A Roth conversion moves pre-tax retirement money into a Roth IRA and charges you ordinary income tax on it now, in exchange for tax-free growth later. For a business owner, the best time to convert is usually a year when your taxable income is lower than normal, you have cash outside the account to pay the tax, and you have enough years ahead for the growth to outweigh the upfront bill. Your business income decides most of the math, which is why the answer is rarely the same two years in a row.
TL;DR
- A conversion is taxed as ordinary income in the year you do it, so the tax rate you pay on it is set by your business profit, salary and other income that year.
- The best windows are low-income or down years, a startup year, a year with a large deduction, or a year before income is expected to rise.
- Pay the tax from money outside the retirement account. Using the converted dollars to pay the bill weakens the case for converting.
- Conversions cannot be undone. Since 2018 a conversion cannot be recharacterized back to a traditional IRA, so model it before you move money.
- S corporation owners and owners of several businesses should check how the added income interacts with the QBI deduction and with other planned strategies before choosing an amount.
Table of Contents
- What a Roth conversion is, and what you can convert
- How much can you convert, and are there income limits?
- How a conversion is taxed
- When to do a Roth conversion
- How S corporations and multiple businesses change the picture
- The rules and risks to know before you convert
- Perspective: why we model conversions as part of the whole plan
- Getting a conversion plan built around your entities
- A short checklist before you convert
- FAQ
- Sources
What a Roth conversion is, and what you can convert
A traditional IRA, SEP IRA or SIMPLE IRA holds money that has not been taxed yet. A Roth IRA holds money that has. A conversion is the act of moving dollars from the first kind of account into the second, and you pay income tax on the pre-tax amount that moves.
Owners typically convert from one of these:
- A traditional IRA
- A SEP IRA or SIMPLE IRA
- A pre-tax balance in an employer plan such as a 401(k) or a solo 401(k), where the plan allows it
One exclusion matters if you have inherited money: inherited IRAs cannot be converted to a Roth IRA by a non-spouse beneficiary in the usual way, so those balances are off the table for this strategy.
There are three ways to carry out the move: a 60-day rollover, a trustee-to-trustee transfer, or a transfer within the same institution. The IRS lists these methods and requires the conversion to be reported on Form 8606. For most owners, a direct transfer is the cleanest, because there is no 60-day clock to miss.
How much can you convert, and are there income limits?
There is no income cap on conversions, which surprises many high earners. Roth IRA contributions phase out at higher incomes, but conversions have no such income limit, and the same page notes a conversion is open to a taxpayer at any income level. There is also no dollar cap on the amount you can move in a single year.
The real limit is the tax bill. Every pre-tax dollar you convert is added to your taxable income for the year. So the practical question is not "how much am I allowed to convert" but "how much can I convert before the next tax bracket costs more than the conversion is worth."
That is also why high earners who cannot contribute to a Roth directly often use the conversion route instead. If that is your situation, our backdoor Roth playbook for high earners walks through the two-step process and the pitfalls.
How a conversion is taxed
The converted amount is treated as a distribution from the old account. The part that is a return of after-tax basis, meaning money you already paid tax on, is not included in gross income. The rest is added to your income and taxed at your ordinary rates.
Two practical points follow from that.
The tax stacks on top of your other income. If your business throws off a high profit, the conversion is taxed at the top of your bracket stack, not the bottom. A conversion in a year when your income dips lets more of it fill lower brackets.
After-tax basis is not always tax-free to convert. If you hold both pre-tax and after-tax money across your traditional, SEP and SIMPLE IRAs, the IRS looks at them together, not one account at a time. This is the pro-rata rule, and it is the reason a backdoor Roth can produce an unexpected bill when an owner has an old rollover IRA or SEP balance. Form 8606 is where basis is tracked, so keep every year's copy.
A worked example
Suppose a married business owner expects a profit well above the prior year and has a $100,000 pre-tax IRA. If they convert the whole balance in a peak year, that $100,000 lands on top of an already high income. If they convert $40,000 a year over several years, or convert more in a year with a large equipment deduction, the same dollars are taxed at lower rates. The figures are illustrative: the point is that the year and the size, not the account, drive the cost.
| Scenario | Business profit that year | Conversion effect |
|---|---|---|
| Strong year, no offsetting deductions | High | Converted dollars taxed at your highest bracket |
| Startup or down year | Low or a loss | Converted dollars may fill lower brackets |
| Large one-time deduction (equipment, depreciation) | Reduced taxable income | Room to convert more at moderate rates |
| Income expected to climb next year | Moderate now | Paying now may beat paying later |
When to do a Roth conversion
Research from the Financial Planning Association points to two conditions: a business owner should consider converting when they have enough outside cash to pay the tax and an investment horizon long enough for tax-free growth to outweigh the upfront cost. The same analysis frames the decision as a trade-off between today's tax rate and a likely future rate, together with the effect of compounding.
For a business owner, that translates into a handful of situations where the timing tends to work.
A low-income or down year
A slow year, a new business launch, a big reinvestment year or a partial year of income can all produce a lower bracket than you will normally see. Business income is more volatile than a W-2 paycheck, which gives owners more chances to find these years than employees have.
A year with large deductions
Cost segregation or bonus depreciation on a rental or business property, large equipment purchases and retirement plan contributions can pull taxable income down. A conversion can use the room those deductions create. The key is to model the deductions first and the conversion second, so you know the real taxable income before choosing an amount.
Before income rises or rates change
If you expect your profit to grow, or you are building a second or third entity, your future bracket may be higher than today's. Converting while income is still moderate locks in today's rate on those dollars. Tax rates are set by law and can change, so treat any future-rate assumption as an assumption, not a promise.
When you can pay the tax from outside the account
This is the condition owners most often overlook. The same research notes a conversion may be optimal when you have enough cash outside the retirement account to pay the resulting taxes without tapping the converted assets. If you have to take money out of the conversion to pay the tax, you shrink the amount that grows tax-free. If you are under 59½, you may also trigger an early-distribution penalty on the withheld amount.
One adviser quoted by the Plan Sponsor Council of America put the idea as paying tax on the seed rather than on the harvest. The PSCA article on Roth conversions shows why that framing appeals to owners who want control over future taxable income.
When conversions are a poor fit
A conversion is harder to justify when you need the money soon, when you would be forced to borrow or sell business assets to pay the tax, or when you expect to be in a much lower bracket in retirement. If you plan to leave the account untouched for decades, or to pass it on, the case for converting gets stronger, but that is a decision to model, not assume.
How S corporations and multiple businesses change the picture
For most owners, business income flows onto your personal return. That means a conversion interacts with every other number on the return.
The QBI deduction. Owners of pass-through businesses may claim the Section 199A qualified business income deduction, and a conversion raises taxable income, which can push you into a range where the deduction is limited. Kitces Research notes that Roth employer contributions to a solo 401(k) are reported as pre-tax contributions followed by an immediate Roth conversion, which can reduce a self-employed owner's QBI deduction. The details differ by structure, so run the numbers before choosing the Roth option inside a plan. Our guides to QBI for S corp owners and the solo 401(k) for S corp owners explain how salary and plan design feed into this.
Roth employer contributions. The SECURE 2.0 Act made it possible for employers to make contributions in Roth form. The American Retirement Association's Robert Kaplan says this offers new flexibility for plan design. For an owner who is also the employee, that opens a second route to Roth dollars alongside conversions.
Several entities, uneven income. If one company has a great year and another loses money, your combined taxable income is what the conversion lands on. Owners with several entities should look at the entities together before choosing a conversion year, not one K-1 at a time.
Salary and distributions. In an S corporation, the salary you pay yourself shapes your retirement plan contributions, your QBI deduction and your personal taxable income all at once. Changing it to make room for a conversion has knock-on effects, so decide salary and conversion together.
The rules and risks to know before you convert
A few rules cause most of the trouble. Know them before you move money.
- No undo. Conversions and rollovers to a Roth IRA made during or after 2018 cannot be recharacterized back to a traditional IRA. If income turns out higher than expected, you cannot reverse the conversion. A partial conversion is the usual way to manage this.
- The five-year rule on converted amounts. If you withdraw a converted amount before five years from the start of the year of conversion, the distribution is nonqualified and may carry a 10% penalty. Each conversion has its own clock, so a plan to use Roth money in the near term deserves a closer look.
- Report it. Conversions are reported to the IRS on Form 8606, and your custodian issues a Form 1099-R. Check the two match.
- Estimated taxes. Because business owners do not have an employer withholding on their behalf, a conversion in the middle of the year can create an underpayment if you do not adjust your estimated payments. Add the conversion tax to your quarterly plan.
- The conversion counts in the year it is completed. Plan the amount before year-end, not after. Our December tax planning checklist shows where a conversion fits among the other year-end moves.
Perspective: why we model conversions as part of the whole plan
Most conversion advice treats the account as the unit of analysis. For our clients, the better unit is the whole tax picture: the entities, the salary, the depreciation, the retirement plan and the expected income over the next few years.
A conversion is not a standalone trick. It is one lever among several that all draw on the same taxable income. We see owners lose value in two ways: they convert in a year when their income is already at its peak, or they skip converting in a year with room because nobody modeled it. Both mistakes come from looking at one return at a time.
Our approach is to build a multi-year view first, using the owner's real entity structure and expected profit, and then decide how much to convert, if anything. Sometimes the answer is to convert a modest amount every year. Sometimes it is to wait for a year with a large deduction. Sometimes it is not to convert at all. A calm, numbers-first answer beats a strategy sold on a headline. Our broader thinking on this is in our guide to proactive tax planning for small business owners.
— Melissa
Getting a conversion plan built around your entities
If you own an S corporation or several businesses, we build conversion decisions into year-round planning rather than treating them as a December afterthought. Two ongoing options are published on our advisory comparison page: Monthly Tax Advisory at $11,997 per year and Quarterly Tax Strategy Sessions at $9,497 per year. If your main question is salary, entity structure and retirement contributions for an S corporation, the S-Corp Tax Strategy Accelerator is a $997 one-time starting point.
If you are a high earner weighing several strategies at once, our 2026 tax planning guide for high earners shows how a conversion fits alongside the others.
A short checklist before you convert
- Project this year's taxable income, including all entities, before choosing an amount.
- Identify your bracket edges and the QBI deduction range you are near.
- Add up all traditional, SEP and SIMPLE IRA balances to see the pro-rata effect.
- Confirm you can pay the tax from outside the account.
- Decide whether to convert in one step or in stages over several years.
- Update your estimated tax payments.
- Keep Form 8606 and the 1099-R on file with your return.
FAQ
Can I convert my business retirement plan to a Roth?
Often yes, but it depends on the plan. A SEP IRA or SIMPLE IRA can be converted to a Roth IRA, and some 401(k) and solo 401(k) plans allow in-plan Roth conversions. Check your plan document or ask your custodian before you plan the amount.
Is there a limit on how much I can convert?
No dollar limit and no income limit apply to a conversion. The limit is practical: every pre-tax dollar converted is added to that year's taxable income, so the right amount is the one that stays within a bracket you are comfortable paying.
Can I undo a Roth conversion if my income turns out higher?
No. Conversions made in 2018 or later cannot be recharacterized. That is why many owners convert in smaller amounts and confirm their income before adding more.
Can I withdraw converted money right away?
You can, but it may cost you. A withdrawal of a converted amount within five years of the start of the conversion year is nonqualified and may be hit with a 10% penalty. Plan to leave converted money alone for at least that long.
Does a Roth conversion affect my QBI deduction?
It can. A conversion raises your taxable income, and the QBI deduction has income-based limits for some owners. If you are near those limits, model the deduction with and without the conversion before you commit.
Sources
- Traditional and Roth Individual Retirement Accounts (IRAs), Congressional Research Service
- Retirement plans FAQs regarding IRAs, IRS
- 26 CFR 1.408A-4, Converting amounts to Roth IRAs, eCFR
- The Arithmetic of Roth Conversions, Financial Planning Association
- Everything You Need to Know About Roth Conversions, PSCA
- How Roth Employer Contributions to Solo 401(k) Plans Reduce the QBI Deduction, Kitces
- Roth IRA Conversion Considerations, Ed Slott and Company