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