Timing of Conversion to Roth
New guy here… happy to have found this board and I appreciate the effort that goes into making such a great resource available!
I have a friend who just graduated from a fellowship education program. His taxable income this year is only about $ 6K so far. He will be closing on buying a house in early Nov and will qualify for the $8K home buyers credit.
Since he wont be owing any taxes and it would be a shame if he lost the golden opportunity of this credit, I suggested he roll over his Trad IRA (currently about $ 61K) into his Roth so he can use the homebuyers credit to cover his conversion tax. Does this sound like it is possible/reasonable approach?
Thanks for any advice,
Cheers,
Ray
Permalink Submitted by Clyde Wolf on Sat, 2009-09-12 23:55
The first time home buyer tax credit of up to $8,000 is a refundable tax credit. When the credit is not needed to pay taxes due on the 2008 or 2009 tax return, the excess is refunded to the taxpayer. The first time home purchase must be completed before December 1, 2009.
The ROTH IRA Conversion will increase the tax payer’s AGI, and taxable income. So yes this is a reasonalble approach to use the first time home buyer tax credit.
Permalink Submitted by Ray Knapp on Sun, 2009-09-13 00:05
Thanks, cwolf… as I read your reply, I have a question. If he has no tax liability at all this year on his $6K income, my read of your post is that he would get the $8K home buyers credit so he would have cash in pocket?….
hmm, might be something he’d want to do = get the cash rather than do a conversion this year. and just save the conversion for a later time.
-OR- maybe convert just enough THIS year to keep him right below the bracket where he would be paying any tax so he takes advantage of getting the conversion this year for “free”, getting the $8K in pocket, then perhaps next year, convert the balance and spread that year’s tax liability over 2010 and 2011.
Just trying to rack my brain on all the options…Thanks, Ray
Permalink Submitted by Clyde Wolf on Sun, 2009-09-13 01:27
Yes, the first time home buyer credit is calculated on form 5405 and reported on 1040 line 69 (2008 tax year). That adds into all of the other payments the tax payer has made and other refundable tax credits.
With $71,000 of gross income a single taxpayer would have a tax bill of about $5,000 for 2009. When the taxpayer qualifys for the maximum $8,000 first time home buyer tax credit, that would cover the tax bill and refund about $3,000.