Roth Conversion in a Sale Year: How It Works, Who It Fits, and the Catch

How a Roth conversion works

A Roth conversion moves money from a traditional IRA (or an eligible plan) into a Roth IRA. The pre-tax amount converted is ordinary income in the year of conversion (IRC 408A(d)(3)). In exchange, qualified Roth withdrawals later are excluded from income, Roth IRAs have no required minimum distributions for the owner, and heirs inherit income tax-exempt accounts (still subject to the 10-year payout rule for most beneficiaries).

Three mechanics matter for planning. If you have after-tax money in any traditional IRA, the pro rata rule (IRC 408(d)(2)) applies across all your IRAs. Since 2018, a conversion cannot be recharacterized back. And each conversion has its own five-year clock for the 10% penalty if you are under 59 and a half.

Why a sale year usually makes conversions cost more

Ordinary income is stacked first and capital gain on top. Adding conversion income in a sale year therefore does more than tax the conversion at your ordinary rate:

• It shifts gain up a bracket. Each dollar of conversion pushes a dollar of gain out of the 15% bracket into the 20% bracket, if the gain straddles that line.
• It can raise NIIT. Conversion income is not investment income, but it raises modified AGI. NIIT is 3.8% of the lesser of investment income or MAGI over the threshold, so higher MAGI can pull more gain into the tax.
• It can add AMT. A large gain phases out the AMT exemption, and more ordinary income adds to tentative minimum tax.
• It can cost other benefits: the SALT cap phase-down above $505,000 of MAGI in 2026, the senior deduction phase-out, and ACA premium credits for those under 65.

One partial offset: if the sale already puts you in the top Medicare IRMAA tier, a conversion that year adds no extra IRMAA, and Social Security benefits may already be 85% taxable.

Who it fits, and who it does not

• Fits: sellers whose sale year includes big deductions: suspended passive losses released when a rental is sold (IRC 469(g)), a large charitable gift such as a donor-advised fund or charitable remainder trust contribution, or an ordinary business loss.
• Fits: sellers who use an installment sale and convert in the smaller-income years that follow.
• Fits: sellers about to move from a high-tax state to a no-tax state, who convert after the move.
• Does not fit: a lump-sum sale year with no offsetting deductions, which is usually the most expensive year to convert.
• Does not fit: anyone who would pay the conversion tax out of the IRA itself, which shrinks the benefit.

Worked example

Assumptions (engine, 2026 federal rules and the 2026 IRMAA table as a proxy for premiums two years later, married filing jointly, Texas, both spouses on Medicare, $150,000 of other ordinary income): the couple converts $200,000 in one of three kinds of year. A lump-sum sale year has $2,000,000 of long-term capital gain. An installment year has $200,000 of gain from a 10-year note. A quiet year has no gain.

In the lump-sum year, the conversion pushed $200,000 of gain from the 15% to the 20% bracket and added AMT, which outweighed the IRMAA it avoided. Spreading the sale with a note left years where the same conversion cost about $14,500 less. Numbers are illustrative engine output.

IRS stance and audit risk

Roth conversions are expressly allowed by IRC 408A and carry no special audit risk; they are reported on Form 8606 and a Form 1099-R from the custodian. Mistakes are the risk: missing the pro rata rule, double-counting basis, converting required minimum distributions (which cannot be converted), or underpaying estimated tax on a large conversion. Because a conversion cannot be undone, model the year before converting, not after the sale closes.

Costs and fees

• The tax on the conversion, ideally paid from money outside the IRA.
• Second-order costs: NIIT, AMT, IRMAA two years later, and lost phase-out benefits.
• Estimated tax payments to avoid underpayment penalties in a large-income year.
• No product fees are required; conversions are done at the IRA custodian.

How it compares with a Section 453 installment sale

They are complementary. A lump-sum sale crowds the year with income and makes it a poor year to convert. An installment sale or seller financing spreads the gain, keeps each year's income lower, and leaves room to fill with conversions at ordinary rates without pushing gain into higher brackets. Protect the note as you would any seller-financed deal: a down payment, a first-position deed of trust or UCC lien, a personal guarantee from the buyer's owners, and default and acceleration terms.

See also 0% capital gains harvesting and year-end timing.

How Hans helps

The $5,000 Big Sale Tax Analysis lays the sale, any installment payments and possible conversions on a year-by-year map, including NIIT, AMT, IRMAA and state tax, and compares the paths side by side. Start with the one-year vs spread estimate.

Frequently asked questions