Why Small Business Owners Should Consider Roth Conversions to Avoid Tax Pitfalls in Retirement

Many small business owners assume they’ll retire into a lower tax bracket—but the reality can be quite the opposite. With Social Security income, Required Minimum Distributions (RMDs), and the widow’s tax penalty, retirement can come with a surprising tax bill. Once you turn 73, you’re forced to withdraw from traditional IRAs, adding ordinary income and possibly bumping you into higher brackets. After the loss of a spouse, the shift from joint to single filing can dramatically raise your tax exposure even further. Add in the fact that up to 85% of Social Security income can be taxed, and the need for strategic planning becomes clear.

The solution? Roth IRA conversions. By converting traditional IRA funds into Roth IRAs in lower-income years—such as between retirement and age 73—you can minimize lifetime tax liability. Roth accounts grow tax-free and have no RMDs, allowing for more control over your taxable income. When heirs inherit a Roth IRA, they must withdraw the funds within 10 years per the SECURE Act, but those withdrawals are tax-free. This makes Roth IRAs a powerful estate planning tool, especially for business owners whose heirs are in peak earning years and already face high tax rates.

A personalized Roth conversion plan allows you to take advantage of today’s tax brackets and build a more tax-efficient legacy. Proactively managing your taxable income over time can reduce your own retirement tax burden and ensure more of your wealth passes to the next generation, untouched by excessive taxes. Collaborating with a tax advisor or financial planner can help you assess how much to convert each year, balancing current tax costs with long-term benefits. It’s a smart, forward-looking strategy that puts control back in your hands—and keeps more of your hard-earned assets in the family.

Click here for the full article

For personalized guidance tailored to your unique situation, contact Diversified Asset Management, Inc. at info2@diversifiedassetmanagement.com or (303) 440-2906.

Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinions, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.