A Roth conversion after selling a business is often more efficient in the quieter years that follow the sale, not in the sale year itself. The year you close a deal is usually your highest income year of the decade, which makes converting then expensive. The real opening tends to appear in the lower income years afterward, in the gaps between installment payments, and in the runway before required minimum distributions begin.
For most sellers, the sale year is the wrong year to convert because the gain stacks on top of ordinary income and pushes you into the 32% or 35% bracket. The stronger window opens in the low income years after the sale, before required minimum distributions start at age 73. Converting partial amounts across several of those years, sized to fill the 24% bracket, usually results in less total tax than one large conversion.
Why the year you sell is usually the wrong year to convert
The year you sell a business is usually the wrong year for a Roth conversion because a sale stacks capital gains, depreciation recapture, earnout payments, and any final compensation into a single tax year. That spike can fill the 32% bracket (taxable income above $403,550 for married filing jointly in 2026) before you add a dollar of conversion income taxed at your top ordinary rate.
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How a sale stacks income (cap gains, recapture, earnout, ordinary comp)
A business exit rarely produces one clean number. Different pieces of the deal land in different tax buckets, and they combine to raise your marginal rate. A Roth conversion is taxed as ordinary income, so it sits on top of this stack at your highest rate.
| Income layer from a sale | How it is generally taxed | Effect on a conversion done the same year |
|---|---|---|
| Long-term capital gain on the equity | 0%, 15%, or 20% (LTCG 15% band runs to $613,700 MFJ in 2026) | Raises MAGI and can crowd out low-bracket room |
| Depreciation recapture (Section 1245/1250) | Ordinary rates or up to 25% | Adds ordinary income directly under the conversion |
| Earnout or consulting payment | Ordinary income | Stacks below the conversion at your top rate |
| Final salary, bonus, or accrued comp | Ordinary income | Consumes bracket room before you convert |
When these layers push taxable income into the 35% bracket ($512,450 MFJ in 2026), every conversion dollar is taxed at 35% federally. That is the opposite of the low-rate fill you want. Our guide on how much to convert walks through sizing conversions to a target bracket.
The one exception: when the sale year is actually low-income
There is a real exception. If your gain is excluded, the sale year can be a normal or even low income year, which flips the whole plan. The most common case is qualified small business stock (QSBS) under Section 1202. If C-corporation stock held more than five years qualifies, a large share of the gain may be excluded from federal tax, so the sale year may never spike at all.
Other low-spike cases include an all-installment structure where you receive little cash at closing, or a sale where most of the value flows to future earnouts. In any of these, converting in the sale year may make sense precisely because the expected spike did not happen. QSBS and Section 1202 interactions are technical, and many sellers overlook them entirely, so this is worth confirming with your CPA before assuming the sale year is off limits.
Where does the low-income window actually open after a sale?
The low-income window usually opens the year after the sale closes and stays open until required minimum distributions begin at age 73 (age 75 if you were born in 1960 or later). In those years, salary and deal income have stopped, RMDs have not started, and taxable income can drop into the 12% or 22% brackets, leaving room to convert at a controlled rate.
The gap years before RMDs begin (age 73): your conversion runway
Between the sale and your first required minimum distribution, you often control your own taxable income. Under the SECURE 2.0 Act, RMDs begin at age 73, and at age 75 for anyone born in 1960 or later, with the earliest age-75 RMD year being 2035. A seller who exits at 60 may have a runway of a dozen or more low-income years.
Each of those years is a chance to move pretax IRA or 401(k) dollars into a Roth before RMDs force taxable withdrawals on a larger, still-growing balance. See our overview of required minimum distributions for 2026 for how the RMD clock interacts with conversion planning.
Between businesses, a sabbatical, or a step-back year
Not every seller retires. Many take a step-back year, a sabbatical, or a gap between businesses. Those years often show unusually low earned income, which is exactly when a partial conversion is cheapest. This is the same low income year logic covered in our page on a Roth conversion in a low-income year, applied to the specific rhythm of a business exit.
How do installment sales and earnouts change the timing?
Installment sales and earnouts spread the taxable gain across several years, so there may be no single low-income window at all. Instead, income can stay elevated for as long as note payments or earnouts continue. The sequencing task becomes finding the troughs: the years after a note is paid off, or the gaps between large payments, and sizing conversions into those specific years.
A year-by-year sequencing map: converting in the troughs between note payments
An installment sale under IRC Section 453 lets you report gain as you receive payments, which can smooth income but also extends it. Most articles stop at “installment payments extend income.” The planning question is which years are the troughs. A simple, common pattern looks like this.
| Year | Income profile | Conversion posture |
|---|---|---|
| Year 0 (closing) | Down payment gain plus final comp: high | Usually skip or convert only to the top of a bracket you are already near |
| Years 1 to 4 (note paying) | Installment gain each year: moderate | Convert a smaller amount to top off the 22% or 24% bracket |
| Year 5+ (note paid off) | Note income ends, RMDs not yet begun: low | Largest conversions, fill up to the top of the 24% bracket |
The counterintuitive point is that the biggest conversions often come after the note is fully paid, not right after closing. Those post-note, pre-RMD years are frequently the deepest income troughs of the entire plan.
When the earnout is unpredictable, converting late in the year
Earnouts tied to performance are hard to forecast. Because a Roth conversion has a December 31 deadline and no do-over (recharacterization of conversions was eliminated by the Tax Cuts and Jobs Act), many sellers wait until late in the year, once the earnout is known, then convert only the amount that fits their target bracket. Year-end timing matters most when income is still uncertain.
How much should I convert each year? (2026 bracket-fill by post-sale year)
A common approach is to convert enough each year to fill the 24% bracket without crossing into 32%. For 2026, the 24% bracket for married filing jointly runs up to $403,550 of taxable income, where the 32% bracket begins. You subtract your other income from that ceiling, and the difference is the room available to convert at 24% or less.
Filling the 24% bracket, stopping before 32%: the 2026 OBBBA numbers
The 2026 brackets are set under the One Big Beautiful Bill Act (P.L. 119-21), which made the lower rate schedule permanent. The married filing jointly figures below are the reference points for bracket-fill conversions. The standard deduction is $32,200 for married couples in 2026, so gross income can run somewhat higher than the taxable-income ceilings shown.
| 2026 bracket (MFJ) | Taxable income ceiling | Conversion use |
|---|---|---|
| 22% | Up to $211,400 | Cheap fill in very low years |
| 24% | Up to $403,550 | The usual target ceiling for large conversions |
| 32% | Starts at $403,550 | Generally the stop line |
| 35% | Starts at $512,450 | Rarely worth converting into |
A sample 3-year post-sale conversion table
This illustration shows a married couple after a sale, targeting the top of the 24% bracket ($403,550 taxable income) each year. Each row subtracts their other taxable income from that ceiling to find the room left to convert at 24% or less. It is educational and simplified; your own numbers, deductions, and state taxes will differ.
| Post-sale year | Other taxable income | Room to $403,550 | Illustrative conversion at 24% or less |
|---|---|---|---|
| Year 1 (note paying) | $180,000 | $223,550 | Up to about $223,000 |
| Year 2 (note paying) | $150,000 | $253,550 | Up to about $253,000 |
| Year 3 (note paid off) | $60,000 | $343,550 | Up to about $343,000 |
Whether filling all the way to 24% is right depends on your future bracket, estate goals, and the break-even horizon for paying tax now versus later.
The Medicare IRMAA trap most sellers miss
Medicare uses a two-year lookback, so a high MAGI in your sale year raises your Part B and Part D premiums two years later, no matter what you do afterward. Because those premiums are already spiking, converting a bit more in the already-high sale year, up to the next IRMAA tier, can add relatively little extra Medicare cost. This nuance is missed almost everywhere.
The 2-year lookback: why the sale year already spiked your premiums
The Income Related Monthly Adjustment Amount (IRMAA) is based on modified adjusted gross income from two years earlier. Your 2026 premiums reflect 2024 income. In 2026, the standard Part B premium is $202.90 per month, and IRMAA surcharges push the highest tier to $649.20 (and $689.90 above $750,000 MFJ). The tiers below apply to married couples filing jointly.
| 2026 MAGI (MFJ, from 2024) | Monthly Part B premium (per person) | Approx. annual IRMAA add per couple |
|---|---|---|
| $218,000 or less | $202.90 | $0 |
| $218,001 to $274,000 | $284.10 | about $1,950 |
| $274,001 to $342,000 | $405.80 | about $4,870 |
| $342,001 to $410,000 | $527.50 | about $7,790 |
| $410,001 to $749,999 | $649.20 | about $10,710 |
If you are 63 or older when you sell, that lookback can raise premiums during your Medicare years. Sellers under 62 in the conversion year generally avoid IRMAA effects on that specific year, since the last conversion year that does not affect a Medicare premium is age 62.
Converting up to the next IRMAA tier in an already-spiked year
Here is the counterintuitive part. If a sale has already pushed your MAGI deep into an IRMAA tier, adding conversion income up to the top of that same tier costs no additional IRMAA, because the surcharge is a cliff, not a slope. Filling to just below the next threshold in an already-spiked year can let you convert more without any further Medicare penalty. Cross the line by one dollar, though, and the full higher surcharge applies.
NIIT, the pro-rata rule, and paying the tax the right way
A Roth conversion is not itself net investment income, so the conversion amount does not directly trigger the 3.8% net investment income tax (NIIT). But it raises your MAGI, which can pull other investment income above the $250,000 MFJ threshold and expose that income to NIIT. Paying the conversion tax from taxable funds, not the IRA, keeps more money compounding tax-free.
Keeping conversions from triggering the 3.8% NIIT
NIIT applies at 3.8% on net investment income once MAGI exceeds $200,000 for single filers or $250,000 for married filing jointly. The conversion is ordinary income, not investment income, so NIIT does not tax it directly. The trap is indirect: a large conversion lifts MAGI, so interest, dividends, or capital gains can then fall inside the NIIT net. See our detail on the net investment income tax in 2026.
One more rule to check is the pro-rata rule. If you hold both pretax and after-tax (nondeductible) dollars across your traditional IRAs, the IRS treats every conversion as a proportional blend, so you cannot convert only the after-tax portion. This affects how much of a conversion is taxable and should be modeled before you start.
Paying the tax from taxable or sale proceeds, not the IRA
Paying conversion tax out of the IRA itself shrinks the balance you are trying to grow tax-free and, if you are under 59 and a half, can add a 10% penalty on the withdrawn tax money. After a sale you usually hold ample taxable cash, and many sellers use those proceeds to pay the tax, keeping the full converted amount inside the Roth. Our Roth conversion planning service models the funding source alongside the bracket target.
A post-sale Roth conversion checklist
After a sale, a workable Roth conversion plan usually follows the same order: confirm how the deal stacks income, identify the low-income troughs, size each conversion to a bracket ceiling, watch the IRMAA cliffs, and fund the tax from taxable cash. The steps below put that sequence in order for the years between your exit and your first RMD.
- Map every income layer from the deal: capital gain, recapture, earnout, installment payments, and final compensation.
- Check for a QSBS or Section 1202 exclusion that could make the sale year low-income after all.
- Mark the trough years: the gaps between installment payments and the years after the note is paid off, before age 73.
- For each trough year, subtract projected income from the 24% ceiling ($403,550 MFJ in 2026) to find conversion room.
- Compare the current bracket to your expected future and post-RMD bracket before deciding how full to fill.
- Check IRMAA tiers; if the sale year already spiked MAGI, consider filling to just below the next tier.
- Confirm the pro-rata rule and any nondeductible basis across your IRAs.
- Convert late in the year once income is known, and pay the tax from taxable cash by December 31.
Work with Q3 Advisors
Q3 Advisors is a registered investment adviser focused on retirement tax planning. This page is educational and is not advice; consult a qualified professional.
Frequently asked questions
Is a Roth conversion better in the same year as a business sale?
Usually not. In most sales the gain, recapture, and any earnout stack income into the 32% or 35% bracket, so a same-year conversion is taxed at your highest ordinary rate. The main exceptions are a QSBS or Section 1202 exclusion, or an all-installment structure, where the sale year may stay low.
Should I wait until the year after selling my business to convert?
Often yes. The year after a sale frequently shows much lower income once salary and deal proceeds stop, which opens room to convert in a lower bracket. With an installment note, the deepest troughs may come a few years later, after the note is paid off but before required minimum distributions begin at age 73.
Can I do partial Roth conversions over several years?
Yes. Conversions are uncapped and can be done in any amount, in any year. Spreading partial conversions across several low-income years, each sized to fill a target bracket, generally produces a lower total tax than one large conversion that spikes into the 32% or 35% bracket.
How does an installment sale or earnout affect Roth conversion timing?
Both spread taxable income across future years, so there may be no single low-income window. Under IRC Section 453, installment gain is reported as payments arrive. The planning task is to convert in the troughs, meaning the years between large payments and after the note is paid off, and to wait until late in the year when an earnout is uncertain.
Do Roth conversions affect my Medicare premiums (IRMAA)?
Yes, indirectly. A conversion raises MAGI, and Medicare sets Part B and Part D surcharges from MAGI two years earlier. In 2026, IRMAA for couples begins above $218,000 MAGI, lifting the standard $202.90 Part B premium up the tier ladder. Filling to just below a tier cliff can avoid extra surcharges.
How much should I convert each year after selling my business?
A common target is to convert up to the top of the 24% bracket, which for married couples filing jointly is $403,550 of taxable income in 2026, where the 32% bracket begins. Subtract your other income from that ceiling to find the room. The right amount also depends on your future bracket and estate goals.
Is there an income limit for Roth conversions?
No. Unlike Roth contributions, which phase out at $242,000 to $252,000 MAGI for married couples in 2026, a Roth conversion has no income limit. Anyone with a traditional IRA or an eligible pretax balance can convert any amount, though you cannot convert a required minimum distribution.
What is a common Roth conversion mistake to avoid after a sale?
A common mistake is converting a large amount in the sale year, when the deal has already filled the top brackets, so the conversion is taxed at 35%. Paying the conversion tax from the IRA itself, rather than from taxable sale proceeds, is another.
