After a business sale, a tender offer, an IPO lockup expiration, or another liquidity event, many families find themselves with one or more years in which their realized income is unusually low. The transaction happened in a prior tax year. The proceeds are now invested. Recurring earned income is lower than it was during the working years. The household's marginal tax bracket, for that year, can be meaningfully lower than the bracket it occupied while building the business or working at the company.
That gap, between the bracket the household is in today and the bracket it may occupy later in retirement once required minimum distributions begin, is the structural reason Roth conversions get discussed in this context. The intent of the discussion is not to recommend a Roth conversion; whether one fits is a function of facts that only a qualified tax advisor can evaluate. The intent is to surface the topics that a family in this situation typically reviews with their advisor team, so that the conversation, when it happens, is productive.
This is an educational piece. Nothing here is investment, tax, legal, or accounting advice. The specific decision belongs in a conversation with your CPA, your tax attorney, and a fiduciary financial advisor who knows your full situation.
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The Window That Often Opens After a Liquidity Event
A few patterns recur in the post-liquidity year:
- The business sale or equity event happened in a prior tax year. The current year does not include the large recognized gain.
- Earned income from the original business has dropped or ended.
- Investment income from the new portfolio is still building, depending on how the proceeds were deployed.
- The household may not yet have started Social Security or pension distributions.
- For families with substantial pre-tax retirement balances, the future RMD picture is a different shape than the current taxable income picture.
The combination is what creates the planning window. The window does not last forever. Once Social Security starts, once RMDs begin at the applicable age under current IRS rules, once investment income grows back to the historic level, the marginal bracket the family occupies typically rises. A planning conversation in the quiet years is often a different conversation than the one a few years later.
The Core Concept (Educational)
A Roth conversion moves a balance from a traditional (pre-tax) retirement account to a Roth account. The amount converted is added to the household's taxable income in the year of the conversion. Tax is paid on that amount at ordinary income rates. After the conversion, the balance in the Roth account grows tax-free, and qualified withdrawals are not subject to income tax. The general mechanics are described in IRS Publication 590-A and Publication 590-B.
The arithmetic question the family and the advisor team typically explore is: at what rate is the conversion taxed today, versus the rate at which the same balance would be taxed when it is distributed in a future year. If the bracket today is meaningfully lower than the bracket later, the conversion may pencil out. If it is similar or higher, it may not. The specific answer depends on facts the advisor has visibility into and the family does not.
Topics Typically Discussed With the Tax Advisor
A non-exhaustive list of topics families in this situation often raise with their CPA or tax attorney:
How much room is there in the current marginal bracket without crossing into a higher one? The conversation often starts by mapping the current year's projected taxable income against the bracket thresholds in the IRS tax tables. The size of the conversion that fits inside the current bracket is one of the most-discussed figures.
How do the IRMAA Medicare income thresholds interact with the conversion? For households at or near Medicare age, the income-related monthly adjustment amount (IRMAA) for Medicare Part B and Part D is determined by modified adjusted gross income from two years prior. A large conversion in one year can affect Medicare premiums two years later. The Social Security Administration's IRMAA documentation covers the brackets.
What happens to the state tax picture? State income tax treatment of Roth conversions varies. Some states fully tax the conversion. Some treat it differently. A few have no income tax. Families who moved to a different state around the liquidity event sometimes find the state-level math is the dominant factor.
Is a partial conversion over multiple years preferable to a single large conversion? Spreading the conversion across multiple low-income years can keep more of it inside lower brackets. The trade-off is that the planning window may close (Social Security starts, RMDs begin, investment income recovers) before the staged plan is complete.
How does the conversion interact with other current-year income decisions? Realized capital gains, business income, deferred compensation, and other discretionary income items all sit in the same taxable income calculation. A conversion that fits inside the bracket on its own may push other income across a threshold, or vice versa. The interactions are typically modeled jointly.
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Topics Typically Discussed With the Investment Advisor
Separately from the tax conversation, families often discuss with their wealth advisor:
Which account holds the funds to pay the tax on the conversion? A common best practice the advisor team often surfaces: pay the conversion tax from a taxable brokerage account rather than from the IRA balance being converted. Paying from the IRA balance reduces the amount that ends up in the Roth and is itself a distribution event for the amount used to pay the tax. The Bogleheads wiki entry on Roth conversions discusses this in educational terms.
Asset location considerations for the converted balance. Once the balance is in the Roth, the asset location question (what investments belong in the Roth versus the taxable account versus other pre-tax accounts) often becomes a separate topic. The framing the advisor team often uses is around expected after-tax return, not pre-tax return.
Sequence of returns and time horizon. The general analysis tools the advisor team uses to model Roth conversion outcomes typically include some assumption about future tax rates, future returns, and the household's planned withdrawal sequence. The output is a comparison of after-tax wealth under several scenarios. Families typically ask to see the model and the assumptions, not just the recommendation.
Topics Typically Discussed With the Estate Attorney
If the family has an estate plan in place, the conversion conversation often touches on:
The estate-planning value of Roth assets versus pre-tax assets. Roth assets pass to heirs with different tax characteristics than pre-tax assets do. Under current rules, most non-spouse beneficiaries are subject to a 10-year distribution window on inherited retirement accounts. The interaction with the estate plan is something the estate attorney typically reviews alongside the tax advisor. The AICPA's estate planning publications cover the general framing.
Trust beneficiary considerations. For families whose retirement accounts have trust beneficiaries, the conversion may affect the trust's distribution and tax planning. The interaction is specific enough that an estate attorney is usually the right professional to walk through it.
Topics Typically Discussed Across the Whole Advisor Team
A few topics that sit at the intersection of all three advisors:
The conversion timing relative to the liquidity event itself. For families whose liquidity event included installment payments, earn-outs, or deferred compensation, the income picture in the current year may not be as low as it first appears. The advisor team typically reconciles the picture before any conversion conversation moves forward.
Coordination with other tax-loss or tax-harvesting moves in the same year. If the family is also realizing capital losses, donating appreciated securities, or making qualified charitable distributions, the order and timing of these moves can affect the conversion math. The advisor team typically maps all of these onto a single year-end plan.
Documentation and record-keeping. Roth conversions generate specific paperwork: a Form 1099-R from the receiving account, a Form 8606 filed with the tax return for the conversion year, and updated records of basis. The team typically reviews who is responsible for each piece.
What This Article Is Not Doing
This article does not recommend a Roth conversion. It does not say a low-income year is the right time for one. It does not predict what tax rates will be in the future. It does not suggest a specific dollar amount. Those decisions are not appropriate for a public educational article to make on behalf of a specific family, because the right answer depends on facts the article does not have and cannot know.
The role of an article like this is to help families know which questions to raise so the conversation with their advisor team is shorter and more useful. The advisor team is who answers the questions. The questions are what start the conversation.
For more on how Capivise approaches the broader conversation around tax-efficient reinvestment after a liquidity event, the educational notes at the tax-efficient reinvestment advisor page walk through the surrounding topics. The general framing on how to choose an advisor team for this kind of work is at https://capivise.com/questions-to-ask-an-advisor, and the broader advisor match process is at https://capivise.com/match.
A Note on Professional Qualifications
The topics above are best discussed with professionals who hold the appropriate credentials. For tax and conversion planning, a CPA or tax attorney with experience in post-liquidity planning is typically the right starting point. For investment advisor selection, the SEC's investor.gov resources and the FINRA BrokerCheck database both let families verify credentials and disciplinary history. For fee-only fiduciary financial advisors, the NAPFA directory lists members who meet specific fiduciary and fee-structure requirements.
A Closing Reminder
Roth conversions are not free. The tax is real, it is paid now, and it is gone. The case for them rests on the comparison between the rate paid now and the rate that would have been paid later. The comparison depends on a lot of facts that change over time. A conversation with a qualified advisor team, ideally before the year-end deadline of the year in question, is the appropriate way to evaluate whether the math fits a specific family's situation.
The educational point of this piece is not to give an answer. It is to help families walk into the conversation with the right list of questions, so that the time spent with the advisor is focused on the facts of their specific situation rather than on covering ground that an educational article can cover for free.
