The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Doubleh on September 10, 2014, 09:56:43 AM
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As a brief background, my wife is a UK US joint citizen, I'm a brit and we live in the UK. Because I'm not a US tax payer she files as married filing separately, and as such probably can't make Roth or deductible IRA contributions. She has both Trad 401k and Roth IRA from previous employers in the USA. While she's the more frugal one in the relationship I'm more the optimizer, and am in the process of figuring out how to get the best out of her old investments. We also have cash flow from a couple of US rental properties that we will start to invest and would like to do this as efficiently as possible.
We're in the process of moving her Roth IRA from high fee mutual funds to cheap index trackers with a new provider, and I was planning to do the same with her 401k by rolling to a trad IRA. However from what I've read it sounds like we would be better off leaving the 401k with the former employer to avoid mixing deductible contributions into the Trad IRA (currently she has no Trad IRA). We can than make non-deductible contributions to the Trad, and convert them to Roth without any tax to pay, meanwhile leaving the deductible contributions in 401k and look to convert them in ER when we would hopefully pay little or no tax on the transfer. The downside is that in the mean time we have a limited choice of investment options with the 401k (fidelity net benefits) but I can at least limit this by moving it to the lowest cost funds they offer.
I'm pretty new to the US rules and am on a learning curve, so I'd appreciate if anyone can let me know whether my reasoning makes sense, or is there something you know that I have missed? I'll ultimately run this past our tax preparer to check we're ok but I appreciate your guys' input.
Secondly as the new contributions will come from monthly rent checks I'd like to put them to work each month. Is there any reason we couldn't make a new Trad IRA contribution each month and immediately roll it over into Roth? As far as I can see the alternative would be to do a single conversion once we've built up to the full contribution limit, but this would mean tax due on gains in the meantime.
Appreciate any comments
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I think whether you can deduct with a traditional IRA and married filing separately depends on whether either of you is covered by a retirement plan at work. See table 1-3 http://www.irs.gov/publications/p590/ch01.html#en_US_2013_publink1000230449 (I'm not an accountant, I've just been looking at this info for my own circumstances).
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You mentioned you currently live in the UK. Does your wife have wage income from the US at this time? If not, she may not be able to contribute any new money to an IRA at all. See this part of IRS pub 590 (http://www.irs.gov/publications/p590/ch01.html#en_US_2013_publink1000230355) for more info. The maximum contribution to any IRA is the lesser of $5,500 or "your taxable compensation for the year," which includes wages and salaries, but does not include compensation you exclude from your US income tax return due to the foreign earned income exclusion. Taxable compensation also does not include earnings and profits from property (i.e. rent checks).
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Thanks for the responses.
Flashpacker, I read this as saying that if you are married filing single your eligibility for deduction is gone above 10k, regardless of pension situation, no?
Seattlecyclone, good point. I need to talk to our tax people about this but uk tax rates are way above USA so I think we can use tax credits rather than exclusion to ensure that she does have income to contribute
Any other thoughts much appreciated
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My husband and I are ex-pat Canadians living in the US. Its now almost certain that we will stay here during retirement, but we were on the fence about whether we would return home once I stopped working. At that time we saw an accountant specializing in US-Canada tax laws and he said that if we were seriously considering returning to Canada in retirement that all retirement contributions should be to a regular IRA or 401K where we received a tax benefit at the time of contribution (i.e. reduction of taxable income). This is because Canada did not recognize the Roth in same manner as the US, and any money drawn from it would be considered taxable income in Canada even though it would not have been taxable in the US. This was several years ago now so the rules may have changed, but the UK might have similar tax policies and consider any income from foreign accounts as taxable regardless of their Roth/Traditional IRA designation.
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Thanks Tweezers, good point and one I hadn't really considered. To be honest I've started to do our retirement planning on the basis of what makes sense from a us perspective, on the grounds that I have no idea whether we'll media up living here, there or somewhere else altogether in retirement but we'll always be paying Uncle Sam unless the mrs were to renounce her citizenship which seems unlikely.
For the benefit of anyone else reading this I checked HM Revenue's website and they say that the UK-US tax treaty provides that Roth withdrawals would be tax free in uk to extent they are tax free in US:
http://www.hmrc.gov.uk/cnr/res-dom-faqs.htm#e