I'm trying to decide whether to do a Roth conversion or take the American Opportunity Tax Credit (AOTC) for my daughter going to college this year. The Roth conversion would push me over the income limit of $160K married filing jointly, so I would not be able to take the AOTC (worth up to $2500) anymore. Here some additional info:

  • Federal tax bracket 22%, I expect to remain in that tax bracket
  • State tax bracket 5%, I expect to remain in that tax bracket
  • 529 sufficiently funded (meaning that paying for my daughter's college expenses out of pocket to get the AOTC is not strictly necessary)
  • Roth conversion amount $40K
  • AGI with Roth conversion $200K
  • AGI without Roth conversion $160K
  • Good amount of pre-tax retirement assets, thus trying to avoid putting more money into pre-tax
  • 2022 thus far, with depressed asset prices, appears to be a "good" conversion opportunity
  • I expect taxes to rise

If the $40K grew by ~23% (~$9250) I'd be indifferent between conversion and AOTC, since the added taxes on the $9250 would equal the AOTC value of $2500.

I'm leaning towards the conversion, but are curious what the forum thinks. One question I have is over which time frame I should assume the ~23% growth: 2023 or longer time period? Longer time period, assuming historical growth rates, would probably also favor the conversion.

Please let me know if you need any additional facts and thank you for your answers!

  • Is it a hard cut-off of $160k (meaning if your income is $160,001, do you get nothing)? What is the risk that you will be ineligible even without the Roth conversion (bonus/raise at work, larger-than-expected dividends in a taxable account, other as-yet-unaccounted-for income)?
    – yoozer8
    Commented Jul 11, 2022 at 14:09
  • It's not a hard cut-off: I'm self employed and am able to lower income to whatever it needs to be for the AOTC by making contributions to my solo 401k plan.
    – tmwn6919
    Commented Jul 11, 2022 at 14:25

1 Answer 1


I would take the tax credit. If you expect to remain in the same tax bracket, then there is no benefit of converting to a Roth IRA, except to get around contribution limits.

If you convert $40k, you'll pay $8,800 in tax and have $40k in an IRA. If you instead invested that $8,800 in a Roth, you'll end up in the same place. Assume your tax rate both now and in retirement is T%, and the total gain between now and retirement in X%. You'll have (after tax) 40k * (1+X) * (1-T) in an IRA and 40k * T * (1+X) in a Roth. If you add those and combine terms, you end up with 40k * (1+X), which is the exact same you have if you converted all of the funds to a Roth.

The timing makes no difference either, since you'll selling "depressed" assets to buy "cheap" assets. You end up with the same thing either way.

Plus you'll pay more out of your savings for college, which lowers your net worth.

The most common reason it makes sense to convert to a Roth is if you are in an unusually low tax bracket (the immediate tax hit is less) and expect your tax rate to be higher at retirement (you pay less at a higher rate at retirement).

  • (1) Good answer and good reminder: I did a similar calculation, with tax rates remaining constant, a while back and came to the same, at the time somewhat surprising result, given the eternal hype on Roths, that from a tax perspective, if rates are constant, keeping the money in a traditional IRA or converting into Roth yields the same results. That being said, the Roth has some other advantages - well documented, not elaborating on them here. If tax rates change (be it by being in a different bracket or taxes increasing/decreasing), the situation changes a bit.
    – tmwn6919
    Commented Jul 14, 2022 at 19:34
  • (2) For instance, let's assume that the federal 22% bracket goes up to 25% in 2026. Thus combined state and federal go up from 27% to 30%. The question is then, at which growth rate on a principal of $40K do the incremental taxes you pay by withdrawing later at a higher tax rate (30% vs. 27%) outweigh the $$$ from the tax credit you get now. (assuming you just get the tax credit in cash and you don't even reinvest it, which assigns a more conservative value to the tax credit).
    – tmwn6919
    Commented Jul 14, 2022 at 19:34
  • (3) The answer is 108%, so at an annual growth rate of 9% (LT S&P 500 growth rate, no one know what it will be going forward), you'd be at that point in about 9 years. So, I guess, as with so many decisions, your choice depends on your assumptions about what the future will hold. If you believe your tax rates are going up, you may lean more towards conversion. If you believe that your tax rates are going up AND you'll have strong investment returns, you may lean STRONGLY towards conversion. Any mistakes in my thinking, pls let me know!
    – tmwn6919
    Commented Jul 14, 2022 at 19:35
  • That all makes sense. I haven't run the numbers but it seems like it would take a pretty big tax swing to make up for losing a $2,500 scholarship.
    – D Stanley
    Commented Jul 14, 2022 at 19:42

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .