Author Topic: 401k conversion question - what would you do?  (Read 773 times)

Ttkamara

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401k conversion question - what would you do?
« on: October 28, 2018, 12:21:42 PM »
Long time lurker, first time poster. Thanks in advance for the advice from wise MMMers.

Iím a 36 yr old Brit who lives in the U.K. and is unlikely to ever live/work in the US again. Howecer,  in my twenties,  i worked in New York and contributed to my companyís 401(k) and a Roth.

The current balances are c. $70k in the companyís 401(k) plan (a large retail bank) and c $30k in the Roth with Fidelity (the magic of compound interest as I havenít contributed for almost a decade). I havenít lived in the States for years and have no US income, so itís highly unlikely that I will ever be in a position to contribute to the funds going forward.

My question is - in my shoes, would you do a roth conversion ladder? I donít really understand them despite googling so Iím guessing no! Is there anything else people advise?

I only started contributing to my pension in the U.K. fairly recently so want to make sure Iím being thoughtful about this pot of cash in the US.

Thanks!

lhamo

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Re: 401k conversion question - what would you do?
« Reply #1 on: October 28, 2018, 12:42:22 PM »
Assuming you qualify for the Foreign Earned Income exclusion on your UK income then I would absolutely convert what remains in your 401k to a Roth up to the standard deduction each year -- moves your tax-deferred money into a tax free pot for no current tax hit.

You will have to convert the 401k over to an IRA first.  Probably easiest just to use your existing Fidelity accounts.  You can do the conversion on-line, instantaneously once the IRA is set up (I converted half of my old IRA during the dip last week).

maizeman

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Re: 401k conversion question - what would you do?
« Reply #2 on: October 28, 2018, 12:46:54 PM »
Assuming these funds are essentially invisible to your UK tax obligations, then yes, I'd advise a person with 70k in a 401k who wasn't earning any taxable income in the USA to start rolling it into a roth each year. Given that the sums of money are relatively small, it's likely you wouldn't owe any income tax on traditional withdrawals either, but you've got plenty of years to convert the money entirely to Roth at which point you know* it won't be taxed (by the USA) when you want to take it out and spend it.

However I'm not an expert and cannot speak to how any of this might interact with the UK tax code.

*The US tax code could always be reformed to eliminate the standard deduction and/or raise the lower tax brackets, which would be unfortunate for those with large traditional 401k/IRA balances. It's always possible the treatment of Roth accounts could also change, but it would require legislation specifically targeting these vehicles and be explicitly rather than implicitly be breaking the assurance given to prior savers, so changes in the treatment of Roth accounts is considered by most folks (including me) to be much more unlikely.

Ttkamara

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Re: 401k conversion question - what would you do?
« Reply #3 on: October 28, 2018, 02:21:36 PM »
Thanks both for responding so quickly.

@maizeman youíre correct that these funds are not of interest to the U.K. tax authorities.

@ihamo is the Foreign Earned Income dťduction a provision of the US tax code? Iím assuming that if I go for the roth ladder conversion I would need to file a US tax return, does that sound right to you?

Obviously, I know people are just kindly giving their non-professional advice but Iíve found it tricky to find someone in England who understands American taxes and isnít geared up only for very HNWs and so charging £££ which means that I very much appreciate your views.

If itís not too much trouble, Iíd really appreciate it if someone could explain how a roth conversion ladder works? I have googled - honestly! - but struggling to understand exactly how to go about it.

Regardless, sounds like step 1 is a conversation to an iRA which I do understand :-) and will at least give me optionality.

Thanks again.



maizeman

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Re: 401k conversion question - what would you do?
« Reply #4 on: October 28, 2018, 02:33:21 PM »
The roth conversion ladder is a thing people do to get money out of their retirement accounts before full retirement age (steps 1-3 below). I guess I was mostly just talking about a roth conversion (steps 1 & 2 below), but you could certainly do either.

Step #1: Call Fidelity and tell then you'd like to open a traditional IRA account with a Rollover from a 401k account. They can probably handle the particulars of contacting your original 401k provider and arranging the transfer. If not you may have to call your 401k provider and arrange it from that end.

Step #2A. Figure out how much income you could have in the USA this year without owing any federal income tax. (This should be at least $12,000, but might be more depending on the particulars of your situation.). Call Fidelity again and say you'd like to roll over whatever that amount of money is from your traditional IRA to your Roth IRA account.

Step #2B (not relevant in your case): pay any income tax owed on the amount of money transferred.

Step #2C: repeat steps 2A and 2B annually until the balance of your traditional IRA account is exhausted.

Step #3: Only if you want or need the money, starting five years after your first batch of money transferred from your traditional IRA to your Roth IRA, you can withdraw up to the same amount of money you transferred into the Roth IRA, completely (US) tax free, and spend it on anything you want (groceries, disco balls, pork belly futures). After six years, you can withdraw your second batch of money and so on.


lhamo

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Re: 401k conversion question - what would you do?
« Reply #5 on: October 28, 2018, 03:18:01 PM »
Oh, sorry -- I missed that you were a UK citizen.  FEIE applies only to US citizens, I think. 

@UnleashHell or some of our other forumers of UK origin may have better answers to this question than I do.  I know about US taxes on US citizen expats, but not how things work for expats of other nations trying to get assets out of the US....

Ttkamara

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Re: 401k conversion question - what would you do?
« Reply #6 on: October 29, 2018, 01:52:46 AM »
@maizeman thanks for the step by step instruction and @ihamo thanks for signposting the U.K. forum.

It sounds almost too good to be true! Having that money tax free would materially help out my FIRE goals.

I will have a look at the U.K. forum and see if I can confirm  whether non resident aliens get the standard $12k deduction if filing from abroad.

Thanks again!

UnleashHell

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Re: 401k conversion question - what would you do?
« Reply #7 on: October 29, 2018, 05:30:53 AM »
Oh, sorry -- I missed that you were a UK citizen.  FEIE applies only to US citizens, I think. 

@UnleashHell or some of our other forumers of UK origin may have better answers to this question than I do.  I know about US taxes on US citizen expats, but not how things work for expats of other nations trying to get assets out of the US....

not me - no idea sorry.