Tax loophole? Check my math.

[jIM_Ohio]

OK, so I figured out I can deduct a traditional IRA deposit. I want anyone to poke holes in this logic.

I contribute $5000 to a deductable IRA. I get $1250 deducted from my taxes (or $1250 added to my expected refund).

I have taxable income in the 15% tax bracket.

At end of year (December 30) I convert the traditional IRA to a Roth. I pay $750 in taxes.

My tax refund just went up $500.

Tell me why I cannot do this?

AGI 103k
taxable income 62k.

[safari]

When you're contributing to a traditional IRA, you're subtracting that amount from your income. If you convert that IRA into Roth, you will be adding that amount back to your income, so in the end your taxable income will remain the same. I didn't understand why you were using the 25% tax bracket for the traditional IRA, but when converting to Roth you used the 15% tax bracket. Can you clarify?

[MonkeyMama]

Actually, as a whole there is nothing to keep you from doing this. That is why we converted all our ROTHs recently while in the 15% tax bracket. We took the tax breaks earlier when we were in the 25% tax bracket. So it made much sense to take tax advantage to convert while in a lower bracket.

However, I am not quite sure how this works out in the same year. The traditional contribution reduces your taxable income but a ROTH conversion increases it. It's a wash. They'd both be taxed the same rate.