Recharacterize Roth conversion to stay under AGI threshold?

Posted by adwagner on May 18, 2009, 6:25 pm

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In 2009 my son will be entering college, and I plan to take the
Tuition and Fees deduction on my 2009 tax return. I expect to have at
least $4000 in costs that are eligible for 2009 deduction and I will
be claiming him as a dependent. My income is normally above the
thresholds for qualifying for this deduction; however in 2009 I am
deferring compensation that will place me between the two thresholds
($160,000 and $130,000).

Given that my taxable income is unusually low in 2009, I am also
contemplating converting part of a traditional IRA to a Roth IRA
during 2009.

If my AGI is less than $130,000 I can claim a $4000 tuition and fees
deduction. If I am between $130,000 and $160,000 I can only claim
$2000. My goal is to be below $130,000 but with dividends, bank
interest and some royalty income I cannot plan my AGI to the penny.

If I convert say $10,000 to a Roth in 2009 and find (in March 2010)
that my AGI would be $135,000 can I simply recharacterize $4,900 of
the conversion in order to get my AGI just under $130,000? Is there a
reason this plan would not work?

Thanks.

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Posted by Mark Bole on May 18, 2009, 6:55 pm

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addition to below: in 2010, the $100K limitation goes away.

If your modified AGI (MAGI) is over $100k, conversion is not allowed.
MAGI does not include the conversion amount, but does include Tuition
and Fees deduction (add it back in).

-Mark Bole

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Posted by Mark Bole on May 18, 2009, 7:04 pm

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Mark Bole wrote:

> addition to below: in 2010, the $100K limitation goes away.

> If your modified AGI (MAGI) is over $100k, conversion is not allowed.

> MAGI does not include the conversion amount, but does include Tuition

> and Fees deduction (add it back in).

My first post was swallowed up somewhere on its way.

What I said was, your MAGI under your scenario does not allow for a
conversion, so no recharactization to worry about.

-Mark Bole

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by makbo2 on May 18, 2009, 8:17 pm

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adwagner@hotmail.com wrote:

> In 2009 my son will be entering college, and I plan to take the

> Tuition and Fees deduction on my 2009 tax return. I expect to have at

> least $4000 in costs that are eligible for 2009 deduction and I will

> be claiming him as a dependent. My income is normally above the

> thresholds for qualifying for this deduction; however in 2009 I am

> deferring compensation that will place me between the two thresholds

> ($160,000 and $130,000).

> Given that my taxable income is unusually low in 2009, I am also

> contemplating converting part of a traditional IRA to a Roth IRA

> during 2009.

See below, you are contemplating something that isn't allowed.

> If my AGI is less than $130,000 I can claim a $4000 tuition and fees

> deduction. If I am between $130,000 and $160,000 I can only claim

> $2000. My goal is to be below $130,000 but with dividends, bank

> interest and some royalty income I cannot plan my AGI to the penny.

> If I convert say $10,000 to a Roth in 2009 and find (in March 2010)

> that my AGI would be $135,000 can I simply recharacterize $4,900 of

> the conversion in order to get my AGI just under $130,000? Is there a

> reason this plan would not work?

If your modified AGI (MAGI) is over $100k, conversion is not allowed.
MAGI does not include the conversion amount, but does include Tuition
and Fees deduction (add it back in).

So, under your scenario no conversion, so no recharacterization
either.

-Mark Bole

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by adwagner on May 19, 2009, 4:21 pm

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> If your modified AGI (MAGI) is over $100k, conversion is not allowed.

> MAGI does not include the conversion amount, but does include Tuition

> and Fees deduction (add it back in).

> So, under your scenario no conversion, so no recharacterization

> either.

> -Mark Bole

> > << ------------------------------------------------------- >>

Mark: thanks for the reply. You are correct, and I overlooked that
issue.

I am actually not making a Roth "conversion", since my wife has an
inherited IRA - one for which we must take annual minimum
distributions since my father-in-law was over 70.5 at time of death.
My plan was to create my own "conversion" by simply taking a
distribution of the entire IRA balance (around $8000) and at the same
time contributing a similar amount to a Roth in my name and my wife's
name. I have been thinking about this transaction as a "conversion"
because that is what it is in substance, but it isn't actually a
conversion in legal form. I am using this opportunity in 2009 to
"convert" while my income is unusually low.

Since I cannot "undo" my 2009 IRA distribution in early 2010, I guess
I will simply have to be very conservative on how much I distribute in
2009.

Please let me know if you see it differently, or if you see another
angle to "manage" my AGI just under $130k.

Thanks.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>