Converting Your 401(k) to a Roth IRA While You're Still Working? Yep, It’s Possible.

You might think Roth conversions are something you can only do when you leave a job or retire. But here’s a little-known trick: if your employer’s retirement plan allows in-service distributions, you might be able to start moving money from your 401(k) into a Roth IRA while you're still working there.

And if you're trying to build more tax-free retirement income, this strategy could be a game-changer.

Let’s break it down.

When you do a Roth conversion, you're moving money from a pre-tax retirement account (like a Traditional IRA or a workplace plan like a 401(k) or 403(b)) into a Roth IRA. You do have to pay income tax on whatever amount you convert, since it hasn’t been taxed yet—but once it's in the Roth IRA, it grows completely tax-free. And as long as you follow the rules, you can take the money out in retirement without paying any taxes on it.

Now, usually people convert funds after they leave a job. But some retirement plans let you do what’s called an in-service distribution. That means you can take some of your retirement savings out of the plan and roll it into an IRA while you’re still employed. If you send it straight to a Roth IRA, that counts as a Roth conversion.

It’s important to know that this isn’t just taking money out to spend—it’s a rollover. You’re just changing which type of retirement account it sits in. The benefit is you get Roth treatment from that point forward: no required minimum distributions later, tax-free growth, and more flexibility in retirement.

So who might this work for? It’s great if you’re in a relatively low tax bracket right now but expect to be in a higher one later. It also makes a lot of sense if you’ve already saved enough in pre-tax accounts and want to diversify your future tax situation. And if you live in a state with no income tax but plan to retire somewhere that does, it might be better to pay the taxes now.

Of course, there are a few catches. First, you’ll owe taxes on the conversion, and you’ll want to have cash outside of your retirement account to cover that. Pulling tax money out of the converted funds defeats the purpose. Also, once you convert, there’s no undoing it—so if your tax situation changes unexpectedly, you’re still locked into that year’s tax bill.

There’s also a five-year rule: if you’re under 59½ and you take the money out of the Roth IRA within five years of the conversion, you could owe a 10% penalty. So if you think you might need the money soon, it’s probably not the right move.

That said, you don’t have to convert everything at once. In fact, for a lot of people, it actually makes more sense not to.

Instead of doing one big lump-sum conversion and taking the full tax hit in a single year, you can spread it out over time. This is sometimes called a “staged” Roth conversion or a multi-year strategy. Basically, you just move a portion of your retirement savings each year—whatever amount keeps you in a comfortable tax bracket or aligns with your financial plan.

Let’s say you’re in the 24% federal tax bracket and want to avoid bumping yourself into the 32% bracket. You could convert just enough each year to stay within that 24% range. You get the long-term benefits of building tax-free Roth money, without overwhelming yourself with a huge tax bill all at once.

This approach also gives you more flexibility. You can adjust the amount you convert based on how your income or tax situation changes year to year. Maybe one year you take a break because your income is unusually high. Or maybe you convert a little more one year because you had lower-than-expected earnings or a gap year before retirement.

Another bonus? You might find that spreading out the conversions makes it easier to pay the taxes from non-retirement funds—without dipping into your 401(k) or IRA just to cover the bill.

Bottom line: If your retirement plan allows in-service distributions, you have a valuable chance to start building tax-free retirement income now instead of later. Before you convert, make sure you understand the tax impact and how it fits with your overall retirement goals—checking with HR or your plan administrator can clarify what’s allowed. You don’t need to convert everything at once; spreading out smaller conversions over several years can help manage your tax bill while still taking advantage of Roth benefits. This strategy is especially smart for high earners or those with time to let their savings grow tax-free, making a big difference over the long run.

The information provided in this blog post is intended for general informational purposes only and should not be construed as legal or tax advice. While every effort has been made to ensure the accuracy of the information, tax laws and regulations are subject to change, and individual circumstances may vary. For personalized advice and to ensure compliance with current tax laws, it is strongly recommended that you consult with a qualified tax professional, financial advisor, or legal counsel. The author and publisher of this blog assume no responsibility for any errors or omissions, or for any actions taken based on the information contained herein.