Key takeaways

• Tax-free growth potential: In-plan Roth conversions allow investors to convert pre-tax and after-tax contributions to a Roth account and take advantage of tax-free potential growth
• No early withdrawal penalty: Since an in-plan Roth conversion is a direct rollover back into the plan, savers won’t be subject to the 10% early withdrawal penalty for the conversion
• Tax implications: Converting funds from a non-Roth account to a Roth account is a taxable event —conversions from a pre-tax account and any earnings from a post-tax account will be subject to income tax at the time of conversion

What is an in-plan Roth conversion?

An in-plan Roth conversion allows retirement savers to transfer eligible pre-tax or post-tax funds from their employer-sponsored retirement plan to a Roth account within the same plan. The conversion — also known as an in-plan Roth rollover — is treated as a distribution for tax purposes, even though the funds never leave the plan. Savers who opt for an in-plan Roth conversion will owe income tax on the non-taxed portion of the converted amount for the year of the conversion, but any future earnings can be distributed on a tax-free basis, provided qualified distribution requirements are met.^1,2 

Withdrawals from a Roth account will not be subject to federal taxation if the withdrawal is qualified as defined under IRS regulations. However, state and local taxes may still apply.

Benefits of an in-plan Roth conversion

If you expect to be in a higher tax bracket in the future, have already reached the $7,000 annual contribution for a Roth IRA, or have met the deferral limit for a Roth 401(k) account in 2025, an in-plan Roth conversation could be a useful strategy to lower your future tax liability.³ The key benefits of a Roth conversion include:

• Tax-free potential growth: Once you have paid any applicable taxes on the conversion, any future growth and qualified withdrawals are tax-free
• No Roth RMDs: Unlike with traditional 401(k)s or IRAs, Roth contributions are not subject to required minimum distributions (RMD) until after the death of the account owner⁴
• Diversification: Having a range of different retirement accounts with varied tax treatments can provide more flexibility for managing your tax liability in your retirement years
• Estate planning: Roth accounts can be a useful tool for estate planning as they can be passed on to heirs tax-free
• Lower taxable income in retirement: Withdrawals from a Roth account do not count towards your taxable income, which could help you stay within a lower tax bracket during retirement

When it makes sense

The advantages of a Roth conversion depend on your unique situation. An in-plan Roth conversion could make sense for you if:

• You expect to be in a higher tax bracket in the future than you are now
• You won’t need the funds in the Roth account for at least five years
• You have cash outside of the plan to pay the taxes
• You may want to create a tax-free inheritance for heirs
• You are in a low-income year or tax bracket, making the taxes owed on the conversion more manageable
• You live in a state with no income tax but will retire to a state that has income tax

Given that you cannot reverse an in-plan Roth conversion once processed, you may want to consult with a tax professional to help decide if it is the right move for your unique situation. An in-plan Roth conversion may not be right for you if you expect to be in a lower tax bracket during retirement or if you don’t have cash available outside the plan to pay for the taxes.

Paying taxes on an in-plan Roth conversion

An in-plan Roth conversion is a taxable event that you must report on your federal income tax return. If you elected to make an in-plan Roth conversion from a pre-tax retirement account, the conversion is treated as ordinary income and subject to tax. If you made a conversion with post-tax dollars — such as an after-tax contribution account — you are required to pay taxes on any earnings that are converted. You will receive a Form 1099-R from the plan for the tax year in which the conversion took place, detailing the converted amount. When filing your taxes, enter the taxable portion from Form 1099-R on Form 1040, Line 5b. Participants may want to increase their payroll tax withholding amount or make an estimated tax payment for the period in which the in-plan Roth conversion is completed.⁵

Using in-plan Roth conversion as a mega backdoor Roth strategy

A mega backdoor Roth is a strategy that enables some people who would be ineligible to contribute to a Roth account, based on their income or contribution limits, to transfer after-tax contributions to a Roth account. This can allow investors to save up to $70,000 annually in a Roth account ($77,500 for those age 50 or older). Not all plans offer an after-tax contribution option, so it is recommended to reach out to your plan administrator to confirm availability.⁶ In addition, your ability to make after-tax contributions to the plan may be limited by IRS non-discrimination requirements.

Although after-tax contributions are not taxed upon distribution, a key drawback is that any associated investment earnings will be subject to tax at ordinary income rates. By converting these funds to a Roth account, any investment earnings that accumulate following the conversion have the potential to grow tax-free, provided you meet the requirements for a qualified distribution at the time of withdrawal.⁷

To make use of this strategy with an in-plan Roth conversion savers would need to:

1. Make after-tax contributions: After-tax contributions may enable you to save in your employer-sponsored plan beyond the $23,500 aggregate annual contribution limit for pre-tax and Roth 401(k) accounts⁷
2. Make in-service distributions to a Roth account: If you have a Roth option within your employer-sponsored plan, you may be able to convert the after-tax amounts to a Roth account, depending on your plan’s distribution rules
3. Pay taxes on any earnings included in the conversion: Taxes typically aren’t withheld from your converted transaction, and you’re responsible for paying the tax liability

Setting up a recurring in-plan Roth conversion

Some employer-sponsored plans offer retirement savers the option to automate Roth conversions by setting up recurring in-plan transfers of after-tax contributions. This allows savers to automatically convert a percentage of their after-tax payroll contributions to a Roth account. You can reach out to your plan administrator to confirm the availability of recurring conversion options and find out how to enroll.

FAQs on in-plan Roth conversions

Are in-plan Roth conversions subject to the 10% early withdrawal penalty?

In-plan Roth conversions are treated as a withdrawal and a direct rollover back into an employer-sponsored plan and are therefore not subject to the 10% early withdrawal penalty. If you take a withdrawal prior to reaching age 59½ and within five years from the first day of the year in which you convert, you’ll generally owe a premature distribution penalty of 10% of the taxable portion of the amount converted. Though in-plan Roth conversions are treated as a withdrawal, no cash will be removed from your account.⁸

If I owe taxes on my savings either way, what’s the benefit of paying taxes now?

If you believe your tax rate will be higher in retirement, converting taxable amounts into a Roth account may result in you paying less in taxes over the long run. However, a conversion may not be advisable if you don’t have available cash outside the plan to pay the taxes for the year of the conversion. It’s recommended to speak to a tax advisor before requesting a conversion for guidance.

Who is eligible to make an in-plan Roth conversion?

Eligibility for an in-plan Roth conversion is subject to employer-sponsored plan rules so you should check with your employer for specific guidance. Participants, surviving spouse beneficiaries and alternate payees who are current or former spouses may be eligible to do an in-plan Roth rollover in a plan offering these rollovers.⁹

Why would I want to convert after-tax contributions if I already paid taxes on that money?

After-tax contributions will not be taxed upon distribution, but the associated investment earnings will be. But after you convert your after-tax account to a Roth basis and you withdraw the Roth amounts in a "qualified distribution," you will not have to pay taxes on any investment earnings on that money which has accumulated since you made the conversion.