty is applied as if it had been distributed at conversion, unless an exception applies or the distribution is of nontaxable basis. Each conversion runs its own clock, so annual conversions create overlapping periods. Keep your own record of the amount and year of each; the plan may not track it in a form you can read a decade later.

The principle is the same as the Roth IRA five-year rule, but the clocks are separate — a designated Roth account and a Roth IRA do not share a participation period.

One thing a conversion permanently gives up

If your 401(k) holds appreciated employer stock, stop before converting.

Notice 2013-74 states that an in-plan Roth rollover is treated as a distribution for purposes of determining eligibility for the special tax rules on net unrealized appreciation in employer securities paid as a lump sum distribution under section 402(e)(4)(B). The net unrealized appreciation strategy depends on taking a single lump sum distribution of the whole account in one taxable year. Something treated as a distribution for that purpose can break the lump sum, and with it NUA treatment — which for heavily appreciated company stock can be worth far more than the conversion. If employer securities are a meaningful part of your balance, answer that first, with someone who can see the actual cost basis.

When it makes sense, and when it does not

The arithmetic is the ordinary conversion arithmetic. You pay tax now at your current marginal rate to avoid tax later at an unknown one, buying tax-free growth in between. It wins if your future rate is higher, roughly breaks even if it is the same and you pay the tax from outside funds, and loses if your future rate is lower. Run the comparison with the Roth conversion calculator.

Worth looking at when:

• A low-income year while still employed — a sabbatical, a bad commission year, a large business loss. The conversion fills the low brackets with income that would otherwise be taxed higher later.
• Early career, long runway. Decades of tax-free compounding on a modest tax cost today.
• A large pre-tax balance heading for large required minimum distributions. Converting inside the plan chips away at it during working years. Whether that beats waiting is a real question — the Roth conversion ladder after you stop working is often cheaper, because the brackets are emptier.
• You want Roth money and the plan is where it sits. Still employed and unable to roll to an IRA, this is the only route.

Usually wrong when:

• You would have to pay the tax from the converted amount. You cannot withhold from it anyway, and finding the tax elsewhere is the test of whether you can afford the conversion at all.
• You are near peak earnings and expect a lower retirement rate. Converting at the top of your career pays the highest price you will ever face.
• You hold appreciated employer stock and have not resolved the NUA question.
• You might need the money. Converting does not make it accessible, and the recapture rule adds penalty risk on top.

One warning that cannot be softened: an in-plan Roth conversion cannot be undone. Recharacterisation is not permitted. If the market falls 30% the month after you convert, you still owe the tax on the pre-fall value. Size conversions so the tax is affordable on a bad outcome, not just a good one.

How it compares with the alternatives

Route	Who it is for	Tax on conversion	Money leaves plan?
In-plan Roth conversion	Still employed, plan permits it	Yes, on the pre-tax amount	No
Roth 401(k) contributions	Anyone whose plan offers Roth deferrals	No conversion — contributions are after-tax going in	No
Mega backdoor Roth	Plans allowing after-tax contributions plus in-plan conversion	Only on earnings, if converted promptly	Not necessarily
Rollover to Roth IRA	Separated from service, or 59½ with in-service withdrawals allowed	Yes	Yes

These are not mutually exclusive, and the second row is the one to consider first: Roth 401(k) vs traditional 401(k) covers that decision, and it is a cheaper way to build Roth money than converting a balance already accumulated pre-tax.

The third row uses the same in-plan conversion machinery on a different type of money — after-tax contributions rather than pre-tax — and is explained in mega backdoor Roth. The two get confused constantly because both involve an in-plan Roth rollover. The difference is what is taxable: after-tax contributions carry basis, so only the earnings are taxed, while pre-tax deferrals are taxed in full.

For whether converting is right for you at all, our Roth conversion guide works through bracket management and the knock-on effects on Medicare premiums and Social Security taxation.

Frequently asked questions

Can I do an in-plan Roth conversion while still working?

Yes, if your plan permits it. Since the 2012 change to the Code, plans may allow conversions of amounts you are not otherwise entitled to withdraw, which is what makes this available to employees who have not reached 59½ or left their job. Whether your plan allows it is a design question — ask the administrator specifically about converting nondistributable amounts.

Does converting let me withdraw the money?

No. Amounts that were not distributable before the conversion remain subject to the same restrictions afterwards, and so do their earnings. You have changed the tax character of the money, not your access to it.

Can I undo an in-plan Roth conversion if the market drops?

No. Recharacterisation of an in-plan Roth rollover is not permitted. The tax is fixed by the value at conversion regardless of what happens next — a reason to convert in tranches rather than all at once if the amount is large.

How do I pay the tax if nothing can be withheld?

From money outside the plan. Because a nondistributable amount must move by direct rollover and is not otherwise distributable, no withholding is possible on it. The IRS guidance itself says you may need to increase withholding from your pay or make estimated tax payments to avoid an underpayment penalty. Work the figure out before you convert and confirm it with your tax adviser — rates, brackets and the knock-on effects of extra income change every year.

---

This article is general education about how in-plan Roth conversions work, not personal tax or investment advice. Whether one makes sense depends on your marginal rate now and later, your plan's terms and your other income; the comparisons here are simplified. Confirm your plan's rules with the administrator and your tax position with a qualified adviser before converting anything.