Roth Conversion Strategy for High-Income Executives

Conventional wisdom says high-income executives can't do Roth conversions — their income is too high and the tax rate on conversion is too punishing. That's wrong on both counts. Roth conversions have no income limit, and executive compensation is often lumpy enough to create genuine low-bracket windows that most salaried employees never see.

A C-suite executive at a public company might earn $1.5M in RSU-heavy years and $300K in the year after they leave a company before starting their next role. That gap year — or the two years between the lockup expiry and the next grant cliff vest — is the conversion window. Knowing when to look for it is most of the work.

Roth conversion basics

A Roth conversion is the process of moving money from a pre-tax account (traditional IRA, traditional 401(k), rollover IRA) to a Roth account. The converted amount is added to your ordinary income for that year and taxed at your marginal rate. After that, all growth and qualified distributions are tax-free — permanently.

Key rules:

• No income limit. Unlike direct Roth IRA contributions (which phase out above $242,000–$252,000 MFJ in 2026¹), Roth conversions are available at any income level.
• Taxed as ordinary income. Converted amounts are taxed at your ordinary income rates — not capital gains rates. The rate depends on your total income in the conversion year.
• No penalty. The 10% early withdrawal penalty does not apply to conversions (only to distributions used for non-qualifying purposes before age 59½). But the 5-year seasoning rule applies to penalty-free access to converted principal before 59½.
• No ceiling on conversion amount. You can convert a $3M IRA balance in one year if it makes sense. The question is always: what rate will you pay now versus what rate will you avoid later?

Why executive compensation creates conversion windows

The executive income profile rarely runs flat. Several predictable events compress income into specific years and leave valleys in between:

• Role transitions. The year between a company departure and your next senior role — whether 6 months or 18 months — often has substantially lower W-2 income. Base salary disappears; no new RSU grants have vested; severance may have a defined period. Total income might be $200–$400K instead of $900K–$1.5M.
• Post-lockup lulls. After an IPO lockup expires and you execute your sell-down, the following year's income may be much lower (no large LTCG event if you've completed most of the selling).
• NQDC distribution years. If you elected distributions over 5 or 10 years, each distribution year adds to income — but the non-distribution years may be quieter if other comp elements are smaller.
• Early retirement. The gap between leaving the executive workforce (e.g., age 58) and starting Social Security (age 70 for maximum benefit) can be a decade of low taxable income — ideal for systematic conversions.
• Reduced-grant years. If you move from a role with $2M in annual equity grants to an advisory or board-director role with minimal equity, your income can drop dramatically mid-career.

2026 tax brackets and conversion rate math

For Roth conversion planning, the relevant numbers are the 2026 federal income tax brackets²:

Most executives in peak earning years are deep in the 37% bracket. The conversion math is unfavorable there. But in a gap year with $350K total income (MFJ), you're in the 24% bracket — and there's $59,550 of 24% room before hitting 32%. Converting $200K at 24% to avoid future RMD withdrawals at 37% is a straightforward win.

Roth conversion vs. NQDC deferral: two sides of the same decision

Executives who have access to a non-qualified deferred compensation plan face a related decision that should be made in conjunction with Roth conversion planning:

• NQDC defers current income (you skip taxation now, pay later at ordinary rates on distribution). This is valuable when you expect to be in a lower bracket in the distribution year.
• Roth conversion accelerates taxation (you pay now, receive tax-free distributions later). This is valuable when you're in a lower bracket today relative to expected future rates.

These are mirror strategies. In a high-income year, you'd often want to maximize NQDC deferral. In a low-income gap year, you'd often want to execute Roth conversions. Occasionally they compete: if NQDC distributions land in a year where you'd also like to do a large Roth conversion, the distributions might push you out of the optimal conversion bracket. Model both together, not separately. See the NQDC deferral calculator for the deferral side.

The IRMAA surcharge trap on large conversions

Medicare Part B premiums use a 2-year lookback — your 2026 MAGI determines your 2028 premiums, not your 2028 income. A large Roth conversion in a gap year can spike your MAGI into a higher IRMAA tier and increase premiums two years later, partially eroding the conversion benefit.

The 2026 IRMAA tiers (based on 2024 MAGI — shown as a reference for the tier structure; 2028 amounts will differ due to inflation adjustments)³:

If you're near Medicare age and a conversion year would push MAGI across a tier threshold, the math may favor converting to just below the threshold rather than above it. For executives well below Medicare age (40s–50s), the 2-year lookback is irrelevant now but becomes a planning factor in the decade before Medicare eligibility at 65.

IRMAA has an appeals process (IRMAA Life-Changing Event appeal, Form SSA-44) for income that drops due to qualifying events — retirement, divorce, death of spouse, loss of pension, or a one-time lump-sum distribution. A single-year Roth conversion spike may or may not qualify depending on the reason. Don't count on winning an appeal for a planned conversion.

Pro-rata rule and the backdoor Roth

If you have pre-tax dollars in any traditional IRA (including rollover IRAs from former employers), the IRS applies the pro-rata rule to any conversion or nondeductible contribution. You cannot designate which dollars you convert — the IRS treats all of your IRAs as one aggregate pool and taxes conversions proportionally to the pre-tax fraction.

Example: You have a $900K rollover IRA (all pre-tax) and want to do the backdoor Roth strategy — contribute $7,500 to a nondeductible traditional IRA, then immediately convert. The conversion is not tax-free. The nondeductible $7,500 represents only 0.83% of your total IRA balance ($7,500 / $907,500). Only 0.83% of the converted amount comes out tax-free; 99.17% is taxable. The backdoor Roth only works cleanly when you have no pre-tax IRA balance — a situation few senior executives are in if they've been rolling over 401(k)s for decades.

The common solution is to roll the pre-tax IRA into your current employer's 401(k) plan (if the plan accepts rollovers), clearing the pro-rata denominator. After the rollover, the backdoor Roth works cleanly. Not all 401(k) plans accept incoming rollovers — check your Summary Plan Description.

Five-year seasoning rules

Roth conversions have two distinct 5-year clocks that confuse many people:

1. The earnings clock. To withdraw Roth earnings tax-free and penalty-free, you must have had any Roth IRA open for at least 5 years, AND be age 59½ or older (or meet another qualifying exception). This clock starts January 1 of the year you first opened or contributed to any Roth IRA — it's not per-account.
2. The conversion penalty clock. Converted principal (not earnings) can be withdrawn without the 10% early withdrawal penalty after 5 years from the conversion year, if you're under 59½. Each year's conversion has its own 5-year clock. This matters only if you might need the converted funds before age 59½. After 59½, all seasoned Roth funds are accessible without penalty or tax.

Practical implication for executives: if you start a Roth IRA or do your first conversion at age 52, the earnings clock runs through age 57 — well before your expected retirement distributions begin. The conversion penalty clock is less relevant for executives who don't plan to touch converted funds before 59½. Open a Roth IRA early (even with a small amount) to start the earnings clock.

Worked example: The gap-year conversion

When Roth conversion is the wrong move

Conversion is not always better. Cases where it typically doesn't make sense:

• You'll pay conversion tax at a higher rate than your expected withdrawal rate. If you're converting at 37% but expect to retire into a 24% or lower bracket, you're destroying value.
• You need the conversion funds within 5 years and are under 59½. Accessing converted principal early triggers the 10% penalty on that tranche.
• Your state taxes conversions heavily. A 13.3% California state rate on top of 37% federal means 50%+ going to taxes on conversion. The math requires an implausibly high future rate assumption to justify that.
• You expect large charitable deductions to offset future RMD income. Qualified charitable distributions from IRAs (up to $111,000/year in 2026⁴) can satisfy RMDs tax-free. If you plan to be significantly charitable in retirement, some of the "forced RMD income" problem goes away.
• You have a large NQDC balance you're drawing down in retirement. NQDC distributions are ordinary income. If NQDC distributions will already push you into the 35–37% bracket in retirement, converting pre-tax IRA assets to avoid RMDs at those rates may not add much — you're already there.

Putting it together: Roth conversion as part of the full executive plan

Roth conversion planning for executives doesn't happen in isolation. It interacts with:

• NQDC distribution schedule — NQDC distributions that land in your planned conversion year push up taxable income and may close the conversion window. NQDC deferral and distribution strategy →
• Concentrated stock sell-down — Long-term capital gains from concentrated stock diversification add to MAGI (though taxed at capital gains rates, not ordinary rates, they still count for IRMAA and Social Security phase-in calculations). Concentrated stock guide →
• ISO exercise timing — ISO exercises in a conversion year generate AMT preference items and could push regular taxable income or MAGI in complex ways. Model both. ISO and AMT planning →
• Mega backdoor Roth — Complements conversions by adding after-tax Roth money through the 401(k) channel each year, independent of pro-rata rule. Mega backdoor Roth guide →