Traditional or Roth IRA? (just married a Brit, still in USA)

Hello other people who seem way smarter at taxes and finances 

I'm looking for advice and I'm really trying to read everything on here and make sense of the IRS/UK laws and do research on my own.    But this is soooo insanely complicated and confusing that if anyone has advice or can point me in the right direction I would massively appreciate it. (yes I'll hire an expat specialist professional come tax filing time)

I'm a US citizen and I just married a British citizen (both around age 30). I've applied for my spouse visa and hope to be moving to the UK in the very near future. My husband is in the British Army earning a salary and has a pension fund through them plus a decent amount in his own ISA savings. I am currently working part time in the USA and earning a low/modest income so I'm in a lower income tax bracket this year (so it could be a good time to rollover to Roth).

I recently received about $40,000 from a divorce settlement through a QDRO. I will be moving it out of the 401K with American Funds that its originally in, and into my own IRA I just opened with Vanguard. Is it better to leave it as a traditional IRA or roll it over into a Roth IRA? Convert to Roth now while I'm in the USA still or after I move to the UK?

A few more things I think I've been able to make sense of (kinda sorta maybe) and other questions that arise:
-we'd be better off with Married Filing Separate (him a NRA) because he earns more than I do and doesn't want to report his accounts on FBAR, understandably
-I'd be better off taking the Foreign Tax Credit instead of the FEIE
-but MFS limits how much I can contribute to a Roth. Is Traditional IRA better? I don't expect to ever make an impressive income (I'm an teacher/instructor and earn peanuts) but I do hope to make more than $10K a year.
-so will I be able to invest anything in retirement savings? Or does being an expat and married to a foreigner  (filing MFS) and not earning much basically exclude me from that? (what a pisser!)
-there are no other family/children so Head of Household not an option. There are no other forms of income for either of us, just our jobs.
-I've read I can take an exemption for my NRA spouse with no US earned income on my MFS tax return?
-by using MFS I can gift money to my NRA spouse? (so he can invest it)
-I understand there are hazards of investing in foreign held accounts. Does that mean my IRA with Vanguard which is set up in one of those Target Retirement Funds with both US and foreign stocks and bonds is no good? Do I need to make sure my money with Vanguard is invested only in US stuff?
-I know to not have joint accounts over $10K to avoid FBAR on his savings
-I think in general we might want to use my income to pay living expenses, therefore allowing more of his income to be invested and saved (because of all these nasty complications and limitations for US expat, foreign earned, IRA, etc etc)

Thank you in advance for anyone who can answer any of these questions. And I will keep on reading and researching!

You are asking some great questions, and because you are preparing well before your move, you should be in great financial shape for years to come!

As you say, any Roth conversion of your existing retirement savings should be done when you are in the lowest possible tax bracket - so you'll need to look at your career plans and figure out when this might be. You can also make partial conversions and spread them over a number of years. There is not a single right answer for everyone. One pitfall is that IRA providers sometimes insist on withholding part of the conversion for federal income taxes if you have a foreign address on file. Do not proceed under these circumstances, because the IRS will treat the withholding as an unauthorised IRA distribution and you'll have to pay a further penalty. I was presented with the withholding issue a few years ago, and Vanguard told me to send them a signed W-9, after which they processed the conversion without any withholding. Check with them for further details.

You can continue to contribute to IRAs while in the UK if you use the Foreign Tax Credit instead of the Foreign Earned Income Exclusion. The best solution for most US citizens in the UK is the so-called "backdoor Roth" in which you contribute to a traditional IRA and then immediately convert to Roth. Most of us have little to no US tax liability, so cannot benefit from the US tax relief on traditional IRA contributions. Also, the US-UK Tax Treaty allows you to claim UK tax relief on traditional IRA contributions and (in what some might call a loophole) the UK is prohibited by treaty from taxing the Roth conversion. A UK tax return must be filed to claim this relief.

In order to benefit from the treaty provisions, you should ensure you have opened and contributed to both traditional and Roth accounts before becoming a UK resident - so get that preparation out of the way now!

The MFS limits apply to deductible IRA contributions and Roth contributions. The way around this is to designate your traditional IRA contribution as non-deductible when you file your MFS tax return.

You can invest safely in any of Vanguard's US registered funds (even if the underlying investments are foreign). The problems come in when you invest in funds registered abroad (even if the underlying investments are American).

I'm a USC married to another USC so I don't have firsthand experience of some of your questions around how to manage money in a USC/UKC couple, but others on this board may be able to answer those.

Thanks politicfool! That helped a lot 

One more quick question, you said to open and contribute to both traditional and Roth IRA before I move. I hope that includes the money I'm already transferring into my new traditional IRA (from the divorce settlement) and I can then convert some part of that into a Roth as well. In other words, I really don't have any extra cash to throw at this right now, so those rollovers/conversions count right?

From http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdf, Article 18:

2. Where an individual who is a member or beneficiary of, or participant in, a pension scheme established in a Contracting State exercises an employment or self-employment in the other Contracting State:
a) contributions paid by or on behalf of that individual to the pension scheme during the period that he exercises an employment or self-employment in the other State shall be deductible (or excludable) in computing his taxable income in that other State; and
b) any benefits accrued under the pension scheme, or contributions made to the pension scheme by or on behalf of the individual’s employer, during that period shall not be treated as part of the employee’s taxable income and any such contributions shall be allowed as a deduction in computing the business profits of his employer in that other State.
The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by the other State to residents of that State for contributions to, or benefits accrued under, a pension scheme established in that State.
3. The provisions of paragraph 2 of this Article shall not apply unless: a) contributions by or on behalf of the individual, or by or on behalf of the individual’s employer, to the pension scheme (or to another similar pension scheme for which the first-mentioned pension scheme was substituted) were made before the individual began to exercise an employment or self-employment in the other State; and b) the competent authority of the other State has agreed that the pension scheme generally corresponds to a pension scheme established in that other State.

The language of the treaty is not completely clear, as is often the case. You could argue that by virtue of the rollovers you're making, the traditional IRA is being "substituted" for your 401k and the Roth is then being "substituted" for the Roth, but someone else might argue that those three schemes are not "similar" or that a rollover is not a "contribution".

Why not just contribute $1, or the minimum contribution your chosen IRA provider will accept, to each account? That way there'd be no doubt you'd contributed.

-I know to not have joint accounts over $10K to avoid FBAR on his savings
-I think in general we might want to use my income to pay living expenses, therefore allowing more of his income to be invested and saved (because of all these nasty complications and limitations for US expat, foreign earned, IRA, etc etc)

So I'm not going to pretend to be an expert in any of this.  I've filed MFS with a NRA (UKC) for 2 years now.

There are certain benefits that MFJ filers get whereas MFS filers don't -- the main one I've investigated has to do with claiming back the interest paid on student loans. So you will have to consider this aspect if you haven't already.  But once you file Jointly, you cannot go back to filing Separately.    For me, I decided it best to keep my other half out of my US taxes, given that he is more likely to earn far more than myself in the future.

In terms of FBAR -- this would need to be filed for the combined sum on all accounts you have signature authority on which exceed $10,000. So if you have signature authority on 2 accounts (one single / one joint), where one has $5k and the other $6k, you would need to file the FBAR.   I didn't find the form too difficult to fill out, so I wouldn't necessarily make all decisions regarding money management based on this form.

If for some reason your relationship breaks down, and all savings were in his name, you could end up very unfortunate financial situation.  What you choose to do is your own personal decision, but I personally prefer to have money that I can call my own-- to me it's worth it to have as a sort of security blanket.  I have my own separate current and savings accounts, and one joint account for shared expenses (rent, bills).  

(Though this approach may all change in a few years when we decide to have kids...or actually have enough money to buy a house within the M25!).