Preface: It's probably better to get the withholdings right rather than to do this.
Let's say in December 2020, tax software for 2020 was installed and there is a $3500 refund when only $500 can be kept per the confirmation order.
Normally, the trustee takes the $3000 without a motion to retain tax refund, and the BK attorney discourages filing that motion with this particular trustee even though he makes money on it.
So let's say there is a traditional IRA with $50k in it. For purposes of easy math, the combined state and federal tax rate is 30%.
Before the end of 2020, convert $10k of the traditional IRA to a Roth which incurs $3k of taxes.
The money is never liquidated to spendable cash just like a 401k to IRA rollover. So there is no spendable disposable cash. Just phantom income simply designed to absorb the tax refund.
When the Roth is liquidated post BK, all of it with the possible exception of the Roth earnings are now tax free.
If the traditional IRA was not touched, taxes would be owed upon liquidation post-BK and the $3k refund to the trustee is also gone as well.
In my district, I already know that a 401k loan default with imputed income does not factor into schedule I or the means test. The loan proceeds were spent years ago. It did factor into J with the increased tax withholding on the paycheck but there was no tax refund so the sched J was legit. It's phantom income only recognized by the IRS. I would argue it's the same thing with the IRA conversion.
In the end, it's better to pay the IRS than to pay the trustee.
Any problems with this?
Let's say in December 2020, tax software for 2020 was installed and there is a $3500 refund when only $500 can be kept per the confirmation order.
Normally, the trustee takes the $3000 without a motion to retain tax refund, and the BK attorney discourages filing that motion with this particular trustee even though he makes money on it.
So let's say there is a traditional IRA with $50k in it. For purposes of easy math, the combined state and federal tax rate is 30%.
Before the end of 2020, convert $10k of the traditional IRA to a Roth which incurs $3k of taxes.
The money is never liquidated to spendable cash just like a 401k to IRA rollover. So there is no spendable disposable cash. Just phantom income simply designed to absorb the tax refund.
When the Roth is liquidated post BK, all of it with the possible exception of the Roth earnings are now tax free.
If the traditional IRA was not touched, taxes would be owed upon liquidation post-BK and the $3k refund to the trustee is also gone as well.
In my district, I already know that a 401k loan default with imputed income does not factor into schedule I or the means test. The loan proceeds were spent years ago. It did factor into J with the increased tax withholding on the paycheck but there was no tax refund so the sched J was legit. It's phantom income only recognized by the IRS. I would argue it's the same thing with the IRA conversion.
In the end, it's better to pay the IRS than to pay the trustee.
Any problems with this?