Roth Conversion

[BP.]

After a couple dozen years in one industry, 45 y.o. client is changing careers. She'll go from 25-28% tax bracket, to being a full-time student for the next 1 1/2 years, and working entry level part time in her new field.

She expects AGI of about $13,000 for 2008, mainly wages. Her former employer 401k's are accumulated into a rollover IRA. If she converts about $12,000 of the rollover IRA into a Roth IRA, there'll be about $25,000 in AGI. She'll file single, take the standard deduction, have about $2,000 in tax, be eligible for the Lifetime Learning Credit of $2,000, and thus have about zero tax.

Prior years' AGI was too high for Roth conversions. I like the idea of using the effectively tax-free Roth conversion to get the full value of a non-refundable credit. Would be great to do this in 2009 also. Have I overlooked anything? Thanks!

[Roland Slugg]

I believe an IRA distribution is a very good idea for any taxpayer who is in the 0% tax bracket ... i.e. has no taxable income. Distributions are also smart for most taxpayers in the 10% tax bracket, and even the 15% tax bracket, especially if higher tax brackets are likely in future years. If the T/P wants to then roll the distribution into a Roth IRA, that is a separate decision, and one that would depend, in part, on how badly he/she needs the money currently, and whether he/she is under or over 59½ years of age.

The 15% tax bracket goes to $32,550 in 2008, so a single taxpayer can have taxable ordinary income of up to that amount without leaving the 15% bracket.