A Roth conversion after selling a business usually costs least in the years between closing and Social Security, once income has dropped and before RMDs begin. Many owners convert in the closing year to get it over with. That year's ordinary income can already sit above the 37% line ($768,700 for joint filers), while the year after closing often sits far lower.
The question owners ask is some version of this: "The money is finally in the bank, so how much of my SEP-IRA should I move to a Roth, and when?" The answer is a different amount each year, set by two edges: the next tax bracket and, from age 63, the next Medicare premium tier.
Corient Wealth Management sizes each gap-year conversion against those edges and checks the figure with the client's CPA before anything moves. Below, a hypothetical couple, Boyd and Tracy (61 and 59, owners of a 30-year-old landscaping supply S corporation with a $6,000,000 private equity offer), show the arithmetic.
By Marcus Thompson, CFA — Wealth Manager | Reviewed by Sarah Chen, CFPMarcus builds diversified portfolios for high-net-worth clients, with deep expertise in asset allocation and risk management.
The conversion rate is set by the ordinary part of the sale. I'd rather see a client wait a year than convert at 37% on a number we could have taxed at 24%.
CPA and Tax Director, Corient Wealth Management
Income at 63 sets the Medicare premium at 65. Staying $8,000 under a tier line is worth more than most owners expect.
Senior Financial Planner, Corient Wealth Management
"Converting in the closing year gets the tax over with"
It feels tidy, but the rate on a conversion is set by the ordinary part of the sale, not by the total gain. Capital gains stack on top of ordinary income. Depreciation recapture, inventory and final wages are the ordinary pieces. If that part already tops $768,700 on a joint return, each converted dollar is taxed at 37%.
Deal structure matters here. A buyer's preferred asset sale of an S corporation creates more ordinary income than a stock sale. When the buyer takes the shares instead, the ordinary portion can be small, so the closing year is not automatically the worst year to convert. Have the CPA model both structures while the LOI is still unsigned.
Before Corient Wealth Management suggests converting a single dollar, it lays the proposed conversion over the CPA's closing-year income projection and shows the marginal tax cost of the conversion on that projection. Sometimes the answer is nothing this year.
In a closing year whose ordinary income already tops $768,700 on a joint return, convert nothing. Wait for the lower-income years.
"Our income is too high for a Roth"
Roth conversions have no income limit. The IRS phase-out of $242,000 to $252,000 for joint filers in 2026 only limits direct Roth IRA contributions (the $7,500 limit), not conversions. A SEP-IRA converts like a traditional IRA: pre-tax dollars are taxed as ordinary income in the year they move, and any after-tax basis on Form 8606 is spread pro rata across all your traditional, SEP and SIMPLE IRA balances. Each conversion also starts its own 5-year clock. Converted principal withdrawn within 5 years by someone under age 59½ owes the 10% penalty, so for Boyd the clock matters mainly for earnings and for a younger spouse.
"Medicare starts at 65, so conversions can't touch our premiums yet"
They can, and the delay is the trap. Medicare sets Part B surcharges for a given year from the tax return filed 2 years earlier, so income at age 63 sets the premium at age 65. Joint MAGI on that return counts for both spouses once each is on Medicare.
Take Boyd and Tracy's year at 63. A hypothetical household, they have only $60,000 of interest and dividends and a $900,000 SEP-IRA in Boyd's name. Picture them beside an identical couple with one difference: the size of the conversion.
Boyd and Tracy convert $150,000. $60,000 + $150,000 = $210,000 MAGI, under the $218,000 joint tier, so Boyd's Part B at 65 stays at $202.90 each month. The other couple converts $250,000. Their MAGI is $310,000, which falls in the $274,000 to $342,000 tier, so the premium is $405.80. The difference is $202.90 a month, and $202.90 × 12 = $2,434.80 extra for Boyd that year (2026 tiers, for illustration). If Tracy is on Medicare too, the surcharge doubles.
Look at what the extra $100,000 bought. The tax on it is prepaid, not saved: they pay it now and skip it at RMD age. The $2,434.80 surcharge, though, is money they would never have spent otherwise. We only advise crossing a tier when the couple's projected rate at 75 is clearly higher than today's.
The 2026 joint tiers are $218,000, $274,000, $342,000, $410,000 and $750,000. Thresholds are reset each year, so check the current CMS tier before sizing a conversion.
Two couples, one difference
What the extra $100,000 really buys
When does the low-income window open and close?
For someone born in 1960 or later, the window runs from the first full year after closing until Social Security (full retirement age 67, or later if delayed) and RMDs at age 75. For Boyd, closing at 62, that is up to 12 years, from age 63 through age 74.
Conversions before age 63 don't affect Medicare premiums, but they are not free of side effects. If you buy marketplace health coverage before 65, a conversion raises the MAGI that sets your premium credits. Price that lost credit alongside the income tax. From 63 on, each conversion also sets the Part B premium two years later.
The three options compare as follows. Option 3 usually pays the least combined tax cost for a couple with a large SEP-IRA.
| Criterion | Wait, take RMDs | Fill a lower bracket | Stop under IRMAA tier |
|---|---|---|---|
| Rate paid | Set later, often higher | Current bracket | Current bracket |
| IRMAA exposure | High at RMD age | Possible from 63 | Avoided by design |
| Size of RMDs at 75 | Largest | Smaller | Smallest of the three |
| Yearly effort | None | Moderate | Highest |
| Fits large SEP-IRA | Rarely | Sometimes | Usually |
What happens if part of the price arrives as a note or earn-out?
Each year's note interest (ordinary income) and gain portion (capital gain) lands on that year's return, and it shrinks the room for conversions in every year the payments arrive. Map the payment schedule from the purchase agreement year by year before choosing any conversion amount. Our article on how earn-outs are taxed covers the mechanics.
5 numbers to pull together before the December 31 deadline
The IRS counts conversions by calendar year, so the money has to move by December 31 to land on that year's return. Gather your paperwork first, then work the steps in order. Start with the projection of income without any conversion, at the top of the table below; every later step depends on it.
Practical detail: year-end requests queue up at custodians, so a request sent on December 28 may not settle in time. Early December is safer.
The steps in order
First moves
| Task | Who does it | When |
|---|---|---|
| Project income without conversion | CPA with advisor | September to October |
| Choose amount below next bracket or tier | Advisor and couple | October to November |
| Submit conversion request | Couple, through custodian | Early December |
| Pay estimated tax from taxable account | Couple or CPA | By January 15 |
| Report conversion on Form 8606 | CPA | With return, by April 15 |
- Purchase price allocation (Form 8594) from the deal attorney or CPA
- Last 2 years of Form 1040
- SEP-IRA year-end statement from the custodian
- Any prior Form 8606 for basis
- Benefit estimate in your my Social Security account
Corient Wealth Management's part in the gap-year conversions
A Corient Wealth Management wealth advisor sets a conversion amount for each gap year against the bracket edges and IRMAA tiers, then checks it with your CPA before anything moves. You get the fee arrangement on paper before you hand over any assets. To begin, send us the request form.
A conversion that crosses a Medicare tier doesn't save tax; it moves tax forward and adds a new cost.
Questions about a Roth conversion after selling a business
The buyer is keeping me on as a paid consultant for 2 years after closing, should I still convert part of my SEP-IRA during that time?
Can we reverse a Roth conversion if the market drops right after we convert?
By what date does a Roth conversion have to be finished to count for this tax year?
Primary sources
This content is general information for educational purposes. It is not individualized investment, tax or legal advice for your situation. Investing involves risk, including the possible loss of principal. Before making financial decisions, consult a qualified professional who understands your circumstances.