As much as I might not want to admit it, I’m a sucker for complicated tax technical issues. See my writings here and here.
Recently an odd issue has come up: does income created by an in-plan Roth conversion count as modified adjusted gross income for purposes of determining eligibility to make an annual Roth IRA contribution?
What follows below is simply one practitioner’s views on a somewhat ambiguous technical tax issue. It is not financial, legal, or tax advice for you or anyone else.
Issue
The ability to make an annual contribution to a Roth IRA is limited or eliminated at certain levels of “modified adjusted gross income” (MAGI). For example, in 2026 those married filing jointly with MAGI of $252,000 or more are unable to make a 2026 contribution to a Roth IRA.
There is an odd rule: Roth IRA conversion income does not count as MAGI for purposes of determining whether a person has income low enough to make an annual contribution to a Roth IRA. See Section 408A(c)(3)(B)(i).
Why is this rule the rule? It is counterintuitive considering that if a person simply distributes money from a traditional IRA or a traditional 401(k) to themselves, that income is included in MAGI for purposes of determining whether income is low enough to make an annual contribution to a Roth IRA.
The rule has a purpose, which I wrote about back in 2022. In 1997, when Congress first created Roth IRAs, it had to define MAGI for two purposes. First was the eligibility to make an annual Roth IRA contribution. Second was the eligibility to do a Roth conversion. Back then Roth conversions were limited only to those with MAGI not exceeding $100,000. See page 39 of this file.
Congress chose to create only one MAGI definition for these two purposes. Since that MAGI definition policed Roth conversions, Congress had to avoid creating a circular calculation issue. If MAGI included income created by Roth conversions, Roth conversions could disqualify themselves.
A person with $90,000 of other AGI doing any Roth conversion over $10,000 would suddenly be ineligible to have done any Roth conversion by going over the $100,000 MAGI limit if Roth conversions were tested against themselves. Thus, Congress excluded Roth conversion income from the definition to avoid the circular calculation issue.
While entirely rational, that choice had an interesting lingering effect: Roth conversion income does not count when determining MAGI for purposes of determining whether a person can make an annual Roth IRA contribution.
In-Plan Roth Conversions
The Economic and Growth Tax Relief Reconciliation Act of 2001 first introduced the concept of a Roth 401(k). See Section 402A as originally enacted on page 66 of this file.
It was not until 2010 that the Small Business Jobs Act of 2010 introduced the concept of an “in-plan Roth conversion” i.e., converting an amount in a traditional 401(k) to a Roth 401(k) in a taxable transaction akin to a Roth IRA conversion. See page 63 of this file.
So the question emerges: If we exclude Roth IRA conversion income from the annual Roth IRA contribution definition, do we also exclude in-plan Roth conversion income from the definition?
Relevant Authorities
Section 408A established the Roth IRA in 1997, first effective in 1998. In that law, Congress defined MAGI for Roth IRA annual contribution eligibility purposes as MAGI as defined by Section 219(g)(3) except that any income created by a taxable Roth IRA conversion is not included in MAGI. See Section 408A(c)(3)(B)(i).
A Roth IRA conversion is taxable under Section 408A(d)(3)(A)(i).
In 1999, the IRS and Treasury published final regulations governing Roth IRAs.
Treas. Reg. Section 1.408A-3 Q&A 5 states that:
[M]odified AGI is the same as adjusted gross income under section 219(g)(3)(A) (used to determine the amount of deductible contributions that can be made to a traditional IRA by an individual who is an active participant in an employer-sponsored retirement plan), except that any conversion is disregarded in determining modified AGI. (emphasis added)
It’s not immediately clear what this regulation means by “conversion.” To determine what “conversion” means as used in Treas. Reg. Section 1.408A-3, we need to look to Treas. Reg. Section 1.408A-8(b)(2), which defines “conversion” for purposes of the Roth IRA regulations. That definition states:
The term conversion means a transaction satisfying the requirements of § 1.408A-4 A-1.
Now we have to look at Treas. Reg. Section 1.408A-4 Q&A 1. It defines a conversion as a transfer from a traditional IRA to a Roth IRA. Note that this regulation has never been updated for the 2006 law change allowing Roth IRA conversions from qualified plans such as traditional 401(k)s directly to Roth IRAs.
Section 402A, enacted in 2001, first created the Roth 401(k).
In 2006, the Pension Protection Act allowed Roth IRA conversions directly from qualified plans such as traditional 401(k)s. See Section 824 of the Pension Protection Act of 2006.
Congress enacted Section 402A(c)(4)(A), which allows for taxable in-plan Roth conversions, in 2010.
Notably, nothing in the Small Business Jobs Act of 2010 changed Section 408A, the statute governing Roth IRAs, including the MAGI limit on the ability to make annual Roth IRA contributions.
Today, IRS Publication 590-A has Worksheet 2-1, which computes MAGI for Roth IRA annual contribution purposes. Line 2 of that subtracts from “adjusted gross income” any Roth IRA conversion coming from an IRA and any Roth IRA conversion coming from a qualified retirement plan (such as a traditional 401(k). Nothing in that worksheet subtracts in-plan Roth conversion from adjusted gross income. It is important to note that IRS Publications are not authority binding on the IRS and/or taxpayers and cannot be cited as authority.
In-Plan Roth Conversions and the Roth IRA Annual Contribution MAGI Limit
My view is that income created by in-plan Roth conversions should be included in MAGI for purposes of determining whether a person can make an annual Roth IRA contribution.
In 1997, Congress said to use the IRA MAGI definition (Section 219(g)(3)) but kick out income created under Section 408(d)(3), which is Roth IRA conversion income. See Section 408A(c)(3)(B)(i). Income created by an in-plan Roth conversion is not created by Section 408(d)(3) but rather it is created by Section 402A(c)(4)(A).
In-plan Roth conversion income could not have been kicked out of the 1997 MAGI definition because it did not exist in 1997 to be kicked out of the MAGI definition!
No subsequent development kicks out in-plan Roth conversion income, or any other income, from the Roth IRA MAGI definition. The 1999 final regulations do not do so.Those regulations define the conversion income to be kicked out as income created by a transfer to a Roth IRA. Thus, the 1999 final regulations do not kick in-plan Roth conversion income out of the definition of MAGI for annual Roth IRA eligibility determination purposes.
In 2010, Congress created a new type of income: in-plan Roth conversion income. That income is part of all AGI and MAGI determinations unless Congress decides to exclude it from MAGI for any particular purpose. If Congress did not want that new type of income to count as MAGI for annual Roth IRA contribution purposes, it could have concurrently amended the Roth IRA statute in 2010. Congress chose not to.
Further, there is no compelling reason to kick out in-plan Roth conversion income from the definition of MAGI for annual Roth IRA contribution limitation purposes. Remember, there are essentially two reasons Roth IRA conversion income was kicked out in 1997.
First, in 1997 Congress decided to economize when it came to Section 408A MAGI definitions. It could have created two new MAGI definitions (one for testing annual contributions and one for testing Roth IRA conversions) but it took the economical path and simply created a single definition.
Second, Congress did not want to create a circular calculation definition. As applied to Roth IRA conversions, it would be highly problematic to test Roth conversions against themselves.
When we combine these two reasons, we see why Roth IRA conversion income is kicked out of MAGI for purposes of determining Roth IRA annual contribution eligibility. Neither of these two reasons (separate or together) apply when considering whether in-plan Roth conversion income needs to be excluded from MAGI to determine Roth IRA annual contribution eligibility.
Planning
The in-plan Roth conversion issue rarely comes up when considering annual Roth IRA contribution MAGI. Why?
As I discussed on an episode of the ChooseFI podcast, our working years tend to be a bad time to do taxable Roth conversions! Having a full time job tends to be a great indicator that a taxable Roth conversion is not advantageous. Note that a “backdoor” Roth conversion is entirely distinct from a “taxable Roth conversion” and something I tend to favor if the profile is right and the cash flow is adequate.
Thus, the issue addressed in this blog should not hit most workers’ planning radar. But I also know that not everyone agrees with me on the advantageousness of taxable Roth conversions during one’s working career. So the issue will arise from time to time.
Conclusion
My view is that in-plan Roth conversion income, unlike Roth IRA conversion income, is not kicked out of MAGI for purposes of determining eligibility to make an annual Roth IRA contribution. Of course, this post is simply one practitioner’s view. It is not advice for you, your situation, or anyone else.
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