Ex-pat Roth Conversion

[KCM5]

I currently live in the US and am planning on moving with my family overseas in a few years when our stash is large enough. Currently most of our savings are in 457 accounts and Roth/traditional IRAs. Once we move overseas will will basically have no income in the US - maybe some taxable investment accounts depending on how much our wages increase in the meantime. Can we convert an amount of the standard deduction + personal exemptions ($24250 in 2014 including our child) from our traditional IRA or 457 to a Roth and pay no taxes for the year?  We'll be working overseas, but I'm not planning on making enough to go over the foreign earned income exclusion (we'll be downshifting significantly). Is there anything I need to be aware of if we move forward with that plan?

[AnAmericanAbroad]

I'm no tax expert but live abroad, if you couldn't guess by the username. I think your plan would work. You just can't contribute to a Traditional or Roth IRA unless you have earned income over the FEIE for the year.

[johnny847]

You will probably find Jeremy's post on his situation helpful, you're basically in the same situation as him. http://www.gocurrycracker.com/go-curry-cracker-2014-taxes/

He's a MMM forum member if you want to try to reach out to him about more specific quesitons.

[johnny847]

Oh also if we are talking about a governmental 457b there's no need to convert 457b money to Roth. Once you terminate employment, you can withdraw money from a 457b penalty (but not tax) free.

I don't remember if the rules are different governing withdrawals from nongovernmental 457b's.

[KCM5]

Thanks for the link!

It looks like our situation would be similar in that we'd be living overseas but we'd also be contending with UK tax law and it doesn't look like they're residents for tax purposes elsewhere (or he didn't mention it in the post). But I've done some research and it looks like in our tax treaty with the UK that they're interpretation is that a rollover has no tax liabilities to the UK government.

I'd start rolling over the traditional IRA but I'm going to do as much of the 457 as I can without paying taxes on it - the purpose being tax avoidance, not so we can access the money. Most of our money is in the governmental 457 so we're totally able to access it as soon as we leave our jobs.

Regarding the contributions to the IRA, I think I've been reading that it may be possible to contribute if you use the foreign tax credit rather than the foreign earned income exclusion? I haven't looked into it much, but will when we get closer to moving.

[johnny847]

Thanks for the link!

It looks like our situation would be similar in that we'd be living overseas but we'd also be contending with UK tax law and it doesn't look like they're residents for tax purposes elsewhere (or he didn't mention it in the post). But I've done some research and it looks like in our tax treaty with the UK that they're interpretation is that a rollover has no tax liabilities to the UK government.

I'd start rolling over the traditional IRA but I'm going to do as much of the 457 as I can without paying taxes on it - the purpose being tax avoidance, not so we can access the money. Most of our money is in the governmental 457 so we're totally able to access it as soon as we leave our jobs.

Regarding the contributions to the IRA, I think I've been reading that it may be possible to contribute if you use the foreign tax credit rather than the foreign earned income exclusion? I haven't looked into it much, but will when we get closer to moving.

Oh gotcha. Yea I'd convert the tIRA first but if you completely convert that then yea go for the Roth"

*This results in you being able to withdraw far less before 59.5 penalty free. If you left all of your money in your 457, you could withdraw all of your gains penalty free. By converting it to a Roth, any gains cannot be withdrawn without penalty until 59.5. Not that this is a bad thing, because the gains are now tax free forever. But it is important to take into account because it is possible to end up not having enough access to money penalty free before 59.5 by doing things this way.**

**Not that paying the penalty is something to be avoided at all costs - sometimes it is still worth it to pay the penalty depending on the tax bracket spread.

[SunnySaver]

Once we move overseas will will basically have no income in the US - maybe some taxable investment accounts depending on how much our wages increase in the meantime. Can we convert an amount of the standard deduction + personal exemptions ($24250 in 2014 including our child) from our traditional IRA or 457 to a Roth and pay no taxes for the year?  We'll be working overseas, but I'm not planning on making enough to go over the foreign earned income exclusion (we'll be downshifting significantly). Is there anything I need to be aware of if we move forward with that plan?

Unfortunately your overseas income still "counts against" the deduction+exemptions because of the way the foreign earned income exclusion works: it's not "tax on (income - excluded income)" but rather "tax on income - tax on excluded income." To put it another way, you are excluding the first $X rather than the last $X. Check out the Foreign Earned Income Tax Worksheet for 1040 line 44 in the form 1040 instructions.

Of course, if your overseas income is less than deduction+exemptions, you should generally be able to convert the difference US tax free (I have no familiarity with the US-UK tax treaty or UK tax).

I am not a tax expert, but you may want to prepare a sample return using your projected numbers to see how it works. Remember you can take the foreign earned income deduction instead of the exclusion if that is better for you (see pub 54).

You will probably find Jeremy's post on his situation helpful, you're basically in the same situation as him. http://www.gocurrycracker.com/go-curry-cracker-2014-taxes/

The difference is that Jeremy has almost no regular earned income, which leaves him plenty of deduction+exemptions room to convert IRAs. In that situation, it's a very effective strategy!

[KCM5]

Thanks SunnySaver - so basically to me this indicates that we wouldn't benefit from converting as we'll just access our 457 as normal. That makes sense- it did seem like the plan was too good to be true! I'll also pay attention to the foreign tax credit as we get closer to executing our plan to see of that would make it worth it.