In-Plan Roth Conversion in 2026: IRC §402A(c)(4)(E), the SECURE 2.0 §325 RMD Elimination, and Every Plan Requirement

An in-plan Roth conversion is the movement of pretax employer-plan dollars — traditional 401(k), 403(b), or governmental 457(b) balances — into the designated Roth subaccount of the SAME plan, without a distribution to the participant.^[1] The mechanic lives in Internal Revenue Code §402A(c)(4) and its two enabling clauses: the Small Business Jobs Act of 2010 §2112, which created the feature but limited it to amounts otherwise distributable, and the American Taxpayer Relief Act of 2012 §902, which added §402A(c)(4)(E) to authorize rollover of any vested balance regardless of distributable status.^[2] The participant recognizes the converted pretax basis as ordinary income in the year of conversion, but not the earnings that then compound tax-free inside the designated Roth account going forward.^[3]

What changed for 2026 is not the mechanic — the statute has been stable since 2013 and Notice 2013-74 gave operational guidance that remains authoritative — but the surrounding rules that made the mechanic worth using. SECURE 2.0 §325, effective for taxable years beginning after December 31, 2023, eliminated lifetime required minimum distributions on designated Roth accounts under IRC §401(a)(9)(H).^[4] Before that change, an in-plan Roth conversion still forced RMDs at the participant's required beginning date — meaning the conversion's tax-free-compounding advantage was capped at the participant's actuarial lifespan, and a full-conversion strategy usually ended with a mandatory rollover to a Roth IRA before age 73. That step is now unnecessary. The in-plan Roth balance can compound tax-free for the full participant lifetime and only face beneficiary RMDs under the post-death 10-year rule.^[5]

This guide walks the 2026 in-plan Roth conversion decision end-to-end: the exact §402A(c)(4)(E) mechanic, the tax accounting at conversion, the two separate five-year clocks that trip up unwary participants under age 59½, the plan-design gate that governs whether your plan even offers the feature, the interaction with the SECURE 2.0 §603 mandatory Roth catch-up rule that took effect January 1, 2026, three worked case studies at $200K / $500K / $750K wages, six mistakes to avoid, and the eight-item checklist to verify your 2026 conversion is optimally sized. Model the arithmetic as you read using the CalcLeap Roth conversion calculator, which handles the 2026 IR-2025-176 bracket schedule and the split-tax-year present-value math.

1. What an in-plan Roth conversion actually is

The formal name in the statute is "in-plan Roth rollover," not "in-plan Roth conversion" — but the industry has settled on the latter because "rollover" implies a distribution and change of custodian, which is not what happens here. The Roth-side account remains in the same plan, held by the same trustee, invested in the same fund menu. What changes is the tax character: pretax dollars become after-tax Roth basis, and future earnings on those dollars will be tax-free in a qualified distribution rather than fully taxable.^[6]

The mechanic is administrative, not custodial. The recordkeeper does two things simultaneously: (1) debits the pretax subaccount for the converted amount and credits the designated Roth subaccount for the same amount, and (2) records the converted amount as taxable income for the participant on Form 1099-R with distribution code G in Box 7 and the taxable amount in Box 2a.^[7] The Roth account then compounds under the §402A(d)(2) rules for qualified distributions — no tax on either basis or earnings when distributed after age 59½ and after the participant-level five-year clock has run.

Because the mechanic is a within-plan movement rather than an out-of-plan distribution, three features distinguish it from a rollover to a Roth IRA. First, no mandatory 20-percent withholding under IRC §3405(c) applies at conversion — the tax bill must be funded from outside-plan resources, which is a feature and not a bug for participants who want to convert the full pretax amount without cash-flow leakage.^[3] Second, no 10-percent §72(t) early-distribution penalty applies because the money stays inside a qualified plan. Third, and most importantly, the feature is available to active participants at any age — a 42-year-old employee who cannot yet take an in-service distribution from her 401(k) can still convert a portion of her pretax balance to the Roth subaccount if the plan permits.^[8]

2. Two flavors: distributable-amount rollover vs §402A(c)(4)(E) nondistributable-amount rollover

The 2010 Small Business Jobs Act created the original in-plan Roth rollover as a distributable-amount-only feature. A participant could convert only balances that were otherwise eligible for distribution — meaning, in the typical 401(k), only after age 59½ (in-service distribution age), or after separation from service, or from a source subject to no distribution restriction (like a rollover contribution source that many plans permit to be distributed at any time). This limitation excluded the elective deferral and employer match subaccounts of most participants under 59½ and still working.^[9]

The 2012 American Taxpayer Relief Act §902 added IRC §402A(c)(4)(E), authorizing plans to permit rollover of any vested pretax balance regardless of otherwise-distributable status. This is the modern in-plan Roth conversion most participants care about: it allows a 45-year-old employee with a $400,000 pretax 401(k) balance to convert an arbitrary portion to Roth even though none of that balance would otherwise be distributable until she separates or hits 59½.^[2] The tradeoff for the plan: any amount converted under §402A(c)(4)(E) becomes subject to the §72(t) 10-percent early-distribution penalty if distributed within five years of conversion and before age 59½, per Treas. Reg. §1.402A-1 Q&A-12.^[10] The penalty applies only if the converted amount is actually distributed inside the five-year window — inside a still-going plan, the amount continues to grow tax-free without triggering the clock.

3. Tax mechanics at conversion — federal and state

The pretax amount converted is included in the participant's gross income for the year of conversion at ordinary income tax rates.^[3] There is no separate "conversion" tax bracket — the amount stacks on top of the participant's other income and is taxed at whatever marginal rate applies. For a married-filing-jointly household in the 2026 tax brackets under IR-2025-176, taxable income above $206,700 lands in the 24-percent bracket, above $394,600 in the 32-percent bracket, above $501,050 in the 35-percent bracket, and above $751,600 in the 37-percent bracket.^[11] A conversion straddling two brackets is taxed proportionally: $50,000 converted while $30,000 remains in the 24-percent bracket produces $7,200 (24% × $30,000) + $6,400 (32% × $20,000) = $13,600 of federal tax.

The taxable amount is reported on Form 1099-R issued by the plan trustee for the conversion year. Box 1 (gross distribution) equals the converted amount; Box 2a (taxable amount) equals the pretax portion converted; Box 7 (distribution code) shows code G for a direct rollover to a Roth account.^[7] The participant reports the 1099-R on Form 1040 Line 5b for the taxable amount. Because there is no distribution to the participant, no §3405(c) mandatory 20-percent withholding applies — the plan does not withhold and the participant must fund the entire tax bill from outside-plan resources.

State income tax treatment generally follows federal. Most states include the converted amount in state taxable income at whatever marginal state rate applies. A short list of states carve out exceptions: Pennsylvania does not tax the conversion because Pennsylvania does not tax rollovers between qualified retirement accounts under 72 P.S. §7301(d); Alabama, Hawaii, Illinois, Mississippi, and a few others have partial exclusions for defined-contribution retirement distributions but typically do not extend the exclusion to conversions. Participants in high-marginal-rate states (California at 13.3 percent, New York at 10.9 percent, Hawaii at 11 percent, Massachusetts at 9 percent) should model the state tax separately — for a $100,000 conversion in California at the 13.3-percent top bracket, state tax alone can be $13,300, materially altering the after-tax comparison against the pretax alternative.

4. The two five-year clocks (and which one bites)

The single most-common source of participant confusion about in-plan Roth conversions is the interaction of two separate five-year rules. Understanding them requires clarity on what each clock measures and what happens if it has not run.

Clock 1: the participant-level Roth 401(k) qualified-distribution clock. Under IRC §402A(d)(2)(B), a distribution from a designated Roth account is qualified — meaning both basis and earnings come out tax-free — only if the account has been open for at least five taxable years measured from the first contribution to any designated Roth account within the same plan.^[6] This clock starts once per plan per participant. An in-plan Roth conversion into an already-established Roth 401(k) does not restart the clock; the participant can use the pre-existing clock date. A participant whose first Roth 401(k) contribution was in 2020 has the clock running from 2020 for all subsequent conversions in that plan.

Clock 2: the conversion-specific §72(t) recapture clock. Under Treas. Reg. §1.402A-1 Q&A-11 (and paralleling the Roth IRA conversion rule at §408A(d)(3)(F)), an amount converted under §402A(c)(4)(E) is subject to the 10-percent early distribution penalty if distributed within five years of conversion and before age 59½.^[10] This clock starts separately for each conversion. A conversion in 2026 has its own clock ending December 31, 2030; a subsequent conversion in 2028 has a separate clock ending December 31, 2032.

The practical rule: for participants over 59½ at conversion, only Clock 1 matters, and only if the participant is opening a first Roth 401(k) account. For participants under 59½ at conversion, both clocks matter, and the operative constraint is the intended distribution date. If the participant does not intend to distribute within the next five years, Clock 2 has no practical effect — the money continues to compound tax-free inside the plan and the clock silently runs down.

5. SECURE 2.0 §325 and the lifetime RMD elimination

Before SECURE 2.0, designated Roth 401(k) and Roth 403(b) accounts were subject to lifetime required minimum distributions under IRC §401(a)(9). This was an oddity of the statute: Roth IRAs had no lifetime RMDs under IRC §408A(c)(5), but designated Roth accounts inside employer plans did — meaning a participant with a $500,000 Roth 401(k) at age 73 was forced to distribute an actuarial fraction of that balance every year, even though the distribution was tax-free.^[12] The typical workaround was a rollover of the Roth 401(k) to a Roth IRA before the required beginning date, which eliminated the RMD requirement — but that step was easy to forget and forced a change of custodian for participants who preferred to keep their assets in-plan.

SECURE 2.0 §325, effective for taxable years beginning after December 31, 2023, amended IRC §401(a)(9)(H) to exempt designated Roth accounts from lifetime RMDs.^[4] This is a quiet but consequential change for in-plan Roth conversions: converted balances now enjoy the same lifetime-tax-free-compounding benefit as Roth IRAs, and the participant no longer needs to execute a defensive rollover to a Roth IRA before age 73. The RMD-elimination exemption applies only to lifetime distributions to the participant — the post-death 10-year distribution rule for non-eligible-designated-beneficiaries under §401(a)(9)(H)(i) still applies to inherited Roth 401(k) balances.^[5]

What §325 changes about the conversion math: before 2024, a participant projecting the after-tax value of an in-plan Roth conversion had to model a forced-distribution schedule starting at age 73, with the distributed amounts either spent or reinvested in a taxable brokerage account subject to future tax drag. After 2024, the same participant can model the conversion as compounding tax-free until the participant's actual death (or intentional distribution), a materially longer horizon. For a 55-year-old with a 30-year life expectancy who converts $200,000 at a 24-percent bracket in 2026, the difference is approximately $47,000 of additional after-tax terminal wealth (7 percent real return, retirement at 65, spending down the taxable brokerage from age 73 in the pre-§325 model versus preserving the Roth 401(k) until death in the post-§325 model).

6. Plan design gate — does your plan even permit this?

The plan document controls whether an in-plan Roth conversion is available and, if so, what type. Three separate plan-document features must all be true for the modern §402A(c)(4)(E) conversion to be available to a mid-career participant:

1. Designated Roth account under §402A(a). The plan must offer a designated Roth 401(k) or Roth 403(b) source. Per PSCA 66th Annual Survey, roughly 82 percent of §401(k) plans have this feature as of year-end 2024.^[13]
2. In-plan Roth rollover authorization per Notice 2013-74. The plan document must expressly permit in-plan Roth rollovers of any type. Approximately 52 percent of §401(k) plans have this.
3. §402A(c)(4)(E) nondistributable-amount rollover authorization. The plan must adopt the 2012-added authorization to allow conversion of vested balances that are not otherwise distributable. Approximately 36 percent of §401(k) plans have this.

The 36-percent number understates coverage for large-plan participants. The feature is bimodal: large plans (5,000+ participants) offer §402A(c)(4)(E) rollover at approximately 60 percent adoption; small plans (fewer than 100 participants) offer it at approximately 12 percent adoption. Governmental §457(b) plans lag further — approximately 8 percent adoption per the NAGDCA 2024 Perspectives in Practice report.^[14] The best way to confirm availability at your plan is to open your plan's Summary Plan Description and look for language like "in-plan Roth rollover" or "Roth conversion" and, specifically, whether the SPD says the feature is available for "vested balances" or is restricted to "distributable amounts."

If your plan does not offer §402A(c)(4)(E) rollover but you are over 59½, you can still typically convert your entire vested pretax balance under the ordinary distributable-amount rollover authorized by clauses §402A(c)(4)(A)-(D). If your plan does not offer any in-plan Roth rollover, your only path to Roth conversion of employer-plan dollars is (a) separation from service followed by rollover to a Roth IRA, (b) an in-service distribution after 59½ followed by rollover to a Roth IRA, or (c) requesting your plan sponsor to amend the document to add the feature (unlikely to succeed at a small plan but occasionally feasible at large plans).

7. Interaction with SECURE 2.0 §603 mandatory Roth catch-up

Since January 1, 2026, SECURE 2.0 §603 has forced the §414(v) catch-up contribution ($8,000 for age 50+ or $11,250 for age 60–63) into Roth for participants with prior-year FICA wages above $150,000 from the same employer.^[15] The rule governs the tax treatment of new elective contributions, not the movement of existing balances. An in-plan Roth conversion of pretax dollars sitting in a traditional 401(k) subaccount is governed by §402A(c)(4), not by §414(v)(7), so §603 does not apply to conversions.

The two rules still interact strategically. For a §603-covered participant, the catch-up is already earmarked for Roth — the participant loses no additional pretax deferral capacity by adding an in-plan Roth conversion. But because §603 already accelerates the participant's Roth accumulation, the marginal Roth-diversification value of an incremental in-plan conversion is slightly lower than for a non-§603-covered participant. A rough rule: the §603 catch-up contributes 5–8 percent of a high-earner's total Roth accumulation over a typical 15-year period; if the pre-§603 optimal partial-conversion amount was 100 percent of the "fill 24-percent bracket" number, the post-§603 optimal amount is approximately 92–95 percent of the same number, and the difference is small enough that the simplification of "keep converting the same amount as before" costs less than $500 of present-value tax over a 15-year horizon in most cases.

Where the two rules combine to matter is in the mega backdoor Roth pathway. A §603-covered participant aged 62 at a fully mega-backdoor-capable plan can accumulate $24,500 (base Roth deferral, optional) + $11,250 (mandatory Roth super catch-up per §603) + $47,500 (mega backdoor Roth via §402A(c)(4)(E) applied to after-tax employee contributions) = $83,250 of Roth in a single calendar year. Adding a discretionary in-plan Roth conversion of pretax dollars on top can push total 2026 Roth activity above $150,000 for a single participant — the highest Roth-accumulation rate available in any U.S. retirement-plan structure. See our mega backdoor Roth 2026 guide and SECURE 2.0 §603 mandatory Roth catch-up 2026 guide for the interaction detail.

8. Three case studies ($200K, $500K, $750K wages)

Case 1: Priya, age 45, $200,000 W-2 wages, MFJ, Texas, $380,000 traditional 401(k) balance

Priya's household files jointly with $220,000 taxable income before any conversion, placing her firmly in the 24-percent federal bracket ($206,700–$394,600 for 2026 per IR-2025-176). She lives in Texas (no state income tax). She wants to Roth-diversify but is under 59½ and cannot take an in-service distribution. Her plan permits §402A(c)(4)(E) conversion of any vested balance. She converts $170,000 in December 2026, timed so she knows her actual 2026 income is essentially locked in.

Tax bill: $170,000 fills the 24-percent bracket up to $394,600 taxable income ($394,600 − $220,000 = $174,600 of bracket-24 capacity, so all $170,000 stays in 24 percent). Federal tax: $170,000 × 24% = $40,800. State tax: $0 (Texas). Total conversion cost: $40,800, funded from her taxable brokerage account. Ten-year projection with 7-percent real return, retirement at age 65 in the 22-percent bracket: post-conversion after-tax wealth exceeds no-conversion after-tax wealth by approximately $61,000, driven by (a) tax-free earnings growth on $170,000 for 20 years and (b) avoidance of §401(a)(9) RMD forced distribution at age 73 under the pre-§325 rule. Both five-year clocks matter: Clock 1 (already run — her Roth 401(k) opened 2020) is complete; Clock 2 (starts 2026, ends 2030) matters only if she distributes the converted amount before 2031 AND before age 59½, which she does not plan to do.

Case 2: Marcus, age 60, $500,000 W-2 wages, MFJ, California, $1.4M traditional 401(k) balance

Marcus's household files jointly with $560,000 taxable income before any conversion, placing him in the 35-percent federal bracket ($501,050–$751,600 for 2026). He lives in California (top state bracket 13.3 percent). He is §603-covered so his 2026 §414(v)(2)(E)(i) age-60–63 super catch-up of $11,250 is automatically Roth. He wants an additional in-plan Roth conversion but the math is more delicate — every dollar of conversion is taxed at 35 percent federal plus 13.3 percent state = 48.3 percent combined marginal rate. His projected retirement bracket in California at age 68 is 22 percent federal + 9.3 percent state = 31.3 percent combined. The conversion is dead-loss in expected-value terms at these bracket differentials.

The correct 2026 strategy for Marcus is to defer conversion. He instead maxes the pretax elective deferral ($24,500), pays the §603 mandatory Roth super catch-up ($11,250 — automatic), and uses his mega backdoor Roth capacity ($47,500) to move after-tax employee contributions into Roth. All three moves accumulate tax-advantaged retirement dollars without triggering the 48.3-percent conversion tax on his pretax balance. He plans an in-plan conversion sequence starting the year after he retires — years 65–72 (before RMDs would have started under the pre-§325 rule but now with no lifetime RMD constraint), when his marginal bracket drops from 35+13.3 to a mixed 22+9.3, converting approximately $150,000 per year across 8 years. Present value of the deferred conversion strategy exceeds the age-60 conversion strategy by approximately $340,000 on his $1.4M pretax balance.

Case 3: Diana, age 66, $750,000 W-2 wages, single, New York, $2.6M traditional 401(k) balance, plans to move to Florida in 2027

Diana is single with $700,000 taxable income before any conversion, placing her in the 37-percent federal bracket ($626,350+ for single filers under IR-2025-176). Her New York top bracket is 10.9 percent + New York City residency adds 3.876 percent for a combined federal + state + local of 51.776 percent on marginal income. She plans to move to Florida (no state income tax) in 2027 and retire fully in 2028. She is over 59½ so both five-year clocks are irrelevant to her.

The correct sequence for Diana is aggressive deferral of any conversion until 2027 at the earliest, and preferably until 2028. In 2026 she would face a 51.776-percent combined marginal rate on conversion; in 2027 in Florida she faces only 37 percent federal (assuming she still works part-time at a high level) or lower if she retires; in 2028 in Florida in full retirement she can arrange to keep her taxable income within the 24-percent bracket, converting approximately $394,600 − retirement-year-baseline taxable income per year at a 24-percent federal + 0-percent state = 24-percent combined rate. The difference between a $500,000 conversion at 51.776 percent (2026 tax cost: $258,880) versus at 24 percent (2028 tax cost: $120,000) is $138,880 of present-value savings. Over her full $2.6M pretax balance, a well-timed multi-year post-relocation conversion sequence yields approximately $680,000 of additional after-tax wealth compared to a same-year conversion strategy.

9. Six mistakes to avoid

Mistake 1: Funding the tax bill with plan withholding. Because in-plan conversions have no mandatory withholding, some participants manually elect withholding to fund the tax. This is a triple penalty: withheld dollars leave the tax-free growth Roth account, become taxable to the participant, and if the participant is under 59½ trigger the 10-percent §72(t) penalty on the withheld amount. Fund the tax from outside cash or a taxable brokerage.

Mistake 2: Converting so much you cross into a higher bracket. A partial conversion sized to fill your current bracket without crossing into the next one is the near-universally optimal size. Converting an amount that pushes 30 percent of the conversion into a bracket 6–8 percentage points higher (24→32 or 32→35) generally destroys 4–8 percent of present-value tax advantage. Model the crossover using the Roth conversion calculator.

Mistake 3: Converting the same year as an executive equity vesting. A large ISO exercise, RSU vesting, or non-qualified stock option exercise can push a participant's marginal rate to a temporary spike in a single year. Layering an in-plan Roth conversion on top of that spike wastes the conversion opportunity — the effective marginal rate on the conversion is the temporary spike rate, not the participant's normal rate. Save the conversion for a year without a large one-time income event.

Mistake 4: Ignoring the state-tax delta. A $200,000 conversion in California at the 13.3-percent top rate costs $26,600 more than the same conversion in Texas or Florida. For participants who plan to relocate to a no-tax state at retirement, deferring the conversion until after the move can save 10-plus percent of the conversion amount. See Case 3 Diana for the arithmetic.

Mistake 5: Assuming the pre-SECURE 2.0 §325 conversion break-even still applies. Any calculator or planning framework built before 2024 assumes lifetime RMDs still apply to designated Roth accounts. The post-§325 conversion break-even is approximately 2 percentage points lower on the current-to-retirement bracket differential. Re-run your model with the post-§325 assumption before deciding to skip a conversion because "the brackets don't differ enough."

Mistake 6: Forgetting that a conversion is irrevocable. Recharacterization was eliminated by the Tax Cuts and Jobs Act of 2017 for all Roth conversions in tax years starting 2018. There is no do-over. If the converted assets crash in value the following month, the participant still owes tax on the pre-crash conversion amount. Time conversions late in the year (November or December) after you know both your annual income and can observe the market's recent trajectory, and never convert an entire balance in one year unless you have modeled the downside.

10. Your 8-item 2026 in-plan Roth conversion checklist

11. Frequently asked questions