Roth conversion may impact financial aid

A desk with an apple, money floating and Financial Aid written on the board
  • A 2010 Roth conversion enables you to defer income to 2011 and 2012.
  • The income from a Roth conversion can affect financial aid prospects.
  • Find out if your school will discount the income from a converted IRA.

You've decided it makes financial sense to do a Roth conversion this year. You qualify because the $100,000 income limit that kept you from converting a traditional IRA to a Roth was lifted in January. In addition, this year there's a one-time window to defer and spread out the income spike, and the subsequent taxes owed on the conversion, over two years -- 2011 and 2012.

But if you have kids in college or high school, you need to plan carefully and contact the college's financial aid office before you make the switch. Converting a traditional IRA to a Roth IRA could lower the value of the financial aid package your student may be eligible for. But you can address this problem.

Here's how it works. When you fill out the Free Application for Federal Student Aid, or FAFSA, you will have to list the Roth conversion as income either in 2010 or 2011-2012. For financial aid purposes, universities consider income earned in the calendar year before a child begins college.

"The Roth IRA conversion shows up on your income tax as taxable income," says Mark Kantrowitz , publisher and founder of, a popular financial aid website. The more money a family earns, the higher the expected family contribution to college costs.

If your child will be a college junior in 2010-2011, you could make the conversion in 2010 and defer the income to 2011 and 2012 -- past the window for financial aid consideration, Kantrowitz says. On the other hand, if your child will be a high school junior this fall, consider taking the entire income and tax hit in 2010, before the window for financial aid consideration opens. The biggest potential impact comes on students who will be high school seniors, college freshmen and sophomores in 2010 -- because the income spike will fall inside the financial aid window no matter how you parse it.


"If a child is a freshman or even a sophomore in high school, it might be OK," says Richard L. Kaplan, Peer and Sarah Pedersen professor of law at the University of Illinois College of Law.

Let's look at a hypothetical 45-year-old couple earning $100,000 with two children, one in college. They have $20,000 in a traditional IRA that they convert to a Roth. Based on Bankrate's IRA to Roth calculator, that couple will have nearly $8,000 more in retirement with a conversion. But that bump in income would add about $6,400 to the family's expected contribution to the student's college costs, according to calculators on

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