Roth Conversion Around an Installment Sale: When to Convert

Part of our Beyond the tax bill series.

What does a Roth conversion do to your tax return?

Under IRC §408A(d)(3)(A), the amount you convert from a traditional IRA is included in gross income as if you had taken it out. It is ordinary income, taxed at your ordinary rates in the conversion year. The 10% early-distribution tax does not apply to the conversion itself (§408A(d)(3)(A)(ii)).

Four rules shape how a conversion interacts with a sale:

• It is not net investment income, but it raises MAGI. §1411(c)(5) excludes distributions from IRAs and Roth IRAs from net investment income. The conversion still sits in modified AGI, so it can push your sale gain over the 3.8% net investment income tax threshold ($250,000 joint, $200,000 single, never indexed).
• It counts for IRMAA. Medicare's income test uses AGI plus tax-exempt interest (42 U.S.C. §1395r(i)(4)), and it looks back two years. SSA's POMS HI 01120.005 lists "Conversion of an IRA" (and "Capital gains from the sale of property") as events that do not qualify for a life-changing-event appeal.
• You cannot undo it. Since the 2017 tax law (P.L. 115-97 §13611), a conversion cannot be recharacterized back to a traditional IRA (§408A(d)(6)(B)(iii)). If you convert in March and the sale closes in November, both land on the same return.
• The 5-year rule. If you are under 59½ and withdraw converted money within the 5-taxable-year period that starts with the conversion year, the 10% additional tax of §72(t) applies to the taxable amount converted (§408A(d)(3)(F)). At 59½ or older, the §72(t) exception covers it.

Why does a conversion make the sale gain more expensive?

Capital gain stacks on top of ordinary income. The 0%, 15% and 20% bands are measured against total taxable income, with ordinary income filling the bottom first. For a married couple in 2026 the 0% band ends at $98,900 of taxable income and the 15% band at $613,700 (Rev. Proc. 2025-32).

So every dollar of conversion lifts every dollar of gain above it. A conversion can move gain out of the 0% band into 15%, or out of 15% into 20%. It also shrinks the room under the NIIT threshold, can cost part of the $6,000-per-person senior deduction (reduced 6% of MAGI over $150,000 joint, §151(d)(5)(C); see senior zero capital gains), and moves you up the IRMAA tiers.

What does $100,000 of conversion cost in three different years?

Illustrative facts: a married couple, both 66, $80,000 of pension income, $50,000 of Social Security, federal tax only (2026 tables), converting $100,000 in a year with no sale, a year with $150,000 of installment gain, or a year with $1.5 million of cash-sale gain.

Where the money goes:

• No-sale year. The conversion is taxed at 12% and 22%, and the higher AGI trims the couple's senior deduction from $12,000 to $3,300. MAGI of $222,500 crosses the first IRMAA line ($218,000 joint, CMS 2026 fact sheet) by $4,500, which adds $2,297 of premiums in the year the return is used.
• Installment year. The conversion itself costs $20,620 at 12% and 22%. Another $1,785 is gain pushed out of the 0% band into 15%. The extra MAGI puts $100,000 more of the gain over the NIIT line ($3,800). And MAGI jumps from IRMAA tier 1 to tier 3, adding $6,943 of premiums for two people.
• Cash-sale year. The conversion costs the same $20,620 in ordinary tax, plus $6,785 from gain pushed into the 15% and 20% bands, plus $5,380 of added AMT (more income phases out more of the AMT exemption), plus $3,800 of NIIT. IRMAA adds nothing only because the sale already put the couple in the top tier.

Does spreading the sale always make room for a conversion?

No, and the table shows why. The installment year is cheaper than the cash year for the conversion (33.1% against 36.6%), but the gap is small, and the IRMAA line runs the other way: the $150,000 installment year was sitting just under IRMAA tier 2, and the conversion pushed it two tiers up. In the cash year the sale had already maxed out IRMAA, so the conversion added none.

The real win from spreading is not the installment years. It is the years without a lump. A cash sale fills one year completely and leaves the others quiet. A spread schedule puts some gain in every year, which leaves partial room in each. Either way, the cheapest conversion dollars are the ones that land where the sale does not. The lever is sizing: convert up to the line that matters for your return, not past it.

Where are the lines for 2026?

Bracket lines are taxable income (after deductions); IRMAA and NIIT lines are MAGI (before them). For the couple above in the no-sale year, the IRMAA line binds first. Converting $95,500 instead of $100,000 stops MAGI at exactly $218,000: federal tax on it is $20,225 and IRMAA is $0, or 21.2% instead of 23.6%. The last $4,500 of the $100,000 conversion cost $3,406. IRMAA tiers are cliffs; one dollar over costs the whole tier for the year. See IRMAA after a property sale and the capital gains and IRMAA guide.

How can you sequence conversions around a sale?

Patterns to run with your CPA:

1. Convert in the years before the sale closes. Modest-income years before closing may have 12% and 22% room the sale year will not.
2. Keep the conversion out of a cash-sale year. In our example it is the most expensive year to convert. And because a conversion cannot be undone, convert late in the year only once you know whether the sale closed.
3. Use the low installment years. With a structured schedule, payments can be set before closing so some years carry less gain. Those years can absorb a conversion sized to the next line.
4. Leave room under IRMAA two years ahead. Premiums at 65 are set by the return from age 63. If you are converting at 63 or later, size each year against the $218,000 joint line (or whichever tier you can live with), not just the bracket.
5. Watch when required minimum distributions start. They begin at 73, or 75 if you reach 74 after 2032 (§401(a)(9)(C)(v), SECURE 2.0). Once they start, each year's distribution is ordinary income on top of any installment gain, which is one reason people convert before then.

On the structured sale side: the buyer pays in full at closing and you take the proceeds as scheduled payments from an assignment company funded by an annuity from a highly rated life insurer. What to know: payments are locked in once set; they depend on the assignment company and the insurer behind it; there is no published IRS ruling on this specific assignment structure, so have your CPA review it; and a commission is built into the pricing. More in what a structured installment sale is and the structured installment sale guide.

How do you test this on your own numbers?

The calculator on our demo page has a "Beyond the tax bill" slide showing, year by year for a cash sale and a spread schedule, the sale's IRMAA, NIIT, Social Security, SALT and ACA costs. The years it leaves under each line are your conversion windows. See also high-income structured sales, IRC Section 453 and the capital gains exit calculator.

Frequently asked

Q: Is a Roth conversion subject to the 3.8% net investment income tax? A: No. §1411(c)(5) excludes IRA and Roth IRA distributions from net investment income. But the conversion raises MAGI, so it can push your capital gain over the $250,000 joint threshold, and that gain pays the 3.8%.

Q: Can I appeal IRMAA because of a Roth conversion? A: No. POMS HI 01120.005 lists a conversion of an IRA, and capital gains from a property sale, as events that do not qualify as life-changing events.

Q: If the sale closes after I convert, can I reverse the conversion? A: No. Recharacterizing a conversion has not been allowed since 2018 (§408A(d)(6)(B)(iii), added by P.L. 115-97 §13611).

Q: Does converting raise the tax on my sale gain? A: It can. Gain stacks on top of ordinary income, so the conversion can push gain out of the 0% band into 15%, or out of 15% into 20%, and add NIIT and AMT. In our cash-sale example those knock-on effects cost about $16,000 on a $100,000 conversion.

Q: What is the 5-year rule for conversions? A: If you are under 59½ and take out converted money within the 5-taxable-year period starting with the conversion year, the 10% §72(t) additional tax applies to that money. At 59½ or older it does not.

What should you read or run next?

• Beyond the tax bill: the costs a sale triggers
• IRMAA after a property sale
• Net investment income tax
• Social Security taxes after a property sale
• AMT on a property sale

Illustrative estimates using 2026 law, federal tax only. Not tax, legal or accounting advice. Figures change each year; have your CPA confirm with your own return.

Who wrote this?