Roth IRA Conversion Query

I'm trying to figure out the amount of tax I would pay on a Roth IRA Conversion and would appreciate any insight that can be offered. I've read up on the topic online and asked a few accountants but have encountered incomplete or conflicting info.

I'm a dual US/UK citizen in my mid-40s, living and working in the UK with minimal US income. I understand that a conversion from my IRA to my Roth IRA is taxed by the US as ordinary income, and this would not allow for FEIE. I also understand that this conversion is not taxed by the UK.

So if I have $60k of income in the UK, it is entirely excluded by FEIE on my US tax return and I would pay no tax. But if I did a $40k Roth IRA conversion, then for tax purposes is the $40k taxed at 22% ($100k tax bracket)? Can I apply my $15k standard deduction against the $40k to reduce the tax due?

After the conversion I need to wait 5yrs before I can withdraw it tax/penalty free. If I withdraw the conversion right away, I know this will incur a 10% tax penalty. Will it also incur US income tax? I assume it wouldn't as the funds were already taxed at the point of conversion, but just want to make sure. I assume either way it will not incur UK income tax? 

Thanks for any help that can be offered.

I'm trying to figure out the amount of tax I would pay on a Roth IRA Conversion and would appreciate any insight that can be offered. I've read up on the topic online and asked a few accountants but have encountered incomplete or conflicting info.

I'm a dual US/UK citizen in my mid-40s, living and working in the UK with minimal US income. I understand that a conversion from my IRA to my Roth IRA is taxed by the US as ordinary income, and this would not allow for FEIE. I also understand that this conversion is not taxed by the UK.

So if I have $60k of income in the UK, it is entirely excluded by FEIE on my US tax return and I would pay no tax. But if I did a $40k Roth IRA conversion, then for tax purposes is the $40k taxed at 22% ($100k tax bracket)? Can I apply my $15k standard deduction against the $40k to reduce the tax due?

After the conversion I need to wait 5yrs before I can withdraw it tax/penalty free. If I withdraw the conversion right away, I know this will incur a 10% tax penalty. Will it also incur US income tax? I assume it wouldn't as the funds were already taxed at the point of conversion, but just want to make sure. I assume either way it will not incur UK income tax? 

Thanks for any help that can be offered.

I am not a tax professional but here are some observations.

I believe that if you have $60k of earned income in the UK then using FEIE it would be tax free regardless of whether or not you did a Roth conversion. However that $60k would be part of the calculation on what tax would be paid on the Roth conversion. Having said that then the tax on the conversion will not be 22% because the marginal tax rates are on taxable income after deductions. A married couple gets around $30k free of tax. The first $23.5k above that is taxed at 10% and the next $23.5k is taxed at 12% etc. So, for your $100k of income for a married couple then none of it would be taxed at 22%. It is the effective tax rate that really matters, not marginal tax rate. (Effective tax rate = taxes/gross income)

https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025

Try playing around with free tax estimators.  Even with $100k income with no FEIE you would only be paying $8k in tax using this estimator. (Effective tax rate of 8%).

https://www.calculator.net/tax-calculator.html

Even without FEIE you would use foreign tax credits to reduce your US taxes by deducting what you paid in UK taxes.

My two cents worth here.... And I am also not a tax specialist.

As far as contributions:   I think I remember that if you used the FEIE to exclude all your UK income from US taxes, none of it can be contributed towards a Roth IRA (or any IRA). I think it was different if you claimed the FTC on part of the UK income.  (Up to the limit of, I think, $7K a year for someone under age 50.) There appears to be no limit on how much can be rolled over from a regular IRA to a Roth. So at least you could put your US income (up to the limit in effect for the year) into the Roth without problems if it's earned income after you pay any income tax due on that amount.

Taxes:  Everything I've read online while looking at possibly doing the same thing myself (a rollover from an IRA to a Roth IRA) a while back says that the standard deduction would be taken off your overall US taxable income when you file. (That is, the converted amount is treated as ordinary taxable income, as Durhamlad says.)

Also, if you withdraw funds before age 59.5 you may have to deal with a 10% early distribution penalty even if it's been 5 years since you funded the Roth. You would owe no actual income tax on the Roth distribution, but you'd have the penalty.


Sorry I can't be more helpful!  My broker's link might possibly be of some use - https://www.fidelity.com/learning-center/personal-finance/retirement/answers-to-roth-conversion-questions It does have some info on potential near-future tax increases.

Roth IRA distributions and tax consequences are covered well here

https://www.nerdwallet.com/article/investing/roth-ira-withdrawal-rules

When my son moved back to England in 2017 he immediately started work here and these are the steps we took to minimize his taxes including Roth conversions.

Immediately after leaving his company he rolled his company 401k into a Rollover IRA at a brokerage that supports overseas customers. This is a non-taxable event. Over the next couple of years he did lump sum conversions of his IRA into a Roth while at the same time excluding his UK salary using FEIE. Non-periodic distributions like this are only taxable by the IRS and his effective tax rate was around 8%. He doesn’t plan on touching his Roth now until he is 59.5 when distributions in both countries will be tax free. He is not making any Roth contributions while living and working in England. (I think that by excluding his foreign income then he pays no US tax so is not eligible to make contributions but I may be wrong. )

Thanks for the replies.

I get the application of marginal tax rates, but guess I'm tripped up on why the tax calculation on the Roth IRA Conversion includes my UK income (i.e. does not allow for FEIE). But it sounds like I can apply my single filer deduction of $15k and then also offset any FTC to greatly reduce the US tax that's due.

In my current situation I have a lot in retirement funds (IRA, Roth IRA, SIPP), but little free money in the bank. I've had to switch jobs so my income is reduced and I would like to access some of my retirement funds early (£50-80k) to furnish home improvements. I'm willing to pay penalties and tax so long as I can keep the effective hit on the extracted funds at around 20% or less.

For my Roth IRA I've already withdrawn all my prior contributions, so have roughly $80k all in earnings. I guess I could withdraw the earnings and pay the 10% penalty plus tax. In this case would the tax calculation also include my UK income (like it does for the Roth IRA conversion)?

I would like to keep my Roth IRA well funded, so would still look to do the conversions spread out over several years.   






 

Thanks for the replies.

I get the application of marginal tax rates, but guess I'm tripped up on why the tax calculation on the Roth IRA Conversion includes my UK income (i.e. does not allow for FEIE). But it sounds like I can apply my single filer deduction of $15k and then also offset any FTC to greatly reduce the US tax that's due.

In my current situation I have a lot in retirement funds (IRA, Roth IRA, SIPP), but little free money in the bank. I've had to switch jobs so my income is reduced and I would like to access some of my retirement funds early (£50-80k) to furnish home improvements. I'm willing to pay penalties and tax so long as I can keep the effective hit on the extracted funds at around 20% or less.

For my Roth IRA I've already withdrawn all my prior contributions, so have roughly $80k all in earnings. I guess I could withdraw the earnings and pay the 10% penalty plus tax. In this case would the tax calculation also include my UK income (like it does for the Roth IRA conversion)?

I would like to keep my Roth IRA well funded, so would still look to do the conversions spread out over several years.   

That is just how the IRS works. If you exclude your foreign wages (eg $60k) and they were not included in the Roth conversion calculation then you would be getting the first $15k of your conversion completely tax free and that is not how the system was envisaged. IRA contributions are meant to be tax deferred, not tax free. Since the lump sum conversion to a Roth is not taxed by HMRC then you cannot use a FTC to reduce the taxes you pay on that Roth conversion. Your choices are either to use the FEIE or include your UK salary as income and then apply FTCs to reduce the taxes to the IRS.

Making early lump sum withdrawals from your IRAs and paying taxes plus a 10% penalty is easily doable. Just use that tax estimator above that I posted a link you to see how much tax you would pay.

When my wife and I retired early at age 55 our income dropped dramatically as expected and from that point on we started making IRA to Roth conversions every year until after 12 years we were 100% Roth. This was to avoid paying too much tax as once SS, OAP and RMDs start we would be in a higher tax band.

durhamlad - "That is just how the IRS works. If you exclude your foreign wages (eg $60k) and they were not included in the Roth conversion calculation then you would be getting the first $15k of your conversion completely tax free and that is not how the system was envisaged. IRA contributions are meant to be tax deferred, not tax free."

This makes sense, but goes against the advice given here,
https://www.harrisonbrookusa.com/tax-free-roth-conversions-for-us-expats/ [nofollow]

from the Case Study:
Jerome, who is single and currently lives and works in France, earned $60,000 last year. He has a 401k with a balance of $500,000 from his previous employer in the US. He also rented out his apartment back in the US for a total of $12,000/year. After deductions (maintenance, mortgage interest, etc.), he will claim $6,000 of rental income this year. Beyond his French salary and his US rental, he has no other incoming income.

Since he earns less than the Foreign Earned Income Exclusion (2024 FEIE: $126,500 per person), he will not pay any US taxes on his French salary. As a single taxpayer, he can claim the standard deduction ($14,600 in 2024), which he can use against his rental income to bring his taxable income to zero.

However, we see that there is still an “unused” part of the deduction: $14,600 – $6,000 = $8,600. This unused part of the deduction can be used against any type of income, including Roth IRA conversions. Therefore, Jerome can convert up to $8,600 of his 401k to a Roth IRA without paying any taxes.
 
I trust an expat with experience doing Roth IRA conversions over free internet articles from tax experts. Please are you able to show what US tax would be due in the case study?

I can consult the tax service that does my US tax returns, but they will charge quite a bit to make a recommendation (and even then I'm slightly worried it may not be accurate). I'm hoping I can reach a conclusion if a conversion is worthwhile before going to them.

I am no tax expert but I do use TurboTax to help my son do his taxes.  So, I just a test run with foreign earned income of $60k, $5 of bank interest and a $40k Roth conversion. (I made up a 1099-R similar to ones I used to receive)

The screen shot shows the 1040 and you can see that tax due is $5,588. I was wrong above in my explanation.  The tax due is calculated purely on the Roth conversion sum plus the non-salary income.

Thanks for doing that!

Turbo Tax returned an effective tax rate of 22% for the Conversion (after deduction), so the marginal tax rate is taken from the bracket with foreign income included (60k-100k) but only applied to the Conversion.

That conflicts with the Case Study info from Harrison Brook, "He could also convert an additional $47,150 in 2024 and still stay in the 12% tax bracket." They assume foreign income is excluded for the purposes of picking up the marginal tax rate for the Conversion.

I think in this case then I'll need to limit Conversions as my foreign income would already put me in the 22% or 24% brackets and I don't have that much free cash to pay the up-front tax of the Conversion.

It seems a better option for me is to take Roth earnings and pay the 10% penalty, but try and keep the total within my deduction limits (as I assume Roth earnings would be taxed similarly to Roth Conversions using the marginal tax rates from the bracket which includes foreign income).

Thanks for doing that!

Turbo Tax returned an effective tax rate of 22% for the Conversion (after deduction), so the marginal tax rate is taken from the bracket with foreign income included (60k-100k) but only applied to the Conversion.

That conflicts with the Case Study info from Harrison Brook, "He could also convert an additional $47,150 in 2024 and still stay in the 12% tax bracket." They assume foreign income is excluded for the purposes of picking up the marginal tax rate for the Conversion.

I think in this case then I'll need to limit Conversions as my foreign income would already put me in the 22% or 24% brackets and I don't have that much free cash to pay the up-front tax of the Conversion.

It seems a better option for me is to take Roth earnings and pay the 10% penalty, but try and keep the total within my deduction limits (as I assume Roth earnings would be taxed similarly to Roth Conversions using the marginal tax rates from the bracket which includes foreign income).

How are you calculating effective tax rate? By TurboTax definition effective tax rate = tax/gross income so that $40000 has an effective tax rate of 14%. The deduction has nothing to do with effective tax rate.

I think we are talking at cross purposes, it is just semantics.

Yes, I shouldn't have said "effective". I was looking at the tax rate used = tax/(gross income - deductible).

14% is a very good effective tax rate to pay. I came in hoping for a rate around 10%, so that when I paid the additional 10% penalty for early withdrawal I would be around 20% in total (as I'm happy paying the basic UK rate, just not the higher UK rate).

I assume Child Tax Credits can also be applied against the tax on Conversion?

I assume Child Tax Credits can also be applied against the tax on Conversion?

I really don’t know. My children are in their 40’s so I have never had any dealings with that.

I am wondering if the new UK Foreign Income & Gains regime introduced since April 2025 has moved the goalposts regarding Roth conversions while being a UK resident?  Has anyone heard anything how FIG affects future conversions?

I am wondering if the new UK Foreign Income & Gains regime introduced since April 2025 has moved the goalposts regarding Roth conversions while being a UK resident?  Has anyone heard anything how FIG affects future conversions?

I’m just pleased that I and my wife completed all our Roth conversions a couple of years ago.

Be careful assuming that HMRC won't tax IRA to ROTH rollovers that you declare as "lump sums" under the US/UK Tax Treaty. I've read that HMRC is now using the "Savings Clause" to tax the rollover. So talk to a qualified tax professional and maybe calculate the appropriate rollover amount considering both the UK and US tax brackets.

https://www.ustaxfs.com/insights/significant-change-hmrc-stance-on-us-pension-lump-sum-distributions/