IRA withdrawal taxation whilst resident in the UK ?

I've gotten myself in a muddle and need some help please!  

My wife is a US/UK dual citizen currently resident in the USA with a traditional IRA and a Roth IRA.  We plan to move back to the UK in the near future for retirement.  I'm a UK citizen but currently permanently resident in the USA.  We file jointly in the USA our marginal tax rate is about 20%ish.  Since there is no joint filing in the UK and she has virtually no income of her own, when we move back she will have access to the personal allowance of tax free income.

a)I understand that Roth IRA distributions will not be taxed by either country (not sure if I need to fill out any forms on either return for this? or can we just withdraw it and be done.)

b)For the traditional IRA I was thinking she could withdraw equivalent to the personal allowance each year tax free (once she passes 59.5).  I read somewhere that the US UK treaty would mean that this would not be taxed in the USA?  Do I need to do anything special with her US tax return for this to apply? Or did I read this wrong?

Would it be possible to rollover the amount each year (instead of withdrawing it) into the roth IRA and get the same tax free treatment? That way we could keep it invested until needed but still get that tax free portion.

Sounds too good to be true.  Which usually means someone will spoil my party  

If my thinking is right then that would mean it would be very advantageous for us to contribute to the traditional ira at present rather than the roth.  

EDIT Oh and finally do I need to switch to HMRC reportable EFTs inside these IRA wrappers to avoid UK tax mess?  I guess not for the roth since there is no taxable capital gains but yes to the traditional IRA? 

A UK/US dual citizen resident in the UK will be liable to income tax on IRA withdrawals in the UK because of residence and in the US because of citizenship. If you are looking at the treaty don't miss the standard "saving clause" at the beginning. If your wife actually takes income (ie does not do a rollover to another qualified retirement plan) she will have to pay UK tax on 90% of the income and then take a foreign tax credit for UK tax paid on her US return to offset any US tax bill. She'll also have to claim back the 10% withholding the IRA administrator will apply. If you keep the income below the lowest of of the "tax free allowances" of either the UK or the US you will pay no tax. However, it might be best to pay some tax between ages 59.5 and 70.5 to control your tax bill once RMDs start.

If she does the rollover to a ROTH there will be no UK tax at all as the rollover is exempted by the treaty. She will obviously have to pay US tax, but won't pay any tax if she keeps the rollover in the 0% tax band ie below her personal exemptions and deductions. That amount will be governed by her filing status. When you take ROTH distributions you'll get a 1099-R and if you have followed the rules there will be no tax. You enter the amount on 1040, line 15a and show 0.00 as the taxable amount. You can do the same on the UK self assessment SA 106.....enter the ROTH distribution as a foreign pension payment and put the UK taxable amount as zero under the DTA.

FYI you don't have to worry about HMRC reporting funds inside a US retirement account wrapper, you can hold anything that is available from your US administrator. HMRC reporting funds are only required for taxable accounts

Thank you Nun!

Ok so the withdrawal route has consequences and complications.

So assuming we are back to the uk and I am no longer resident so she will file married separately in the US

so there is nothing stopping her rolling over $10000 (or whatever her std deduction/ exemption covers) to a roth each year with no Us or uk tax liability since it is covered by std deduction/exemptions in the US and the rollover is not taxable in the UK because of the treaty. And if she is already 59.5 she can withdraw it US and UK tax free straight away.  Or just wait the shorter of 5yrs and until she is 59.5 to withdraw it if she isn't 59.5 when the ira is converted? 

Sounds like a plan.

also for rollover for uk tax purposes - how does one go about claiming for the treaty exemption.  Any specific clause I should look into?

Thanks again!

An IRA to ROTH rollover is tax free in the UK under Article 18.1 of the DTA. ROTH payments are tax free in the UK under Article 17.1b. If you are using the DTA in the UK you can write appropriate notes on your UK self assessment, in the US you claim treatment under the DTA on form 8833.

The situation for IRA rollovers for your wife is basically the same as if she was a US resident; she can rollover an amount equal to her exemptions and deductions tax free. IRA income will also be tax free up to the lower of the tax free income limits in either the US or the UK. All ROTH withdrawals will be tax free.

IRA income will also be tax free up to the lower of the tax free income limits in either the US or the UK. All ROTH withdrawals will be tax free.

I would expect that if she is younger than 59.5 then even though it is tax free because of the withdrawal being below the tax free income limit it will still be subject to the 10% early withdrawal penalty.

In other words, while she is under 59.5 do ROTH conversions within her tax free income limit and no tax or penalty will be payable.

I would expect that if she is younger than 59.5 then even though it is tax free because of the withdrawal being below the tax free income limit it will still be subject to the 10% early withdrawal penalty.

In other words, while she is under 59.5 do ROTH conversions within her tax free income limit and no tax or penalty will be payable.

Yes the usual early withdrawal penalties will apply

I would expect that if she is younger than 59.5 then even though it is tax free because of the withdrawal being below the tax free income limit it will still be subject to the 10% early withdrawal penalty.

In other words, while she is under 59.5 do ROTH conversions within her tax free income limit and no tax or penalty will be payable.

I though that with ROTH rollovers since the money is taxed already you can withdraw that amount without penalty?  Just not any subsequent earnings.  You just have to make sure you've held it for 5 years.  So say i rollover $10000 in 2015 and in 2020 the account is $12000.  In 2020 I can now withdraw $10000 tax and penalty free wherever I am.  The $2000 will have to stay in until 59.5 to be penalty free. 

I though that with ROTH rollovers since the money is taxed already you can withdraw that amount without penalty?  Just not any subsequent earnings.  You just have to make sure you've held it for 5 years.  So say i rollover $10000 in 2015 and in 2020 the account is $12000.  In 2020 I can now withdraw $10000 tax and penalty free wherever I am.  The $2000 will have to stay in until 59.5 to be penalty free. 

Exactly what I would do.  Good example.

What you can't do "before age 59.5" is a ROTH rollover and then immediately withdraw the money "because it has already been taxed", as that is an obvious ruse to avoid the 10% penalty.  You need to hold that taxed rollover money for a period of 5 years or until you are 59.5, whichever comes sooner.  As you point out, after the 5 year period you cannot withdraw the earnings from the rollover money tax free.

Following this helpful information!