Roth Conversions: Using a Low-Income Year
Why a year with a business loss, a sabbatical, or a move to Florida is the time to convert, how much to convert, and the knock-on effects to check first.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A Roth conversion moves money from a traditional IRA or 401(k) into a Roth account, paying income tax now so growth and withdrawals are tax-free later. It works best in years when your income and rate are unusually low: a startup year with losses, a gap between businesses, or the year after a sale.
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When is a year "low" enough?
| Situation | Why it helps |
|---|---|
| Business loss or net operating loss carryforward | The loss absorbs conversion income at little or no tax |
| Sabbatical, parental leave, or a year between ventures | Income drops into the lower brackets |
| Year after selling the business | Income is low again while the proceeds are invested |
| Early retirement before Social Security and required distributions | Several low years before income rises |
| Move to a state with no income tax (such as Florida) | Converting after the move avoids the old state's tax |
The goal is "bracket filling": convert enough to use up the 10, 12, and 22 percent brackets (or the 24 percent bracket for larger balances) without pushing into the next one.
What should you check before converting?
- The qualified business income deduction. Conversion income raises taxable income and can push a service business owner into the phase-out range.
- Medicare premiums. Income two years earlier sets the premium surcharge; a large conversion at 63 raises Medicare costs at 65.
- Marketplace health insurance credits. Conversion income reduces or eliminates premium tax credits for the year.
- The net investment income tax. Conversion income is not investment income, but it raises the modified adjusted gross income that triggers the tax on other investment income.
- Estimated taxes. A conversion with no withholding needs estimated payments to avoid the underpayment penalty.
- Paying the tax. Using outside cash keeps the full amount growing in the Roth; using converted funds reduces the benefit and, before 59½, triggers a penalty on the amount withheld.
What are the five-year rules?
Each conversion starts its own five-year clock, counted from January 1 of the conversion year: withdrawing the taxable converted amount before five years and before 59½ triggers the 10 percent penalty. Earnings are tax-free only once the Roth has been open five years and you are 59½ or meet another qualifying reason. Since 2018, conversions cannot be reversed (recharacterized).
How does a conversion interact with the business?
An S corporation owner can lower the owner's salary in a loss year only within reasonable compensation; the conversion is sized against the remaining low income. Partners and sole proprietors with loss carryforwards can run the math year by year. Owners who expect a large sale later can convert in the years before it, when the sale would otherwise crowd out the low brackets.
Frequently asked questions
Is there a limit on how much I can convert?
No. The only limit is the tax you are willing to pay this year.
Can I convert my SEP or SIMPLE IRA?
Yes. SEP IRA money can be converted at any time; SIMPLE IRA money can move to a regular Roth IRA only after the two-year period that starts when you first participated in your employer's SIMPLE plan.
Does a conversion count toward required minimum distributions?
No. Required distributions (which begin at age 73) cannot be converted, so the year's required distribution must be taken before any conversion.
Can my spouse and I each convert?
Yes, each from their own accounts, with the combined income on a joint return.
Official sources
The IRS explains: “You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you hadn’t converted them into a Roth IRA. These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA.” — Internal Revenue Service, Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs), https://www.irs.gov/publications/p590a
The IRS explains: “You must generally pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover.” — Internal Revenue Service, Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs), https://www.irs.gov/publications/p590b
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk sizes the conversion to the bracket and the qualified business income phase-out each December. See pricing or book a free fit call.
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