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Ask Money

Successful strategy with IRA rollover

Chris Farrell Feb 19, 2009

Question: I’m a Staff Sergeant in the US Army Reserves and spent most of 2008 in Iraq. One obscure maneuver I executed while there was to convert $26,000 from the Rollover IRA to my Roth IRA. Due to the Combat Zone Tax Exclusion (CZTE), my W-2 line 1 from the military will be less than $5000 because time spent in Kuwait, Iraq, etc. is excluded from federal and state taxes (at least, for CA; FICA is still taken out). This resulted in rolling over IRA funds at a lower tax rate than if I had done this during a normal year where my taxable income barely breaks into the six digits. One caveat: Of course, taxes still must be paid on the rollover, and so listeners should estimate what those are and save for that….. and, with the stock market tanking as much as it has, transferring a balance will not incur as much taxes because it’s likely that a person’s portfolio is much smaller than a year ago. All this compounds the advantages. I was even able to do this while on a base in Kuwait. My Rollover IRA (rolled over from my IBM 401k when I resigned) was with Schwab, which let me open a Roth IRA through the web, and then after a few emails, the transfer was executed. Cheers, Jimmy, San Francisco, CA

Answer: Thanks for sharing your strategy. For most savers, assuming they qualify, taking advantage of the bear market to transform their traditional IRA into a Roth is a savvy move.

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