In-plan Roth conversion

What an in-plan Roth conversion is

The IRS term is in-plan Roth rollover. A participant takes vested money in the non-Roth part of their 401(k) and moves it to the designated Roth account in the same plan. Nothing leaves the plan. The taxable part of the amount converted, meaning pre-tax contributions and any earnings, is added to the participant’s income for the year. The 10% early withdrawal tax does not apply to the conversion.

A plan may allow conversions of amounts that are not yet eligible for distribution, such as deferrals of an employee under 59½. That change dates from 2013 and is covered in IRS Notice 2013-74.

Why it matters to employers

This is an optional feature that requires a Roth account in the plan and an amendment to the plan document. It is the usual second step of a mega backdoor Roth. It also gives employees a way to move to Roth without leaving the plan.

Your recordkeeper has to track converted amounts separately, and the conversion is reported to the participant on Form 1099-R.

Example

A participant converts $20,000 of after-tax contributions that have grown by $300. The $20,000 was already taxed. Only the $300 of earnings is taxable income for the year.

Common mistakes

• Treating a conversion as reversible. Once done, it cannot be undone.

• Not warning employees about withholding. Tax is not withheld from an in-plan conversion, so the employee may owe estimated tax.

• Overlooking the five-year rule. Converted pre-tax amounts withdrawn within five years can trigger the 10% early withdrawal tax.

• Adding the feature in the document but not switching it on in the recordkeeping system.