Roth Conversion affecting EIC? | Ed Slott and Company, LLC

Roth Conversion affecting EIC?

My Brother will be graduating from Med school next year. His AGI will be close to zero for 2009. I mentioned he might want to convert all or some of his wife's 401k from her former employer. He wanted to know how the conversion would effect his Earned Income Tax credit. His wife has about $50K in her 401k. I assume any conversion amount is viewed as ordinary income and will therefore lower any credit he would receive--but I am hoping to hear the facts from someone more knowledgeable than my assumptions. Thanks for your help!

Your suspicion is correct. The modified AGI limits for the EIC contain no special exemption for Roth conversions. The figure that applies is the figure on line 38 of Form 1040 or the equivalent line if the 1040 is not used. The taxable amount of a Roth conversion would be added into the MAGI and therefore could eliminate the EIC. The amount of lost EIC should be factored into the tax cost of the conversion, and could well make the conversion too costly. However, the EIC also has an investment income limitation of 2,950, but the worksheet does NOT include retirement plan distributions as investment income. There appears to be an opportunity to convert just enough to stay under the MAGI limit for the number of qualifying children and still qualify for EIC because the conversion does not add to investment income. There is no need to convert the entire 401k. The appropriate amount could be directly converted to a Roth IRA and the balance directly rolled to a traditional IRA, and the conversion amount could fall under the EIC MAGI limit. If he waits until 2010, the conversion income can be split between 2011 and 2012, thereby not impacting the 2010 MAGI. However, they could have other income in 2010 that impacts the EIC in that year.

Looking at 2009 and the conversion effect on EIC requires some "What If" situations to be tried. The conversion amount must be removed from the TIRA by December 31, 2009 and the conversion must be completed within 60 days later.

Thanks very much for your help and expertise!!
 

Find members of Ed Slott's Elite IRA Advisor GroupSM in your area.
We neither keep nor share your information entered on this form.
 

I agree to the terms and services:

You may review the terms and conditions here.