British wife - IRA rollover

Hello,
DW & I are living in the UK (4 years now since 2002), she does not have American citizenship (is a Brit) but used to live in the US.  We both have Traditional and Roth IRAs from when we lived in the States (have not contributed to them since moving here).

We are looking to rollover the Traditional IRAs into the Roth IRAs so that we can close the Trad. IRA accounts.  I am aware that this would normally require tax to be paid as the Trad. IRA is on a pre-tax contribution basis and the Roth IRA on a post-tax contribution basis.

Because DW is not American and does not live in America she hasn't filed with the IRS since moving back (since year 2003).  Now we are confused as to what to do in this situation.  I normally file Married Filing Separately but since the Trad. & Roth IRAs are in her name I'm wondering what she has to do in this situation?  Is there a loophole that prevents her from filing?  I'm not sure whether the tax is paid at conversion time or whether it would be paid during the filing process next April/June?

Any help is much appreciated.
Thanks,
Matt

This is a treaty issue.  It could result in both US and UK tax. 

On the US side, you may not be as eligible for the rollover as you think you are, due to MAGI restrictions which add back any 2555 exclusions.  Once you confirm you are truly eligible, you can make an election to MFJ, but then you must continue doing so.  You can't rollover if you're filing MFS. 

You may want to wait until 2010, when there are no MAGI restrictions to rollovers. 

If you're thinking "ooo, the tax is low 'cause after 2555 I have 0 taxable income", you're wrong; the new tax law passed 17 May 2006 adds back the 2555 for purposes of determining which tax band your income is in.  Thus, if you and your wife both earn $80,000 each, then the tax on your Roth IRA rollover conversion starts at 28% bracket, not the 10%.

Seek competent US advice if you wish to confirm your decision.  Do not rely on random postings, even if they seem quite erudite, as we posters do not possess all the facts of your personal circumstances which may affect the advice.

Most importantly, before you do this, I recommend you seek professional advice regarding the UK tax treatment from a UK tax professional that works regularly with the pensions article of the UK/US treaty, and I'd be prepared to pay for the research into the tax treatment in the UK.

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