What Is an In-Plan Roth Rollover and How Does It Work?

An in-plan Roth rollover is a transaction within a workplace retirement plan, such as a 401(k) or 403(b), that allows a participant to move funds from their traditional, pre-tax account to a designated Roth account under the same plan. This differs from rolling funds out of a plan into an external Roth IRA. Once the funds are in the designated Roth account, they can grow and, if certain conditions are met, be withdrawn completely tax-free in retirement.

Plan Eligibility and Convertible Funds

Before considering an in-plan rollover, you must confirm that your employer’s retirement plan permits such a transaction. The plan document must explicitly allow for in-plan Roth rollovers and contain a designated Roth contribution feature. To determine if a plan offers this option, participants should review the summary plan description or contact the plan administrator directly for confirmation.

Any vested amount in a participant’s account is eligible for conversion. This includes an employee’s own pre-tax contributions, vested employer matching funds, and any vested profit-sharing contributions.

Tax Consequences of the Rollover

The primary consideration of an in-plan Roth rollover is the immediate tax liability. The entire pre-tax amount being converted is added to the participant’s ordinary income for the tax year in which the rollover occurs. For instance, converting $20,000 of pre-tax 401(k) funds means an additional $20,000 of taxable income will be reported on that year’s tax return. This increase in income can potentially push a taxpayer into a higher marginal tax bracket.

Participants have two primary methods for handling the tax payment. The first option is to pay the taxes from an external source, such as a checking or savings account. This allows the full value of the converted amount to move into the Roth account. The second option is to have the taxes withheld directly from the rollover amount.

Choosing to have taxes withheld from the rollover itself is often discouraged. The amount withheld for taxes does not get converted into the Roth account and is instead treated by the IRS as a distribution. If the participant is under the age of 59.5, this distributed portion could be subject to a 10% early withdrawal penalty, in addition to the ordinary income tax.

To avoid potential underpayment penalties, individuals completing an in-plan rollover should consider making estimated tax payments or increasing their payroll withholding for the remainder of the year. The plan sponsor is not required to withhold taxes from a direct in-plan rollover, placing the responsibility for managing the tax liability on the participant.

The Rollover Process

The process begins by contacting the plan administrator or accessing the plan’s online portal. Most plan providers have specific forms or online workflows designed to handle in-plan Roth rollover requests. These tools guide the participant through the necessary steps and disclosures.

The participant will need to specify the exact dollar amount from their pre-tax balance that they wish to convert. This can be the entire vested balance or a partial amount. A formal election regarding tax withholding is also a required part of the process. Participants must clearly state whether they want to waive withholding and pay the resulting taxes from other funds or have the taxes withheld from the conversion amount.

The transaction itself can be processed in one of two ways: a direct rollover or an indirect rollover. In a direct rollover, the funds are moved electronically from the pre-tax sub-account to the designated Roth sub-account within the same plan. An indirect rollover involves the plan distributing the funds to the participant, who then has 60 days to deposit them back into the plan’s Roth account. The direct method is far more common and simpler for in-plan transactions.

Rules for Post-Rollover Distributions

After the rollover is complete, specific rules govern when the money can be withdrawn tax-free. A unique five-year holding period applies to each in-plan Roth rollover. This five-year clock begins on January 1 of the year the conversion was made. For the earnings on the converted amount to be withdrawn tax-free, the distribution must satisfy this five-year period and occur after the participant reaches age 59.5, becomes disabled, or dies.

If a distribution is taken from the converted amount within this five-year window, it may be subject to a 10% early withdrawal penalty, even if the participant is over age 59.5. This is known as a special recapture rule. The rule is designed to prevent individuals from using an in-plan rollover to circumvent early withdrawal penalties on funds that were recently pre-tax.

For a non-qualified distribution from a designated Roth account, the withdrawal is treated on a pro-rata basis. This means the distribution is considered to contain a proportional amount of the employee’s after-tax contributions (the basis) and the taxable earnings.