Your future self will thank you.
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If you have a Traditional IRA account and you’re taking some time off work to go back to school, the smart move is to do a Roth conversion. While this period of low-to-no income might be financially unsettling, you can use this time for some smart tax-advantaged maneuvers. As anyone who has read Money Scoop for more than a week knows, Traditional IRA accounts are funded with pre-tax dollars and income tax is paid on withdrawals, whereas Roth accounts are funded with post-tax dollars and are not subject to taxes on distributions. So converting Traditional funds to Roth involves paying income tax on the amount being changed over. For someone making six figures, that could be more than 20% in federal taxes alone. But single filers whose earnings fall to zero can convert up to $10,275 at just 10% federal income tax (state taxes will vary), and anything over that up to $41,775 at 12%. While it’s never fun to be paying those tax bills in grad school, your future self will thank you. Finally, a word of caution: Roth conversions are reported to the IRS as income, so make sure your conversion doesn’t trigger financial aid penalties.—Daniel
