Roth Conversion Strategies: 2026 Guide for High-Income Business Owners

Roth conversions let you pay tax now at known rates in exchange for tax-free growth and withdrawals forever. For business owners, that’s not just a retirement planning tool—it’s a strategic lever you can pull at the right moments to lock in long-term tax savings.

With current tax brackets now permanent under OBBBA (the One Big Beautiful Bill Act made TCJA rates permanent), and income that fluctuates year to year based on business performance, you have opportunities W-2 employees don’t. A year when your K-1 income drops? That’s a conversion window. Sold a business and taking a year off? Even better.

This guide covers when to convert, how much, and how to coordinate conversions with your business income to maximize the benefit.

What is a Roth conversion and when should you do it?

A Roth conversion moves money from a traditional IRA or 401(k) to a Roth account. You pay ordinary income tax on the converted amount now, but all future growth and withdrawals are tax-free. The best time to convert is when your income is temporarily lower than usual—between business ventures, in years with large deductions, or before RMDs force taxable withdrawals. For business owners, this often means years when K-1 income drops due to business investments, startup losses, or real estate depreciation. With TCJA rates now permanent under OBBBA, today’s relatively low brackets (top rate 37%) provide favorable conversion conditions for building long-term tax-free wealth.

Key Takeaways

• Pay tax now at known rates — Roth conversions lock in today’s relatively low tax rates (TCJA rates now permanent under OBBBA)
• No conversion limit — Unlike contributions, you can convert any amount (but watch your tax bracket)
• Business owner advantage — Income fluctuations create natural low-tax conversion windows
• Pro-rata rule applies — If you have pre-tax IRA money, conversions are proportionally taxable
• Conversion ladder strategy — Spread conversions across multiple years to stay in lower brackets
• 5-year rule for withdrawals — Each conversion has its own 5-year clock before penalty-free access to converted principal

How Roth Conversions Work

A Roth conversion moves money from a pre-tax retirement account (traditional IRA, SEP IRA, 401(k)) to an after-tax Roth account. The converted amount gets added to your taxable income for the year. In exchange, all future growth and qualified withdrawals are completely tax-free.

What You Can Convert

You can convert from:

• Traditional IRA
• SEP IRA
• SIMPLE IRA (after 2-year participation)
• 401(k), 403(b), 457(b) if your plan allows in-service distributions, or after you leave the employer
• Inherited IRAs (with some limitations)

Tax Treatment

The converted amount counts as ordinary income. It gets stacked on top of your wages, K-1 income, investment income—everything. This is why timing matters. A $100,000 conversion in a year when you’re already at the top of the 37% bracket costs $37,000 in federal tax. That same conversion in a year when you have room in the 24% bracket costs $24,000.

Example calculation:

• 2026 taxable income before conversion: $180,000 (married filing jointly)
• Room before hitting 32% bracket: ~$103,000 (32% starts at $383,900)
• You could convert $100,000 and stay entirely in the 24% bracket
• Federal tax on conversion: $24,000
• Same conversion in a $400,000 income year: $32,000 (32% bracket)
• Savings from timing: $8,000

The 10% early withdrawal penalty doesn’t apply to conversions—only to the earnings portion if you withdraw before age 59½ and before the 5-year holding period.

Strategic Timing for Business Owners

W-2 employees have predictable income. Business owners don’t. That’s actually an advantage for conversion planning.

Identifying Low-Income Years

The best conversion years are when your income is temporarily depressed:

• Between business ventures — You sold one business and haven’t started the next
• Startup phase with losses — Pass-through losses offset other income
• Major real estate investments — Accelerated depreciation and bonus depreciation create “paper losses”
• Large charitable contribution years — Bunching charitable giving into one year creates conversion room
• Sabbatical or reduced work years — Intentionally stepping back from the business

Coordinating with K-1 Income

Partnership and S-Corp income varies year to year. Your partnership tax planning or S-Corp tax planning should include conversion timing as part of the overall strategy.

The basic rule: large K-1 year means bad conversion year (you’re already in a high bracket). Low K-1 year means conversion opportunity.

Example:

• Year 1: K-1 income = $400,000. You’re already at 35%. Minimal conversion makes sense.
• Year 2: K-1 income = $150,000 (business reinvested heavily). You have room to convert $150,000+ and stay in 32% or below.
• Year 3: K-1 bounces back to $380,000. Skip conversions.

This kind of year-to-year flexibility is why business owners often end up with more Roth assets than employees with comparable lifetime income.

Current Tax Environment (Post-OBBBA)

Current federal tax brackets (now permanent under OBBBA):

• 10%, 12%, 22%, 24%, 32%, 35%, 37%

The One Big Beautiful Bill Act (2025) made TCJA rates permanent, removing the uncertainty that previously existed around a 2028 sunset. While Congress can always change tax rates in the future, there’s no scheduled reversion to higher rates.

This doesn’t eliminate the case for Roth conversions—it actually provides more clarity. Today’s rates are historically favorable compared to pre-TCJA brackets (when the top rate was 39.6%). Converting at 32% or 35% now locks in these rates regardless of what future legislation might do.

The Roth Conversion Ladder Strategy

Instead of one large conversion, many business owners spread conversions across multiple years to fill lower brackets without jumping into higher ones.

What Is a Conversion Ladder?

A conversion ladder is a multi-year plan to move pre-tax money into Roth in measured amounts. Each year, you convert just enough to “fill” a target bracket—typically 24% or 32%—without spilling into the next one.

This strategy is popular in the FIRE (financial independence, retire early) community, but it works equally well for business owners who have some control over their income timing.

Building Your Ladder

1. Project your income for the next 3-5 years — What do you expect your K-1, salary, and investment income to be?
2. Identify your target bracket — Usually the top of 24% or 32%
3. Calculate conversion room each year — Bracket threshold minus projected income
4. Assign conversion amounts — Spread your total pre-tax balance across years
5. Adjust annually — Actual income will differ from projections; recalibrate each year

Example: 5-Year Conversion Plan

Contrast this with converting $380,000 all at once in the year you happen to think about it—potentially pushing into 35% or 37%.

Your quarterly tax planning process should include conversion projections as a standing agenda item.

The Pro-Rata Rule and Conversions

If you have any pre-tax money in traditional IRAs—including SEP IRAs and SIMPLE IRAs—the pro-rata rule affects your conversion math.

How It Affects Your Tax Bill

The IRS doesn’t let you cherry-pick which dollars to convert. Instead, they look at ALL your traditional IRA balances and determine the taxable percentage of any conversion.

Example:

• Total IRA balance: $500,000 (all pre-tax from old 401(k) rollovers)
• New non-deductible contribution: $7,000
• After-tax percentage: $7,000 / $507,000 = 1.4%
• If you convert $7,000, only $98 is tax-free; $6,902 is taxable

This matters most for backdoor Roth IRA contributions, but it affects all conversions. The full breakdown is in our pro-rata rule explained guide.

Solutions for Business Owners

The fix is straightforward if you have a 401(k):

1. Roll pre-tax IRAs into your 401(k) — This removes them from the IRA aggregation calculation
2. Now your IRA balance is $0 pre-tax — Conversions from new non-deductible contributions are 100% tax-free

If you have a solo 401(k) or your company’s 401(k) accepts rollovers, this is the cleanest path. If you don’t have a 401(k), you’ll need to either accept the pro-rata math or convert everything (paying the tax) to clear the deck.

SECURE 2.0 Considerations

Several SECURE 2.0 provisions affect Roth conversion strategy for business owners.

Mandatory Roth Catch-Up (2026+)

Starting in 2026, if you earned $150,000 or more in FICA wages from your employer in the prior year, catch-up contributions to your 401(k) must be made as Roth.

For S-Corp owners, this means if your W-2 salary exceeds $150,000, you can’t make traditional catch-up contributions—they’re forced Roth. This doesn’t directly affect conversions, but it does increase your natural Roth accumulation.

See our S-Corp reasonable compensation guide for how this interacts with salary planning.

Enhanced Catch-Up (Ages 60-63)

If you’re between 60 and 63, your 401(k) catch-up limit increases to $11,250 (vs. $8,000 for ages 50-59 and 64+). This creates more room for Roth 401(k) contributions during peak earning years—again, not a conversion issue but part of the overall Roth accumulation picture.

RMD Changes

Required minimum distributions now start at age 73, moving to 75 for those born in 1960 or later. This extends the window for tax-free Roth growth before you’re forced to take distributions from traditional accounts. More runway for conversions means more flexibility in timing.

Roth IRAs have no RMDs for the original owner—another reason to convert.

Common Mistakes to Avoid

Converting Too Much in One Year

The most expensive mistake is spiking into a higher bracket when you could have spread the conversion over multiple years.

If you have $300,000 to convert and you do it all in a year when you’re already at $300,000 income, a chunk hits 35% and 37%. Spread over three years with lower income, it might all stay in 32% or below. The difference can be $15,000-$30,000 in unnecessary tax.

Ignoring State Taxes

Federal brackets get all the attention, but state income tax can add 0-13%+ on top.

California and New York Roth conversions face ~13% state tax. Texas, Florida, and Nevada have no state income tax.

If you’re planning to move from a high-tax state to a no-tax state at retirement, delaying conversions until after you move might make sense. Conversely, if you’re in Texas now but planning to move to California, accelerating conversions while you’re tax-free at the state level is smart.

Forgetting the 5-Year Rule

Each Roth conversion starts its own 5-year clock. If you’re under 59½ and need to access the converted principal before 5 years, you’ll owe a 10% penalty on that amount.

This isn’t usually an issue for people who don’t plan to touch retirement money until traditional retirement age. But if you’re pursuing early retirement, track each conversion date carefully.

After age 59½, the 5-year rule no longer triggers penalties on converted principal.

Poor Record-Keeping

Form 8606 tracks your non-deductible (after-tax) IRA contributions. You’ll need this information decades from now to prove your basis.

Keep every Form 5498 (contribution records), Form 1099-R (distribution records), and Form 8606 indefinitely. Digital copies are fine, but they need to exist.

When Roth Conversions DON’T Make Sense

Roth conversions aren’t always the right move.

You’re Already in a Low Bracket Permanently

If your income in retirement will genuinely be lower than it is now, and tax rates stay the same, traditional accounts mathematically win. The deduction at 32% beats the 24% tax you’d pay later.

Most business owners don’t fit this profile—they accumulate enough wealth that investment income keeps them in higher brackets through retirement—but it’s worth running the numbers for your specific situation.

You Need the Tax Money from the Conversion

Converting $100,000 means owing roughly $24,000-$37,000 in federal tax (plus state). That money should come from non-retirement funds.

If you’d have to sell investments or dip into the IRA itself to pay the conversion tax, the math often doesn’t work. You lose the tax-free growth on whatever you sell.

Only convert what you can afford to pay tax on from outside money.

Estate Planning Considerations

Under the SECURE Act’s 10-year rule, most non-spouse beneficiaries must empty inherited retirement accounts within 10 years. That includes Roth accounts—though the withdrawals are tax-free.

If you expect your heirs to be in much lower tax brackets than you, the calculus changes. They might pay less tax inheriting a traditional account than you’d pay converting it.

But for high-earning beneficiaries (or if you want to leave truly tax-free money), Roth still wins.

Frequently Asked Questions

Is there an income limit for Roth conversions?

No. Unlike Roth IRA contributions, which phase out at high incomes, there’s no income limit for conversions. You can convert any amount regardless of how much you earn. This is the “backdoor” that high earners use to get money into Roth accounts.

Can I undo a Roth conversion if my income is higher than expected?

No. Recharacterizations of Roth conversions were eliminated by the Tax Cuts and Jobs Act starting in 2018. Once you convert, it’s permanent. This makes accurate income projections critical.

How much should I convert each year?

Enough to fill your current tax bracket without jumping to the next one. If you’re in the 24% bracket with room for $80,000 more income before hitting 32%, consider converting up to $80,000. Work with a CPA to project this accurately based on your full income picture.

What’s the difference between a Roth conversion and a backdoor Roth?

A backdoor Roth specifically refers to contributing to a traditional IRA (non-deductible) and then immediately converting to Roth. It’s designed to bypass income limits on direct Roth IRA contributions. A Roth conversion is the broader term for moving any traditional retirement money to Roth, regardless of source. See our backdoor Roth vs mega backdoor Roth guide for details.

Do Roth conversions affect my Medicare premiums?

Yes. Roth conversion income increases your MAGI, which can trigger IRMAA (Income-Related Monthly Adjustment Amount) surcharges on Medicare Parts B and D premiums. The look-back is 2 years, so 2026 conversions affect 2028 premiums. For large conversions, factor in an additional $2,000-$8,000+ in annual Medicare costs.

Should I convert all my traditional retirement accounts to Roth?

Not necessarily. Having a mix of traditional and Roth gives you flexibility to manage taxable income in retirement. You can pull from traditional accounts to fill lower brackets, then switch to Roth when you’d otherwise hit higher ones. The optimal mix depends on your expected tax rates, estate plans, and income needs.

How do I report a Roth conversion on my taxes?

Your custodian sends Form 1099-R showing the distribution. You report the taxable portion on Form 1040 as ordinary income. If you had any non-deductible contributions, you’ll also file Form 8606 to calculate the taxable amount (this is where the pro-rata rule gets applied).

Can I convert my 401(k) to a Roth IRA while still employed?

It depends on your plan. Some 401(k)s allow in-service distributions or in-plan Roth conversions. Check your Summary Plan Description or ask HR. If your plan doesn’t allow it, you’ll need to wait until you leave the employer (or reach age 59½ in some plans).

Get Your Conversion Strategy Right

Roth conversions are powerful, but the difference between a well-timed strategy and haphazard execution can be tens of thousands of dollars over your lifetime.

Business owners have unique opportunities to time conversions around income fluctuations. With TCJA rates now permanent under OBBBA, today’s relatively low brackets provide favorable conditions for building tax-free wealth through strategic conversions.

Ready to build your Roth conversion strategy? Schedule a tax planning consultation and we’ll analyze your income projections, identify optimal conversion windows, and create a multi-year plan that coordinates with your overall tax advisory approach.

For a complete view of retirement tax strategies, see our Retirement Tax Planning Hub.

Related Guides:

• Retirement Tax Planning Hub
• Pro-Rata Rule Explained
• Backdoor Roth vs Mega Backdoor Roth
• S-Corp Tax Planning Strategies
• Partnership Tax Planning Strategies