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Going Back to School (Particularly Med School)? Taking a Gap Year? You Might Want to Convert Your tIRA

I gave the example of going back to school in the title but this strategy works any time you have a low income year.

What is an IRA Conversion?

IRA conversions only apply to traditional IRAs (tIRAs), not Roth IRAs (you'll see why a minute). By converting your tIRA you transfer money from your tIRA to your Roth. Of course, this doesn't come for free! Because you didn't pay taxes on that money when you contributed it, and you would pay taxes on it if you had contributed it directly to a Roth IRA, Congress says you have to add this converted amount to your income on your taxes in the year you do the conversion.

Note: I am ignoring state taxes for this post because state income tax rates are all over the place. Doing a conversion will add the conversion amount to your state income as well (but if you're in a state that offers a 529 deduction or credit, you can utilize the 529 coupon to reduce some of the extra taxes incurred). Make sure to include this in your calculations when you're trying to decide if converting your tIRA is worth it.

Sidenote: In the recent tax law recharacterizing (in short, undoing) conversions was eliminated, but conversions are still allowed. Don't be confused.

How Much Are You (and Your Spouse) Earning While in School?

This is the key factor in deciding whether you should do a tIRA conversion or not. You will be increasing your income by doing a tIRA conversion, meaning it will be taxed at your marginal rate. In the worst case scenario, if you continue working at the same job while in school and you convert your tIRA, you'd be canceling out the tax advantage of the tIRA or even paying more in taxes if you convert enough money to go up a tax bracket.

The Easy But Not That Common Case

In this scenario you're single (or married and your spouse earns nothing), in school for multiple years, and not earning anything. This is the easiest case because you would otherwise report no income earned (and we need the in school for multiple years clause since school years don't align with calendar years).

The naive answer here is convert at a minimum the amount of the standard deduction ($12,000 at this time of writing). But it's actually better than that. Because you're going to school and paying for Qualified Higher Education Expenses (QHEE), you can claim the Lifetime Learning Credit [1], which is a tax credit for 20% of the first $10,000 in QHEE. This tax credit is non-refundable, which means that if you qualify for the credit, but your total tax liability is less than the credit (as it would be in this case if you didn't do a conversion), then you do not get a check from the IRS for the full amount of the credit. Your tax liability only gets reduced to zero.
But, by converting your income, you can take advantage of this credit. As of this writing, assuming that you're paying at least $10,000 in QHEE per calendar year, you can convert $30,254.16 [2] and still pay $0 in income taxes. Additionally, if you want to lock in paying 12% taxes to get money into a Roth, you can convert an additional $20,445.84 [3] and still remain in the 12% bracket. It is fundamentally unknowable whether doing so will work to your advantage, since it depends on knowing the future tax rates, but I'd say for most people it's probably a good bet.

The only problem is that while it does vary by field, it's fairly common for students to get internships during the summer or co-ops during an academic semester. But, a medical school student who decides not to go straight from undergrad to med school, earned some money, and contributed that money to a tIRA or 401k seems to be the best candidate for this (from what I've been told, it is not common for med students to get internships).

Still though, if you find yourself in this situation, definitely do this.

The Less Obvious Case

If you or your spouse earns income while in school, then for the conversion to make sense you may have to be willing to lock in paying taxes at 12%. As mentioned earlier, for single people they can only earn $18,254.16 and pay nothing in tax (while claiming the LLC). For married people, as a couple they can earn $43,841.67 [4] and pay nothing in tax (while claiming the LLC).
Of course, if you earn up to these limits, then that leaves no room for you to convert money while paying nothing in tax.

If you earn more than this, then you have to again decide if locking in the 12% taxes is a good bet (which again, I think it is). I already went over how much income a single person can report and stay in the 12% bracket: $50,700. For married couples, this amount is $101,400 [5].


  1. Technically there's also the American Opportunity Tax Credit, but in almost all cases it's used for undergraduate (and if so, disqualifies you from claiming it for graduate school), and also the Tuition and Fees Deduction, but that is worth less than the LLC) ↩︎

  2. 952.50 + .12((x-12000)-9525)) = 2000. Tax brackets can be found here. The 12000 is the standard deduction ↩︎

  3. 38,700+12,000 - 30,254.16 ↩︎

  4. 1905+.12((x-24000)-19050) = 2000. Tax brackets can be found here. The 24000 is the standard deduction ↩︎

  5. Note that for both numbers, I did verify that these incomes do not cause you to phase out of the LLC ↩︎

Going Back to School (Particularly Med School)? Taking a Gap Year? You Might Want to Convert Your tIRA
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