The In Plan Roth 401(k) Conversion That Saves a $400,000 Earner $58,000 in Future RMD Taxes

Picture a 55-year-old earning $400,000 with $1.5 million in a traditional 401(k). The plan’s summary plan description allows in-plan Roth conversions, and the box has sat unchecked for years. That single unchecked box is worth roughly $58,000 to $90,000 in avoided future taxes, and almost nobody at this income level is using it.

The mechanic is narrower than the better-known backdoor Roth IRA. An in-plan Roth conversion moves dollars from the traditional bucket of your 401(k) into the Roth bucket inside the same plan. The dollars stay inside the same plan, with no separate IRA, rollover, or new account involved. The plan administrator processes the conversion, issues a 1099-R coded for a taxable transfer, and the converted balance grows tax-free for life.

The Conversion Math at 55

Convert $100,000 of the traditional balance to Roth. That $100,000 lands on this year’s 1040 as ordinary income. For a household deep into the 24% bracket, with the 32% bracket starting at $403,551 for joint filers in 2026, most of the conversion sits in the 32% slice. The bill, blended with state tax aside, is about $32,000 federal in the conversion year.

Now follow the same $100,000 to age 73, when required minimum distributions begin. Eighteen years at a 7% return turns $100,000 into roughly $339,000. Inside the Roth 401(k), every dollar of that $339,000 is tax-free on withdrawal and exempt from RMDs starting in 2024 under SECURE 2.0. Left in the traditional bucket, the same $339,000 becomes RMD income taxed at whatever bracket you land in at 73, plus whatever Medicare IRMAA surcharge your two-year-lookback MAGI triggers.

The first IRMAA tier in 2026 begins at $109,000 MAGI for single filers and $218,000 for joint filers, and the surcharges scale from $81.20 per month for Part B up to $487 per month at the top tier, with Part D adders of $14.50 to $91. A 73-year-old pulling a large RMD on top of Social Security routinely walks into a 24% to 32% bracket plus an IRMAA bump, producing an effective marginal cost near 40 cents on the dollar. That is the spread the conversion captures.

How the In-Plan Conversion Differs From a Roth IRA Rollover

Three features separate the in-plan conversion from a rollover to a Roth IRA:

1. It stays inside ERISA. The converted balance keeps the federal creditor protection of a 401(k). A Roth IRA leans on state-by-state protections that are weaker for high earners with civil exposure.
2. No five-year clock per conversion if you are already 59½. A Roth IRA conversion starts its own five-year clock for principal access. An in-plan conversion uses the plan’s Roth account aging, so a participant past 59½ with a seasoned Roth 401(k) sub-account has cleaner liquidity.
3. It is irreversible. SECURE 2.0 and the 2017 tax law together eliminated recharacterization for Roth conversions, including in-plan rollovers. If the market drops 30% the week after you convert, you owe the tax on the pre-drop figure. There is no undo button.

Pay the Tax From Outside the Plan

The $32,000 has to come from a taxable brokerage or savings account, not from the conversion itself. Pulling the tax from the 401(k) shrinks the Roth balance you just created and, if you are under 59½, layers a 10% penalty on the withheld portion. The strategy only works for people with enough non-retirement liquidity to write the check cleanly.

For households with an after-tax 401(k) contribution feature, the in-plan conversion pairs with the mega backdoor. After-tax dollars sweep into the Roth sub-account, often automatically each pay period, so growth never accrues in the after-tax bucket where it would be taxable on conversion. A $400,000 earner can stack the $24,500 employee deferral and, if age 60 to 63, an $11,250 super catch-up on top of after-tax contributions up to the overall annual additions limit.

Three Actions This Week

1. Pull your summary plan description and search for “in-plan Roth rollover” or “in-plan Roth conversion.” If the language is absent, the feature is not available. IRS Notice 2013-74 governs the mechanics if your plan does offer it.
2. Model the conversion amount that fills your current bracket without spilling into the next one. For joint filers, that often means converting up to the top of the 24% bracket each year through age 63, before Medicare IRMAA’s two-year lookback starts watching.
3. Confirm you can pay the conversion tax from a taxable account. If you cannot, the conversion still works, but the math tightens considerably and a fee-only CPA review is worth the hour.