My employer offers a 401(k) plan. I decide to leave the company to take a year off. During this year, I make no income. Using various types of tax deductions (mortgage interest, tuition, etc...), is it possible to convert some of this traditional 401(k) money into a Roth IRA account and pay much-lower-than-usual taxes? The conversion gets taxed as regular income, but if the conversion amount is low enough, and the tax write offs high enough, then it seems I have managed to save money for retirement nearly tax free. Pre-tax during the deposit into the 401k, minimal income taxed during the conversion, and tax free at withdrawal from the Roth IRA at retirement. Am I missing something here?
Your basic idea to do the conversion during a year where your earned income is very low makes perfect sense. We tell people in low tax brackets to contribute to Roth accounts because their retirement brackets will probably be higher.
Decide when you are going to do the conversion. If you do it early in 2021 and then decide in September that you need to start earning income again, then that conversion would now push you into a higher bracket.
Make sure you set aside the money for the taxes. You say that you think that your other deductions will bring your income to near zero. But if it doesn't and you owe thousands in taxes because of the conversion you do want to pull the money out of retirement funds to make the payment.
Also watch the underpayment penalty. If you have almost zero W-2 income in 2021, but you have to send them money in April 2022 you might also get hit with underpayment penalties. Understand the role of quarterly estimated payments, and the safe harbor rules.