If you don’t time your Roth IRA conversions correctly, it can cost you your tax credit for homebuyers.

First, the good news….

Because of recent changes in the law, you may find it easy to qualify for homebuyers tax credit.

You qualify for the credit if:

1.    You haven’t owned a principal residence for the three years prior to the new purchase or…
2.    You previously owned and resided in the same home for at least five consecutive years out of the previous eight.

(Here’s a great post on Roth IRA conversion rules by my buddy Matt Jabs.)

Of course there are some limits.  One such limit is income – and that’s where the  IRA Roth conversions come into the picture.

You see, the credit phases out (between $125,000 and $145,000 of AGI for single taxpayers and

between $225,000 and $245,000 of AGI for couples filing jointly).

What does this have to do with your Roth IRA conversions?

Simply put, Roth IRA conversions increase your AGI.  And that means the Roth IRA conversions may put the tax credit beyond your reach.

Luckily, there are a few tactics you can use to convert your Roth and still qualify for the credit.

First, keep in mind that you must buy the new principal residence by April 30 (the escrow can be completed by June 30.)  But you can claim the tax credit in either 2009 or 2010.  That being the case, choose the year with the lowest AGI.

Also, keep in mind that if you do convert your IRA, you can report the income in 2010 or split it evenly between 2011 and 2012. If you report the Roth IRA conversions income in 2011 and 2012, you can still take the tax credit this year without worrying about IRA Roth conversions money pushing you over the limits.

Another tactic is to take the tax credit on your 2009 tax return and (if you are concerned about higher tax rates in 2011 and beyond) and pay the tax on your Roth IRA conversions in 2010.

Bottom line, there is a lot of flexibility and you can use that to your advantage.

Now that you know how to use the Roth conversion rules to your advantage, a bigger question comes up which is  this; should you convert your IRA to a Roth or not?

Don’t blindly assume that the  IRA Roth  conversions are for you. My buddy Sam wrote a nice piece on why you should not convert to a Roth.

Generally speaking, the Roth is not a good choice for you if you will pay the tax with IRA money or you plan on using the converted account within 10 years.

Are you planning to convert your IRA to a Roth?  Had you considered how that might impact your homebuyer’s tax credit? What is your strategy for your Roth IRA conversions and/or the homebuyer’s tax credit?

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