In-work poverty (IWP) affects individuals who are employed but have an equivalised disposable household income below 60% of the national median. While IWP is associated with poorer mental health, it remains unclear whether escaping IWP reduces mental health risk or whether adverse effects persist after upward mobility. This study examines whether escaping IWP reduces mental health risk in Sweden, and whether moving moderately versus substantially above the poverty line differentially affects outcomes. This cohort study included 93,962 Swedish workers aged 24–60 who were in IWP in 2012. Escaping IWP was defined as moving from IWP in 2012 to either “moderately above” (60–100% of the median) or “substantially above” (>100% of the median) the poverty line in 2013, with those remaining in IWP as the reference group. Outcomes were first-diagnosed mental health disorders and first SSRI prescriptions during 2014–2019. Sex-stratified Cox regression models estimated crude and adjusted hazard ratios (AHRs) with 95% confidence intervals. Moving moderately above the poverty line was not associated with a significantly lower risk of either outcome. Men who moved substantially above the poverty line had a significantly lower risk of diagnosed mental health disorders (AHR 0.65, 95% CI 0.50–0.84) and SSRI prescriptions (AHR 0.85, 95% CI 0.74–0.97). No significant associations were observed among women. Escaping IWP yields greater mental health benefits for men than women, and only substantial income gains were associated with improved outcomes. Policies should address not only IWP reduction but also the adequacy and stability of upward mobility pathways.