Tax planning
Roth Conversion Strategy: When and How to Convert a Traditional IRA or 401(k) to Roth
A Roth conversion moves money from a pre-tax account to a Roth — you pay income tax now, then the account grows and withdraws tax-free forever. The strategy is most powerful in low-income years, early retirement, or when tax rates are expected to rise. How to calculate the optimal conversion amount, the Medicare IRMAA trap, and how business owners use income control to create conversion windows.
Written by Matt Reese, CPA · 7 min read · Published April 2026·Share on LinkedIn
Key Takeaways
- A Roth conversion is taxable in the year it occurs — the converted amount is added to your ordinary income. The goal is to pay tax at a lower rate now than you'd pay on required minimum distributions later.
- The ideal conversion window: years when your taxable income is temporarily low — a business loss year, gap between retirement and Social Security, or a year you sold a business with installment note income deferral.
- The Medicare IRMAA surcharge (Income-Related Monthly Adjustment Amount) adds $70–$419/month to Medicare Part B and D premiums based on income from two years prior — a Roth conversion can trigger it unexpectedly.
- Business owners have an advantage: they can often control the timing and amount of taxable income, creating predictable low-income years for strategic conversions.
Why convert at all?
Traditional IRA and 401(k) accounts defer tax — you contribute pre-tax, the money grows tax-free, and you pay ordinary income tax on every dollar you withdraw. Roth accounts work the opposite way: you pay tax now, but qualified withdrawals (including all growth) are forever tax-free.
A Roth conversion makes sense when you expect to be in a higher tax bracket in the futurethan you are today. The math is simple: if you're in a 22% bracket now and expect to be in 32% when you retire, paying 22% today beats 32% later.
| Scenario | Pre-tax account (traditional) | Roth account |
|---|---|---|
| When tax is paid | On withdrawal (ordinary income rate) | On contribution (today's rate) |
| Required minimum distributions | Yes — starting at age 73 | No RMDs during owner's lifetime |
| Estate planning | Heirs pay income tax on inherited RMDs | Heirs receive tax-free distributions (10-year rule still applies) |
| Contribution rules (2025) | $7,000 / $8,000 if 50+ | $7,000 / $8,000 if 50+ (income limits apply) |
| Backdoor contributions available | Not needed | Yes, for high earners (via nondeductible IRA) |
| Conversion possible | Yes — triggers taxable income | N/A (already Roth) |
The conversion window: when income is temporarily low
The Roth conversion strategy is most powerful when you can convert in years with unusually low taxable income. Common conversion windows:
- Business loss year: A large equipment purchase, Section 179 deduction, or operating loss reduces taxable income — creating space to convert without increasing the marginal rate.
- Gap year before Social Security: If you retire at 62 but delay Social Security until 70, those 8 years have no W-2 income and no Social Security. Living on savings during this period while converting creates a powerful window.
- Post-business-sale year with installment note: If you sold your business and elected installment sale treatment, you spread gain over several years — but the year after closing may have lower income than the sale year, creating a conversion window.
- Sabbatical or leave year: A year you intentionally reduce work has lower income — and lower tax cost to convert.
- Early retirement before pension/RMD income begins: Once Social Security, a pension, and RMDs all start, taxable income may be higher than during working years for some retirees.
Business owners often have more income control than W-2 employees — which means more conversion opportunities. When the business has a low-income year, use it.
How to calculate the optimal conversion amount
The goal is to convert as much as possible while staying in your current tax bracket — or just below a bracket or threshold that would significantly increase costs.
The bracket-fill strategy converts exactly enough to use available low-rate space without pushing into higher brackets. Done annually, it systematically reduces pre-tax balances at the most favorable rate available.
The IRMAA trap
Medicare Part B and D premiums are income-based. The surcharge (IRMAA) is based on your Modified Adjusted Gross Income (MAGI) from two years prior. A large Roth conversion in 2025 affects your 2027 Medicare premiums.
| 2025 MAGI (MFJ) | 2027 Monthly Part B premium | Annual surcharge vs base |
|---|---|---|
| $212,000 or below | $185.00 (base) | $0 |
| $212,001–$266,000 | $259.00 | +$888/year |
| $266,001–$334,000 | $370.00 | +$2,220/year |
| $334,001–$400,000 | $480.90 | +$3,551/year |
| $400,001–$750,000 | $591.90 | +$4,883/year |
| Above $750,000 | $627.90 | +$5,315/year |
IRMAA applies to both Part B and Part D — and to each Medicare enrollee
Roth conversion for business owners: using income control
S-corp owners and pass-through business owners control when they recognize income. This creates opportunities unavailable to W-2 employees:
- Large equipment purchase: Section 179 deduction reduces pass-through income to near zero. Convert a large Roth amount at low or zero federal tax.
- Defined benefit plan contribution: A cash balance plan contribution deducts $150,000–$350,000 from taxable income, creating space to convert Roth simultaneously.
- Defer distributions: Leave S-corp profits accumulated without taking distributions in a year when conversion is planned.
- Business losses: A down year is a conversion opportunity — don't let a loss year be wasted without converting.
Roth accounts and estate planning
Roth IRAs have no required minimum distributions during the owner's lifetime — allowing the account to compound tax-free indefinitely. For heirs, the SECURE Act (2019) and SECURE 2.0 (2022) now require most non-spouse beneficiaries to withdraw inherited Roth accounts within 10 years. But those withdrawals are still tax-free.
For a high-net-worth business owner expecting to leave a large retirement account to children in their peak earning years, a Roth is significantly more valuable than a traditional IRA — the heirs avoid paying ordinary income tax on forced distributions.
Model the full picture with your CPA and advisor together
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Frequently asked
Questions owners actually ask
- Should I convert my entire IRA to Roth at once?
- Rarely. Large conversions in a single year push income into higher brackets and may trigger IRMAA. The typical strategy is to convert incrementally — filling up your current tax bracket each year, or converting up to a specific dollar threshold. Over several years, you can convert a substantial balance while managing the annual tax cost.
- Can I undo a Roth conversion if the market drops?
- No — the TCJA 2017 eliminated Roth recharacterization. Prior to 2018, you could undo a conversion by October 15 of the following year. That option no longer exists. This makes conversion timing more important — you can't reverse course if the market drops significantly after you convert.
- Does a Roth conversion affect my QBI deduction or other deductions?
- Yes. A conversion adds to AGI, which can reduce or eliminate the QBI deduction (which phases out above $197,300 single / $394,600 MFJ in 2025), reduce itemized deductions, trigger the NIIT, and affect other income-based phaseouts. Model the full impact before converting.
- What's the best age to do Roth conversions?
- Conversions are most powerful when done early — in your 40s or 50s, the tax-free growth compounds for decades. The years between business sale and Medicare eligibility (65), or between early retirement and Social Security claiming (especially 62–70), often provide natural low-income windows. RMDs begin at age 73; reducing pre-tax balances before then lowers future forced distributions.
- Should I pay the conversion tax from the IRA or from outside funds?
- Pay from outside funds if possible. If you convert $100,000 and pay the tax from the IRA (by withholding), you're effectively converting less and potentially incurring a 10% early withdrawal penalty on the withheld amount if under 59½. Paying the tax from a taxable brokerage account or savings means the full $100,000 enters the Roth and grows tax-free.
Take the next step
Turn tax questions into a plan. Talk with Matt or see how we work with operating business owners.
Educational content only.This article is for informational purposes and does not constitute tax, legal, or investment advice. Every owner’s facts are different; consult a qualified CPA and advisor before acting. Tax and accounting services are provided through Matt Reese, CPA; investment advisory services are provided through Measured Risk Portfolios, a registered investment adviser. Matt Reese, CPA and Measured Risk Portfolios are separate entities; clients are not required to engage both.