converting to a Roth IRA

This is about converting a traditional IRA to a Roth IRA. As I understand it, if you convert the entire amount of an IRA into a Roth IRA, HMRC considers this to be a lump sum withdrawal and doesn't tax it (although the US does). (Also, it being a Roth, they won't tax the growth in the fund in the future).
My question is, what if you only convert a portion of the traditional IRA into a Roth, eg, 40%? does HMRC still consider this a non-taxable lump sum distribution? do they have rules or guidelines governing this?

What makes you think that HMRC won't tax distributions from US retirement accounts when taken by a UK tax resident who is taxed on an arising basis? Also I'm not sure any voluntary distribution from an IRA would count as a "lump sum distribution" for HMRC as that the HMRC's tax free lump sum refers to the up to 25% distribution you can get form UK registered pension plans. I might be being a bit conservative so maybe someone with better knowledge can offer another opinion. Also I intend to do all my IRA to ROTH conversions before I move to the UK to avoid the question entirely.

Anyway my take on it for a US citizen resident in the UK is that 90% of the amount converted from IRA to ROTH would be declared on UK taxes and tax paid and then you'd enter the entire amount on your US taxes as income and take a credit for the UK tax paid.

All growth and distributions from the ROTH would be both US and UK tax free.

If any part of your IRA is from foreign income you might also be able to reduce the US taxable amount using excess foreign tax credits.

http://www.ukustax.com/wp-content/uploads/2012/03/Roth-Article-28-Oct-10.pdf

I got legal advice on this a few years ago. Apparently that's the HMRC positon on IRA conversions.

I got legal advice on this a few years ago. Apparently that's the HMRC positon on IRA conversions.

Well if you take the entire IRA and roll it over into a ROTH and HMRC will consider that a "lump sum distribution" and not tax it that's great. You'd just pay US income tax and no tax in the UK. But that seems to be a strange stance for HMRC to take as you only get up to 25% tax free from a UK pension and it would appear that you can get 100% tax free on US IRA rollovers.

My reasoning would be that the savings clause would kick in so HMRC would tax the distribution. As it's not from a UK pension I'd assume the 25% tax free lump sum rule wouldn't apply. Do you have a detailed explanation of why and under what circumstances a distribution from a US IRA would be considered a lump sum for UK tax purposes and why it would be tax free in the UK?

Also HMRC does not let you recycle tax free lump sums, ie if you use a pension lump sum distribution to fund another pension it is not tax free. Article 17.2 is subject to the savings clause and as a UK resident if you put the IRA money into a ROTH is would not be UK tax free........well that's my reasoning, but I will defer to those more knowledgeable.

Here is a link that states that there are no UK tax consequences for an IRA to ROTH conversion.

http://www.buzzacott.co.uk/uploads/insights/Buzzacott%20Year%20End%20Insight%20for%20Expatriate.pdf

I can't see how Buzzacott comes to this conclusion if HMRC can apply UK tax rules to the conversion (due to the savings clause) because it seems to be recycling of the distribution. The only way it seems to work is if HMRC says we are going to apply the uk tax free lump sum rules to 100% of the rollover, but then not apply the recycling rules.

If it is true that the UK does not tax lump-sum distributions from US IRAs what is to stop me from splitting my US IRAs up into many small IRAs before I return to the UK. Say I have $500k in a US IRA and I split it into 20 separate IRAs of $25k each. That has no US tax consequence. So when I return to the UK I simply cash in one of my numerous small IRAs whenever I need it, pay US tax on it and then pay 0% tax in the UK because HMRC doesn't tax lump sum distributions......that seems stupid to me, but comes out of the logic that HMRC does not tax lump-sum distributions from IRAs.

I'd also ask what "lump sum distribution" means in this context. Is it all of your "pension pot" or retirement savings, or just an entire account?

This is about converting a traditional IRA to a Roth IRA. As I understand it, if you convert the entire amount of an IRA into a Roth IRA, HMRC considers this to be a lump sum withdrawal and doesn't tax it (although the US does). (Also, it being a Roth, they won't tax the growth in the fund in the future).
My question is, what if you only convert a portion of the traditional IRA into a Roth, eg, 40%? does HMRC still consider this a non-taxable lump sum distribution? do they have rules or guidelines governing this?

Marty,
It looks like as long as you don't make additional rollovers in the year before or after the year you make the partial rollover it will be considered a lump sum by HMRC. Lump sums are defined in this discussion.

http://www.taxationweb.co.uk/forum/uk-tax-on-us-retirement-ira-t34553.html

many thanks, nun, that's very helpful.
I should explain that the reason I can't give you the code sections, etc. is that the result of the legal consultation I had was in the form of written notes. Getting a formal report with all the references would (reasonably) have cost a lot more and at the time I decided not to pursue it.

Ha Ha I have the UK tax code that exempts lump sum payment from foreign pensions from UK tax, it's ESC-A10

http://www.hmrc.gov.uk/manuals/eimanual/eim15083.htm

It seems that it will be modified soon, but I don't think it will effect IRAs if you made all the contributions while in the US.

http://www.hmrc.gov.uk/budget-updates/march2011/pensions-esc-a10a11.pdf

So I think IRA distributions that are lump sums will be UK tax free under ESC-A10 and so the opportunity to exclude US retirement savings from UK taxation definitely exists if you organize things carefully.

Nice work nun, good research.

This is about converting a traditional IRA to a Roth IRA. As I understand it, if you convert the entire amount of an IRA into a Roth IRA, HMRC considers this to be a lump sum withdrawal and doesn't tax it (although the US does). (Also, it being a Roth, they won't tax the growth in the fund in the future).
My question is, what if you only convert a portion of the traditional IRA into a Roth, eg, 40%? does HMRC still consider this a non-taxable lump sum distribution? do they have rules or guidelines governing this?

Well I talked to a nice man at HMRC and he made an interesting statement to me

I do not believe the UK takes advantage of Article 1(4).  It generally would not help us as our domestic tax law does not really provide for it and there is no equivalent of Article 24(6) to sort out any double taxation that might arise if we did.

So the taxation of an IRA to ROTH rollover crucially hinges on whether it is classed as a lump-sum distribution. I now believe that a distribution from an IRA cannot be a lump sum as that is specific to a distribution from an employer's plan and I've also seen that stated in a number of places ...ie "Distributions from an individual retirement account (IRA) are never considered a lump-sum distribution".

http://www.irs.gov/taxtopics/tc412.html

A lump-sum distribution is the distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified pension, profit-sharing, or stock bonus plans. All of the participant's accounts under the employer's qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution.

So I contend that the IRS does not consider any amount of an IRA to ROTH rollover as a lump sum, it might be non-periodic though. It would seem that Buzzacott's conclusion is that a distribution from an IRA can be treated as a lump-sum for UK tax purposes. The IRS does not see any IRA distribution as a lump sum, but I suppose if HMRC could be persuaded it was a lump sum you might get away with no UK as you'd only be using the treaty claim on your UK taxes.

OK this is from the HMRC horse's mouth.

We would see rollovers between pension funds as exempted by the words in parentheses at the end of Article 18(1).  It is worth noting though that the IRS only accept a qualifying roll over between US schemes as being a roll over so they would treat a transfer of the funds between a US and UK scheme or vice versa as being a chargeable distribution.

This is in agreement with the statements made by Buzzacotts and BritishAmericanTax so I think we have a quorum. It does then present a useful strategy for the drawing of retirement income as a rollover of any amount from an IRA to ROTH is free of UK tax. This means that a UK resident can indeed avoid UK tax on all their US retirement distributions simply by rolling them into a ROTH. This would go for other accounts like 401k etc. IMHO, this is a strange position for HMRC to take as you could argue that as the IRA distribution is treated as taxable income in the US the money has actually been received by the tax payer before it goes into the ROTH. Still I'm not going to argue.

Marty,
What are you doing re the ROTH rollover?

it's on my list.

You two made my head spin.   
I was just starting to wonder what to do with my retirement accounts when I stumbled unto your thread.... so why would you roll your traditional IRA into a Roth?   Please as simply as possibly.  I have (as an example) $50K in an IRA and $50K in a Roth.   What you're saying is in the long run, it's best to take the penalty fee for withdrawing and rolling over my traditional into a Roth?
I apologize if this seems like a dumb question after reading your whole thread.  My former financial advisor is in another state and charges a fortune for a call. 

You two made my head spin.   
I was just starting to wonder what to do with my retirement accounts when I stumbled unto your thread.... so why would you roll your traditional IRA into a Roth?   Please as simply as possibly.  I have (as an example) $50K in an IRA and $50K in a Roth.   What you're saying is in the long run, it's best to take the penalty fee for withdrawing and rolling over my traditional into a Roth?
I apologize if this seems like a dumb question after reading your whole thread.  My former financial advisor is in another state and charges a fortune for a call. 

Not a dumb question at all.

There is NO penalty for rolling an IRA into a Roth IRA, just be sure the funds go from broker to broker.  If the rollover is done with the same broker then it is extremely simple to do.

You will have to pay income tax on the amount rolled over but there is no 10% penalty, which is for withdrawing the funds before you are 59.5 years old.  (A rollover is not a withdrawal)