"One of the items often ignored with a drop in income is that these years can be helpful for tax planning," said certified financial planner Robert Schmansky, owner of Clear Financial Advisors. Schmansky is a certified financial planner and enrolled agent.
"A period of unemployment is an opportunity to be in a lower tax bracket," he explained. "It isn't odd to see individuals in extremely low brackets or negative taxable income situations where they should consider paying the [withdrawal-triggered] tax at a low rate, withdrawing funds … and never worrying about the taxes again."
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Bennett Sachs of Private Wealth Counsel said that while the bad news in such a situation is that you have no income, the good news is you may be able to do a Roth IRA conversion.
"For example, if you have $100,000 available to roll over, you may be able to peel off $10,000 for a tax-free Roth IRA, which grows tax-free," he explained. Roth IRA contributions are not tax-deductible, but qualified distributions are tax-free.
Schmansky agreed. "There are not many chances in life to make a Roth IRA contribution," he said.