Roth conversion and EIC

[SailorGirl]

I plan to sell my house hopefully this year and use the cash to live on for about 10 years until I can access my retirement accounts.  We'll be living lean on a sailboat and although I may submit an article for pay here and there, I'll mostly be using savings for expenses.  My question is this:

Since I will have essentially no income my plan is to convert ~ $10,000 of my tIRA to a Roth every year.  With standard deductions the net tax should be zero-ish and my income will be low enough to also claim some EIC (single, no kids).  Do I have this correct?  Have I missed anything in this planning?

Feel free to toss out any other money advice you may have.

[johnny847]

That sounds right to me, but I'm not well versed in the details of the EIC. Also, have you lived in this house for the past five years or so? I recall there being some exception to the capital gains tax on the sale of your primary residence if you've lived in it long enough.

What I would recommend, however, is to consider converting more of your tIRA balance to a Roth. Filling up to the top of the 10% bracket is still a good deal, especially considering it can help you avoid large RMDs (though I don't know how big a balance you have in your 401k).

And I would definitely consider establishing residency in an income tax free state if you can, and then practicing capital gains harvesting. You can read about this on my blog: https://fiby40.wordpress.com/2015/01/14/capital-gains-taxes-part-2/ (last section of the post). The gist of it is you can raise the basis of your investments for free.

[MustachianAccountant]

Also, have you lived in this house for the past five years or so? I recall there being some exception to the capital gains tax on the sale of your primary residence if you've lived in it long enough.

If it's been the primary residence for at least two years, you only have to worry about tax on the gain if it's more than $250,000 (half a mil if married). As in, you got over $250,000 MORE than you paid for it. Most people don't fall into this category.

[Eric]

I don't believe that converting a traditional IRA to a Roth IRA qualifies as earned income. 

http://www.irs.gov/Individuals/What-is-Earned-Income%3F

[SailorGirl]

I've lived here for 12 years so that's all good and I do currently live in a no-tax state.  I may change residency to Florida for convenience (they have a great mail-forwarding company there), but that also has no income tax.  Thanks for the blog link - I'll start reading that now.

Gains should be well  under $250,000 so all good there as well.

[seattlecyclone]

To qualify for the earned income credit, you need earned income. As far as I can tell, Roth conversions don't disqualify you from the EIC (though having too much taxable interest/dividend/capital gain income will), but they don't help either.

[SailorGirl]

I think you may be right although I previously found something that made me think that conversions would affect EIC.  So if this is the case I can plan to earn ~ $1000 a year and claim EIC while still converting a chunk of tIRA to Roth.  That works equally well, if not better for me.

[seattlecyclone]

Check out the EIC table on page 61 of the 1040 instructions. A childless single person with earned income of $1,000 will qualify for a whopping $78 tax credit. It's better than zero for sure, but hardly worth considering in your plans. The maximum credit is $496 for earned income between $6,450 and $8,150. The amount of the credit goes down if you earn more or less than this.

Also you'll need to keep your total AGI below $14,590 (so small Roth conversions might be okay, but large ones are not).

[SailorGirl]

Ah, thanks for that irs pub.  As it turns out I won't be eligible for EIC at all because I intend to state my home as outside the US (for ACA and eventually medicare).  Ah well, it would have been a measly amount anyway.  :)