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 FinAid.org, 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 FinAid.org.

Talk to financial aid officers

The good news: College financial aid officers can discount the temporary income spike caused by the IRA conversion. But be sure to ask.

In 1999, the Department of Education sent a letter urging financial aid personnel to use their professional judgment and review individual cases involving transfer of funds from a traditional IRA to a Roth, Kantrowitz says.

“Schools have the authority to eliminate the impact of a Roth IRA conversion from the need analysis formula,” he says. “They’re not required to do so. But my experience is, most colleges, if asked, will do so.”

Ed Irish, director of financial aid at the College of William & Mary in Virginia, says the state-supported school would make the adjustment. “But I suspect that the people doing the conversion probably have a fairly high income and won’t qualify for aid anyway,” Irish says.

That may be true at many public schools, although it never hurts to fill out the FAFSA, Kantrowitz says. But at private colleges, where tuition, room and board can total $50,000 and more per year, even families who earn six figures may qualify for some form of aid or loans.

“Private four-year colleges have more institutional aid because their costs are higher,” says Alison Rabil, director of financial aid at Duke University in North Carolina. “We want to maximize institutional aid and federal aid. We can use that professional judgment on both forms.”

Duke University, a private school, takes a proactive approach, Rabil says. “If we see a withdrawal from an IRA, we will generally ask the family, ‘What did you do?'” she says. “It’s a cue for us that something is going on with this family that they need to take drastic action to get their hands on a large amount of cash. My staff knows to call and find out what’s going on. We can usually remove that taxable piece of their income. How many families earning $150,000 can plunk down $55,000 for college?”

Although some schools will be proactive, you should still check, Kantrowitz says. Don’t discount the IRA conversion yourself on the FAFSA because schools can compare the FAFSA to your federal tax return. “Your FAFSA could be selected for verification — at least 30 percent are,” Kantrowitz says.

Still worried? Call the financial aid offices of the universities your child is interested in and ask about the policy.

“You need to be your own advocate,” Rabil says. “If you understand how the system works, you’re better able to use it to your advantage.”

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