ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Roth IRA Conversion Opportunity in Year of College Graduation

Updated on June 8, 2012

A small amount of tax planning during your college years can significantly influence your financial aid package and give your retirement fund a graduation gift! It takes some discipline and flexibility to make it work, but it’s a win-win in the end.

The FAFSA tax

It starts with taking a close look at the FAFSA (Free Application for Federal Student Aid). Student income below a certain level (approximately $5,750 in 2011-2012) is excluded from what I call the “FAFSA tax.” The FAFSA formula assumes that 45.7% of any earnings above that will be spent towards the coming year’s college expenses—the Expected Family Contribution (EFC). For every dollar your EFC goes up, your Pell grant will go down (unless you’re off the scale on one end or the other). So if you’ve already earned $5,750 for the year and your wage pay for that summer job is $100 per day, $45.70 of it will go towards college expenses, reducing your Pell grant by $45.70 for each extra day you work.

FAFSA application for Pell grants

I don’t know about you, but I’d rather get the extra $45.70 in grant funds than flip burgers for what amounts to half pay. One thing you might do is stop work when you see you’re approaching the $5,750 mark and spend the rest of the summer hiking the Appalachian Trail or doing volunteer social work (which looks better on your resumé than burger-flipping, of course). You might even plan to earn the year’s quota of income through part-time work while school is in session so that you can take the whole summer off back-packing through Europe with your roommate.

Contribute to a “traditional” IRA

Suppose you’ve already earned more than the magic dollar amount for excludable income, or just can’t stand the thought of quitting. Here’s how to shelter the “excess” income from the FAFSA tax: Put the rest into a traditional (non-Roth) IRA, which increases your tax refund because it is tax-deductible. You can’t access it until retirement (bummer!), but it lowers your AGI, which is the amount the FAFSA looks at. If the AGI were higher, it would simply bid up your EFC (expected family contribution) resulting from the FAFSA and decrease the amount of Pell grant money you are eligible for.

I haven't been able to verify this, but I believe that some colleges take the liberty to add any traditional IRA contributions back onto the AGI. If your school does that, it ends up being counterproductive. You might want to inquire about that policy anonymously before counting on your traditional IRA to adjust the FAFSA as it does your IRS Form 1040.

Give yourself a graduation gift: A Roth conversion!

Most students have a one-year window of opportunity to convert funds tax-free from a traditional IRA to a Roth IRA. But before discussing this hidden window, we need to understand the basic difference between the two types of IRAs.

A traditional IRA is "tax-deferred," in that a person will eventually have to pay income tax on it, whereas the Roth IRA is “after tax. At any time, a traditional IRA can be converted to a Roth IRA by paying the income tax up front. That usually involves some guesswork and what-if scenarios about the future. But students have a one-year loophole when the usual difference between the two types of IRAs may not matter.


The year you stop attending college or grad school, three things come together to give you a unique opportunity:

  1. Your income will likely be considerably lower than in upcoming years. You may only have worked half of the year, or even at low wage before finding a career-track position.
  2. You still had those huge tuition expenses for the first half of the year, which means that you still get a nice fat Tuition and Fees deduction or a credit for the American Opportunity or Lifetime Learning credits.
  3. You will not be completing the FAFSA again, so there’s no need to try to make your AGI as low as possible.


Low income from #1 above, plus huge deductions or credits from #2 above, means that you probably won’t be paying any income taxes. All Federal income tax that was withheld will be refunded. In fact, you could probably earn a few thousand more without changing the bottom line of taxes. There’s the opportunity! If you’ve got any traditional IRA, convert it to Roth—converting it from pre-tax to after-tax without actually paying that tax out of pocket. If you’ve got a lot in your traditional IRA, you might not be able to convert the whole thing before you hit the threshold where you start paying tax. Adjust the numbers—up and down—until you find the optimum amount you can convert and still remain just below the amount where you would be taxed.


    0 of 8192 characters used
    Post Comment

    No comments yet.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)