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I'm a graduate student with several kids. Right now I'm trying to leverage my temporarily diminished income by "backdoor" rolling-over my 401k account to a Roth IRA account, without inadvertently disqualifying myself for EIC. My understanding is that any amount I rollover will be counted as "income" for tax purposes--but what kind?

Specifically, for EIC, increases in income like "wages" increases the EIC for a certain range and decreases it for sufficiently high wages (see here). (In my case, I'm assuming money from a stipend is similarly considered)

However, sufficiently high income of other types, e.g. more than $3,500 in "investment income", can disqualify a person altogether. (Aside: It seems the money made from investments in retirement accounts does not count, since this is not counted in your AGI)

  • Since the money moved from a pre-tax 401k to a post-tax Roth IRA is considered taxable "income" (even if it had no return), would this be counted as disqualifying, "investment" income? Would it alternatively be considered the same as "wages"? What if there were earnings?
  • Presumably returns on 529 funds that were distributed would be considered investment income?

The "investment income" on the IRS site presumably is "disqualified income" in the code.

  • The portion of 529 distributions that are earnings are reported and taxed as 'other' income on line 21 (now on schedule 1) -- and not 'investment income' -- only to the extent they exceed your qualified education expenses (tuition and fees, net of any other tax-free assistance). Distributions used for qualified expenses are not reported or taxed at all. – dave_thompson_085 Jan 7 at 1:06
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I spoke with a Fidelity representative and found that:

  • It would count as income for my AGI based on their current market value, but not "investment" income (which I think is boxes 2b and 3b on 1040, plus maybe 1040 Schedule D).
  • Note that 1) a sufficiently high AGI would disqualify you for EIC but otherwise 2) conversion "income" is neither "earned income" nor "investment" income.
  • IRA positions could be converted directly to Roth IRA positions (i.e. without even selling them).

If the positions were sold, I still don't think they count as investment income, since they are being moved from one retirement account to another, and retirement accounts are considered differently.

Some related discussions below:

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    Right. 401k and IRA conversions, and distributions also, go on line 4a and 4b and are income for general tax purposes but not 'investment income' for EITC. (Schedule D goes to line 13, now on schedule 1.) – dave_thompson_085 Jan 7 at 1:06

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