Roth conversion 4 yr rule: tax or income?

From: Richard Alpert <rda@CS.Princeton.EDU>
Subject: Roth conversion 4 yr rule: tax or income?
Date: Mon, 26 Oct 1998 05:20:18 -0500

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Someone, it matters not who, wrote in persfin-digest:

|> >As I understand it, upon conversion, my $20K IRA would count as an additional
|> >$20K of income for me this year, which I could then divide over 4 years.   Net
|> >result is an additional $5K of income each year.  True?
|> 
|> True.  For conversions done in calendar year 1998, you can take the
|> $20K of conversion income all this year or split the income over 4
|> years.  For conversions done after 1998 you have to take all the
|> conversion income in the year you do the conversion.
|> 
|> >But, If I go to grad school in 1999, I will have very low income (probably
|> >$15K salary).  Would it then make sense to convert in 99, assuming I wouldn't
|> >be paying much in taxes on my low salary?
|> 
|> Absolutely!  Converting to a Roth essentially locks in your tax bracket
|> at the time of conversion.  If you can lock in a lower bracket, go for it.

There is an internal inconsistency here, one which I, personally, need to have
cleared up, because it makes a difference.

If I convert today, do I take the conversion amount, divide by four, and add it
to my income over the next four years, or do I calculate my additional tax
liability, and divide that over four years (adding it to my tax each year)?

If the first, then I "split the income over 4 years".  If the latter, then
"Converting to a Roth essentially locks in your tax bracket at the time of
conversion".  Both cannot be true.  Which is?

Rich Alpert

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