converting to a Roth IRA

Thanks dlad.... What a wonderfully simple answer.  Now I can go back and read the thread since I understand the point of it.... ha!

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. 

There is no dumb question. This stuff can be complicated and full of subtleties, but it's important that you understand your money and taxes so that you can either do your own taxes or make sure the people you employ are doing a good job.

The IRA to ROTH rollover has no penalty, you just have to pay US income tax on the amount. It will add to your US taxable income so you have to be careful about that and do the rollovers sensibly so as not to increase your marginal tax rate. If you are a US citizen and use the FEIE on your 1040 you can't use the exclusion when calculating income the tax rate for the rollover. The rollover is not classed as a distribution under the treaty and the UK won't tax it as plan to plan rollovers are tax exempt under Article 18.1 of the treaty.

So if I get this right.....since I am in the 15% tax bracket I could move a decent amount of my TSP over to my Vanguard (as an example) ROTH. As long as I stay under $72500 (I think that's where it changes to the next tax bracket/joint) I would just pay the tax on the amount I moved over for this year.....and then I could do it again next year?

So if I get this right.....since I am in the 15% tax bracket I could move a decent amount of my TSP over to my Vanguard (as an example) ROTH. As long as I stay under $72500 (I think that's where it changes to the next tax bracket/joint) I would just pay the tax on the amount I moved over for this year.....and then I could do it again next year?

That is exactly how I understand it.  If you have tax prep software like TutboTax or TaxAct etc, you can easily do some test scenarios to see how much tax you would pay when doing a conversion.

I have used TurboTax the last few years.....do you need a certain level of the software to get the ability to do the conversion scenarios?

That is exactly how I understand it.  If you have tax prep software like TutboTax or TaxAct etc, you can easily do some test scenarios to see how much tax you would pay when doing a conversion.

I have used TurboTax the last few years.....do you need a certain level of the software to get the ability to do the conversion scenarios?

Nope, the way I do it is as follows:

For 2013 tax return

Start 2012 version with your 2012 tax return.

Save-as a new version, say "2013 Test"

Under Retirement plans, add a 1099-R and follow the step by step directions.

for boxes 1 and 2a enter the same amount, e.g. $50,000 and then box 2b should be checked (taxable amount not determined)

Box 7 should be code 2

check the box labeled IRA/SEP/SIMPLE

Click continue and then answer the questions saying that you converted it to a ROTH account.


You can then go to the forms view, select that 1099-R and simply enter different numbers for the withdrawal amounts in Box 1 and 2a, and see the amount of tax you owe.  e.g. enter $1 and note the tax owed, then enter $50,000 and note the difference in tax owed.

It's only an estimate but as soon as the new version of TT is out you can get a much better estimate if it is out before year end.

FYI, here is an interesting idea involving ROTHs and IRA distributions and expatriation from the Britishexpats.com site. It results in 8% tax on US retirement distributions of $60k where as the US citizen would pay 14% tax on the same amount of retirement income. It is post #23.

http://britishexpats.com/forum/showthread.php?p=10907602#post10907602

 Yesterday, 6:48 pm      #23
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 Re: Move back to UK, give up US citizenship and make IRA to ROTH rollovers
Hi Nun, I think you concluded on a similar Bogleheads thread that the Roth conversions would be subjected to US taxes, for those who have expatriated back to England. I'm considering putting myself in that position, and reviewing tax reduction strategies. I will be looking to 'pay' myself around $60,000 per year out of primarily tax deferred accounts. It seems to me that by doing both distributions and conversions, I could take advantage of both the UK tax-free Allowance, and the the US's standard deductions.

If I take a distribution of 10,000 pounds directly from my IRA (taxable in the UK) then I'd owe something like 100 pounds in taxes in the UK.

Then I could rollover the remaining c.$44,500 from IRA to Roth, taxable only in the US and pay around $4,700 in US taxes.

A tax bill of <$5,000 on $60,000 'income' amounts to an effective rate around 8%!

I wonder if anyone could see flaws in this logic?

From Article 18(2) of the treaty:

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;

Correct me if my interpretation is wrong, but I see the following opportunity for savings.

If a UK resident makes a Traditional IRA contribution, they can in theory deduct it from their UK taxable income. For someone in the 40% bracket making a $5500 contribution they could deduct $2200 (£1375).

Then if the UK resident rolls over the IRA to a Roth they pay no UK tax (and the Roth conversion can normally be done as soon as the contribution has been made).

This seems like a great opportunity for tax savings for those who would otherwise contribute to a Roth.

From Article 18(2) of the treaty:
Correct me if my interpretation is wrong, but I see the following opportunity for savings.

If a UK resident makes a Traditional IRA contribution, they can in theory deduct it from their UK taxable income. For someone in the 40% bracket making a $5500 contribution they could deduct $2200 (£1375).

Then if the UK resident rolls over the IRA to a Roth they pay no UK tax (and the Roth conversion can normally be done as soon as the contribution has been made).

This seems like a great opportunity for tax savings for those who would otherwise contribute to a Roth.

That is how it reads to me, assuming that under US law you can make IRA contributions, since I believe you have to have earned income reported on a W2, and be paying employment taxes (FICA) to qualify for making IRA contributions.

For example, I receive W2 income from the US company I used to work for but it is a non-qualified pension and no FICA payments are withheld.  Consequently I am not eligible to make IRA contributions.  (I also receive a qualified pension reported on a 1099-R)

That is how it reads to me, assuming that under US law you can make IRA contributions, since I believe you have to have earned income reported on a W2, and be paying employment taxes (FICA) to qualify for making IRA contributions.

For example, I receive W2 income from the US company I used to work for but it is a non-qualified pension and no FICA payments are withheld.  Consequently I am not eligible to make IRA contributions.  (I also receive a qualified pension reported on a 1099-R)

To be clear, your income needs to fall within the IRS's definition of taxable compensation.

I know very little about this but the first time I saw an accountant to do my US tax (when I was still working; uk university; taxable but excludable income), he explicitly told me not to contribute to an IRA. So perhaps the issue is whether it's good in terms of your US tax.

To be clear, your income needs to fall within the IRS's definition of taxable compensation.

Agreed.

So, do you have US compensation under these guidelines? 

If so, then I believe you are good to go under the tax treaty rules you quoted.

I'm starting to think more and more about moving some of my TSP money over to Roth every year for a while. I don't think it would hurt anyway. I think I will be in the 15% tax rate forever more.....but....

Agreed.

So, do you have US compensation under these guidelines? 

If so, then I believe you are good to go under the tax treaty rules you quoted.

UK employment income earned by a US citizen can count as taxable compensation for IRA purposes if the taxpayer opts to claim a foreign tax credit rather than an exclusion. This might be a reason for folks using the exclusion to take a second look at using the FTC instead.

UK employment income earned by a US citizen can count as taxable compensation for IRA purposes if the taxpayer opts to claim a foreign tax credit rather than an exclusion. This might be a reason for folks using the exclusion to take a second look at using the FTC instead.

In that case I think making IRA contributions is an excellent idea.