The conventional wisdom on Roth conversions is simple: convert when you're in a lower tax bracket than you expect to be in retirement. For high-income business owners, that seems to rule it out, you're in the highest bracket now.

But the conventional wisdom misses several factors that make Roth conversions strategically powerful for exactly this group.

Why High-Income Owners Should Consider Conversions

Tax rates may increase. The current top marginal rate of 37% is historically low. The Tax Cuts and Jobs Act provisions expire after 2025, and the pre-TCJA top rate was 39.6%. With federal deficits growing, higher future rates are a reasonable expectation.

Estate tax planning. Traditional IRA balances are included in your taxable estate. When your heirs inherit a traditional IRA, they pay income tax on distributions (under the 10-year rule from the SECURE Act). Roth IRA balances are also in the estate, but distributions to heirs are tax-free. Converting now means paying the tax at your rate instead of your heirs' rates.

The "gap year" opportunity. Business owners often have years with significantly lower income, between selling one business and starting another, during a restructuring, or in the year after a major capital loss. These low-income years are ideal conversion windows.

A business owner who converts $500,000 to Roth in a gap year at an effective rate of 28% pays $140,000 in tax. If those funds grow at 7% for 20 years, the Roth balance reaches ~$1.93M, all tax-free to the owner and their heirs. The same $500K in a traditional IRA, taxed at 37% on withdrawal, nets only $1.22M. The Roth advantage: $710,000.

Conversion Strategies

Partial annual conversions: Convert enough each year to "fill up" a target tax bracket without pushing into the next one. This systematic approach spreads the tax cost over multiple years.

Post-sale conversion: After selling a business, the owner may have a year of relatively low ordinary income (the sale gain is capital, not ordinary). This can be an ideal conversion window.

Charitable offset strategy: Pair a Roth conversion with a large charitable deduction (donor-advised fund contribution, qualified charitable distribution) to offset the conversion income.

California Considerations

California taxes Roth conversions as ordinary income with no special treatment. At 13.3%, a $500,000 conversion generates $66,500 in California tax alone. For owners planning to leave California before retirement, it may make sense to defer conversions until after establishing residency in a no-income-tax state.

However, if you're staying in California, converting now at current rates, before potential federal and state rate increases, may still be the better long-term play.

The Integration Point

Roth conversions don't exist in isolation. They interact with:

  • Medicare premium surcharges (IRMAA), conversion income can spike premiums
  • Net Investment Income Tax, conversion income can trigger the 3.8% NIIT
  • Estimated tax payments, conversions require updated estimates to avoid underpayment penalties
  • Estate planning, the tax paid on conversion is itself removed from the estate
The decision to convert isn't about whether Roth is "better" than traditional. It's about modeling your specific situation, income trajectory, state residency plans, estate size, and tax rate expectations, and finding the years where the math works in your favor.

This article is for general informational purposes only and does not constitute tax, legal, or investment advice. Business owners should consult qualified tax and legal advisors before entering into a transaction.