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Taking Tax-Free IRA Distributions in Low-Income Years


by Matthew Abrams, CPA - January 31, 2024


If your income is low this year, your itemized deductions and exemptions might be more than your income.  If this is the case, you are losing the tax benefit of any deductions over over your income. But there is an upside! This scenario creates an opportunity to make a distribution from your IRA by December 31st with no tax impact, since the distribution will be offset by all of the deductions that otherwise would exceed your income. E.g., if your income is $20,000 and your itemized deductions and exemptions total $30,000, $10,000 of your deductions are not being used.   



In this example, you would make a traditional IRA distribution of $10,000, or convert $10,000 of your traditional IRA into a ROTH IRA, in order to increase your income to $30,000 (distributions from a traditional IRA or a conversion to a ROTH are counted as income on your tax return) thereby allowing that extra $10,000 of deductions to be applied. The IRA distribution or conversion to ROTH is tax free since you have enough deductions to offset the additional income.


Important Tips:  


(1) If you are not 59 ½ years old, you should only choose the conversion to a ROTH option. At your age, a distribution from a traditional IRA will be subject to the 10% early withdrawal penalty, but a conversion to a ROTH is not subject to a penalty. ROTH conversions can be reversed by the extended due date of your return, so when your return is prepared, if you find that the ROTH conversion created more income than your deductions, you can simply "recharacterize" (a.k.a., reverse) part or all of your ROTH conversion, so that you can adjust how much of your traditional IRA will ultimately be reported as "converted".

(2)  Before considering a Roth conversion or IRA distribution, check with your tax preparer to be certain you are not creating an unexpected tax event for yourself.  Remember, your IRA custodian or advisor are generally not the best sources for tax advice, so consult the right professional! 

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