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Author: lswswein Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120809  
Subject: 2010 Roth IRA conversion Date: 5/19/2010 11:47 AM
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Hi
I am helping a friend with a tax question and he is planning to go to Grad school this fall and wants to fund it from his IRA account. This is where things stand right now:

1. Has a Traditional IRA with 44K in it.
2. Is in the 25% tax bracket now and will be in the 15% bracket next yr

What he wants to do:

1. Rollover to Roth in 2010, but opt to count it as income (50/50) in 2011 and 2012 (This is the exception for 2010).

2. Withdraw from Roth in 2010 (upto the cost of tuition)

3. It violates the 5 year rule, so subject to 10% penalty, but the penalty will be waived for qualified education expense.

Some numbers:

Plan A:

1. Rollover $44,000 in 2010. (Addl income in 2011 - $22,000. Addl income in 2012 - $22,000)
2. Withdraw $44,000 from Roth in 2010.
2011 Tax from rollover: Expect to be in the 15% tax bracket (federal) + 5% for state => $4,400 (due Apr 2012).
2012 Tax from rollover: Expect to be in the 25% tax bracket (federal) + 5% for state => $6,600 (due Apr 2013).

Plan B:
1. Withdraw from Trad IRA $44,000 in 2010
2010 Tax from withdrawal: Expect to be in 25% tax bracket + 5% for state => $13,200 (due Apr 2011)

You can see why Plan A is tempting.

Does this make sense? I read all the IRS publications and I think this is ok. Any help will be appreciated

thanks
-h
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110452 of 120809
Subject: Re: 2010 Roth IRA conversion Date: 5/19/2010 4:02 PM
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How about plan C.

Leave the retirement money alone. It is for retirement. Save up some money for grad school, then go once enough has been saved. This would be my first choice. And it's my only recommendation if the grad degree would not pay for itself plus the lost wages while in school.

Or plan D.

Get a student loan. Those are generally at very reasonable interest rates and at good terms for the borrower.

While in school, you could take advantage of the low income year to convert part or all of the traditional IRA to a Roth. I've long been an advocate of waiting for such an opportunity to convert.

If you insist on raiding the retirement, here's plan E.

Convert in 2010 only the amount needed to pay tuition in 2010. Elect to report the income in 2011 and 2012. Then in 2011, convert the rest (or just more) of the IRA to a Roth. That gets more of the conversion income into 2011 with its lower tax bite.

--Peter

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Author: lswswein Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 110482 of 120809
Subject: Re: 2010 Roth IRA conversion Date: 5/21/2010 4:10 PM
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Thank you - basically going to implement Plan E.

-h

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