Roth conversions for business owners: SEP IRA Roth conversion, SIMPLE, solo 401(k) and the year you sell

Yes. A SEP IRA is a traditional IRA that gets employer contributions. You can convert any part of it to a Roth IRA at any time. You can even do it in a year your business makes a SEP contribution. The amount you convert is taxable income that year.

Since 2023, the law has also let your SEP contributions go in as Roth, if your provider offers it. Not all do.

Do you also make backdoor Roth contributions? Your SEP balance counts as traditional IRA money under the pro rata rule. That can make part of your backdoor conversion taxable.

Yes, but only after the 2-year period. That period starts on the first day your business put money into your SIMPLE IRA. During those two years, your SIMPLE money can move only to another SIMPLE IRA.

If you move it to a Roth IRA or a regular IRA too early, the IRS treats it as a withdrawal. You owe income tax. If you're under 59½, you also owe a 25% additional tax in place of the usual 10%. After the two years, you can convert your SIMPLE IRA money to a Roth IRA and pay ordinary income tax on it.

Often, if your plan document allows in-plan Roth conversions. Many ready-made solo 401(k) plans from brokerages do. Ask your provider, and check whether you need to amend your plan.

An in-plan conversion keeps the money in your 401(k). If you prefer, you can wait until you are eligible for a distribution. Then you can roll the pre-tax money to an IRA and convert there. For more on moving plan money to an IRA, see 401(k) to Roth IRA.

If you own a sole proprietorship, partnership or S corporation, the QBI deduction may let you deduct up to 20% of your qualified business income. Conversion income is not business income, so it never adds to your QBI. But it does raise your taxable income, and that matters in two ways.

First, your deduction can't be more than 20% of your taxable income (before the deduction, minus net capital gains). In a low-profit year, that cap is often what limits you. A conversion raises your taxable income. That can raise your QBI deduction, up to 20% of your QBI.

Second, wage and property limits start to apply above the 2026 threshold. That is $201,750 single or $403,500 joint. Some businesses are "specified service" businesses, such as consulting, health, law or accounting. For them, the deduction phases out completely by $276,750 single or $553,500 joint. If a conversion pushes you into that range, it can cost you part or all of your deduction.

Usually not a large one. Your sale often brings a big capital gain. It can also bring ordinary income from things like depreciation recapture or inventory. A conversion is added on top. Long-term gains are taxed at 0%, 15% or 20%, depending on your total taxable income. So conversion income can push more of your gain into a higher rate.

There is also the 3.8% net investment income tax. It applies to investment income, such as interest, dividends and capital gains. It kicks in once your modified adjusted gross income passes $250,000 joint or $200,000 single. Gain from selling a business you actively ran is often left out of investment income, but not always. Ask your tax preparer. A conversion isn't investment income, but it raises the income used for that test.

The year after your sale, or a year with a business loss, is often a better time. If you sell on an installment plan, your gain is spread over several years. Plan your conversions around those payments. To try your own numbers, use Roth conversion tax calculator.