By Christopher Clepp, ChFC® · Building Towards Wealth
Should I Do a Roth Conversion This Year?
A Roth conversion makes sense when your current tax rate is meaningfully lower than the rate you expect to pay on that money in retirement. For business owners, the best conversion windows usually show up in low-income years, after a business sale, or when current rates are temporarily favorable.
The Roth conversion question is one of the most common ones I get, and it usually arrives with an opinion already attached. Somebody heard on a podcast that everyone should be converting. A golf buddy converted his whole IRA last year and won’t stop talking about it. A headline warned that tax rates are going up, so you’d better convert before it’s too late.
“Everybody should be” is one of the phrases that tells me someone doesn’t know what they’re talking about. A Roth conversion is a tool, and there’s no such thing as a bad tool — there’s an improper application of the tool. So let’s walk through when this one belongs in your hand and when it should stay in the drawer.
The math everyone gets wrong
Strip away the noise and a Roth conversion is one comparison: your marginal tax rate today against the marginal rate you expect to pay when the money comes out in retirement. Pay tax now at today’s rate, or pay tax later at that future rate. That comparison is the whole game.
- Current bracket is lower than expected retirement bracket
- Tax can be paid from cash outside the IRA
- You have a multi-year window to execute a ladder
- Current bracket is higher than expected retirement bracket
- No cash outside the IRA to cover the tax
- You’ll need the money within five years
The blanket advice pushing everyone toward conversions skips the bracket comparison, which is the only thing that drives the math. What changes every year is your bracket, which is why this is an annual conversation and not a one-time decision.
Why business owners get the best windows
Business owners have something W-2 employees will never have: income that moves. A soft year for the business, a transition year between chapters, a year you reinvested heavily in growth. Those years feel lousy while you’re living them. They can also be planning gold.
A low-income year means a temporarily low bracket, and a temporarily low bracket is conversion runway. Move pre-tax balances into the Roth bucket while the gap is open, pay the tax at the current rate, and let the money compound tax-free from there. A bad year is sometimes a great planning year.
The owners who capture these windows are the ones watching for them on purpose. The owners who treat every year like the same year miss them, over and over. This is one piece of the larger picture in How Can I Pay Less Taxes as a Business Owner?
“A bad year is sometimes a great planning year. The gap year after a sale may be the best conversion window most owners will ever see — and most miss it entirely.”
The gap year after you sell
The single most valuable conversion window most owners miss completely is the year or two right after selling the business.
Significant pre-tax balances can move to Roth at rates you will likely never see again, because the next chapter eventually brings RMDs and higher brackets right back.
The ladder, not the cannonball
Converting a large balance in a single year is usually the wrong play. One giant conversion can shove you into a top bracket and hand the IRS exactly the premium you were trying to avoid.
A multi-year ladder works better for most people. Each year, you convert enough to fill your current bracket without spilling into the next one. Over five or seven years, a substantial balance moves at controlled rates. Singles and doubles win this game.
None of these kills the strategy. All of them belong in the annual math, which is why the ladder gets run with your tax advisor every year instead of set once and forgotten. A conversion ladder is one lever inside the broader tax plan described in Maximizing Tax Planning Advantages of Business Ownership, and it works best pulled alongside the others.
When a conversion is the wrong move
Conversions are a tool, and some years the tool doesn’t fit the job.
- You’re already in a high bracket this year with no reason to expect a higher one later
- There’s no cash outside the IRA to pay the conversion tax
- You’ll need the converted dollars within five years
- Retirement is likely to bring a lower bracket, because of lower spending, a move to a low-tax state, or both
- You’re converting in late December only because year-end is close, without knowing where the year’s bracket landed
Converting at the wrong time costs real money, and so does failing to convert during a genuine window. Both mistakes are expensive. Only one of them gets talked about.
Let’s talk
Whether to convert, how much, and in which years is a plan, and the plan works best coordinated with the rest of your tax and retirement strategy. That is the work I do with business owners through the Abundant Wealth Process.
Disclosure: This article is provided for general educational and informational purposes only and is not personalized tax, legal, accounting, or investment advice. Examples involving dollar amounts are hypothetical and illustrative only; individual results vary based on specific circumstances. Tax laws and IRS thresholds change frequently; current-year figures cited above should be verified before reliance. Christopher Clepp, ChFC®, is a financial advisor and not a CPA or attorney; consult with qualified tax, legal, and accounting professionals regarding the application of any strategy to your specific situation. References to internal blog content are educational only and do not constitute a solicitation.
