Remember last year when I went through all the reasons I was going to convert my rollover IRA (from an old 401(k)) into my Roth IRA? I had plenty of good reasons. It wasn’t going to be that much money either way. I wanted to have all my money in one place so I could buy funds with higher initial investments. And of course…THE FISCAL CLIFF. No one knew exactly what was going to happen on January 1, 2013. I definitely didn’t. But in retrospect, I should have known that congress would just kick the can down the road.
So on December 31, 2012 (seriously, I’m a bit of a procrastinator), I went ahead and converted my IRA to my Roth IRA.
Then, a few months ago, I sat down to fill out my taxes online, and I entered in all my numbers. Now, don’t get me wrong, I knew I was going to have to pay taxes on the conversion amount. But I hadn’t predicted how this added “income” due to conversion was going to impact eligibility for certain tax deductions. Not that I should complain! But apparently there’s a strict cut off for eligibility of the Student Loan Interest Deduction. And with my conversion, I’m over the threshold. There is a range where your increased income decreases the deduction. But over the threshold, you’re out of luck.
I did check to make sure my conversion wasn’t going to put me into a new tax bracket. I knew there was no danger in that happening. But I hadn’t considered the Student Loan threshold (or any other tax deduction/credit cutoffs).
It’s not the biggest issue. But in looking back, I probably could have planned out a little better how much of my IRA to convert so that I wasn’t over the limit. In the end, it wasn’t a lot of money that I could have gotten back with the student loan deduction, but it would have been nice. I’ve never really been the type of person to base financial decisions on tax liabilities…I figured that’s a problem the super wealthy have to deal with!
What tax and money decisions did you make leading up to the end of 2012? Did you make any mistakes with your money decisions? Are you already over it?