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If you convert a traditional IRA to a Roth IRA and all the funds were deposited into the traditional IRA as non-deductible contributions, and there is no gain, and thus there is no income by the conversion, should the conversion increase your income and thus your Expected Family Contribution (EFC) using federal financial aid rules in the FAFSA? This is Parents' Untaxed Portions of IRA Distributions (question 94e) of the FAFSA. When doing an IRS transmittal, the question 94e is filled in with the filed value of 15a minus 15b.

Example scenario, contribute $1,000 to a traditional IRA on April 1, 2014 bringing your total IRA balance to $1,000 then do a Roth conversion on April 30, 2014 of the $1,000 which has been in cash and had no gain. Should $1,000 now count as income for FAFSA purposes in 2014? It would seem FAFSA online app says yes, but that makes no sense to me, this accounting did not create any income, same result could have been achieved by $1,000 Roth contribution directly originally, so why the penalty?

  • Conversion is generally not a distribution. – littleadv Jun 26 '15 at 21:38
  • Roth conversion shows up on line 12 of your form 1040. – WilliamKF Jun 26 '15 at 21:42
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    Line 12 is for schedule C... – littleadv Jun 27 '15 at 2:09
  • @littleadv Thanks for pointing out the error, it is now corrected. – WilliamKF Jun 27 '15 at 15:18
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The FAFSA instructions read:

Subtract the total of lines 15b from the total of lines 15a. Then subtract all rollover amounts from the remainder.

In the example above, while 15a minus 15b is $1,000, the rollover amounts are also $1,000, so the correct answer to the question is $0. The IRS transmittal does not seem to be taking into account the rollover amounts.

The instructions amplify this by also stating:

If you use the IRS Data Retrieval Tool and transfer your information from the IRS into your FAFSA, the answer to this question will be pre-filled and identified as “Transferred from the IRS.” You must subtract rollover amounts from the total.

  • In short, your answer to yourself is "read the instructions".... :-) – littleadv Jun 27 '15 at 2:10
  • @littleadv You are correct, although one might assume, like I did, that the IRS transmittal fill-in was going to be correct and not require manual follow-up. – WilliamKF Jun 27 '15 at 15:20

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