By Kimberly Lankford | November 24, 2008
You can take advantage of more tax breaks and a Roth IRA when your AGI falls below certain levels.
To take advantage of the drop in the stock market, I decided to convert a rollover IRA to a Roth earlier in the year. Unfortunately, now it looks like my adjusted gross income will be a smidgen more than the $100,000 limit allowed for this conversion. Is there a way to reverse the transaction to convert it back to a traditional IRA without incurring penalties?
Yes, there is. As you mentioned, you can convert a traditional IRA to a Roth only in a year when your modified adjusted gross income is less than $100,000 (whether you're married or single). If you discover that your income was too high, you can ask your IRA administrator to undo the conversion and move the money back to a traditional IRA, a process called recharacterization. You have until October 15, 2009, to undo a 2008 conversion, but it's best to make the change before April 15, 2009, so you won't need to report the original conversion when you file your 2008 taxes.
But you may not need to undo your Roth conversion. You still can make several moves to lower your 2008 adjusted gross income, which might get you below the $100,000 cutoff. Also consider some of these income-lowering moves if you're near the cutoff for other tax breaks (see The Upside of a Lower Income for details).
Increase deductible retirement-plan contributions. If you haven't maxed out your 401(k) or 403(b) contributions already ($15,500 per year in 2008, or $20,500 if you're 50 or older by the end of the year), boosting your contributions can help you lower your taxable income. If
you get a year-end bonus, consider adding that money to your 401(k) so it doesn't increase your taxable income.
Sell stocks, mutual funds and other investments for a loss. Capital losses first offset capital gains. After that, you can apply your losses to offset up to $3,000 of ordinary income in 2008 (losses beyond that can be carried over to future years). See Smart Year-End Tax Moves for more information.
Contribute money to a health savings account, if you're eligible. To qualify, your health-insurance policy must have a deductible of at least $1,100 for single coverage in 2008, or $2,200 for families. For more information, see Health Savings Account Answers .
Deduct alimony as well as educator, moving and other expenses. which can lower your adjusted gross income. See the first page of Form 1040 for more ideas. See page 17 of IRS Publication 590, Individual Retirement Arrangements , for a list of the deductions that are added back to your AGI to produce your modified AGI, which is used to determine whether you can qualify for the IRA conversion.
Lower any income from self-employment. whether you have your own business or even just some freelance income on the side. Make tax-deductible contributions to a retirement plan for self-employed individuals. See SEP vs. Solo 401(k) for more information. Increasing your deductible business expenses, such as buying business equipment by the end of the year, can lower your self-employed income. See Tax Filing for Freelancers and Schedule C for more ideas. You may also want to postpone some year-end billing until 2009 to minimize your income for this year.
If these moves don't get your modified AGI below the $100,000 limit, see Undoing a Roth Conversion for more information about converting back to a traditional IRA.