USA IRA rollover to Roth IRA question

[PapaAzucar]

Someone mentioned before that since the USA does not tax on the first 80K of overseas employment, you can essentially rollover under the 1040 standard deduction amount from your IRA to Roth IRA each year tax free if you make less than 80K (US equivalent overseas).

Sorry I can't find the original post on this.

But has anyone tried this or have more details about this?

Thanks.

[tommy525]

hang on. IRA just means that the tax is deferred until you withdraw. Why would you want to put tax free income into an IRA and have taxes paid when you withdraw the funds later?

The 80k is tax free already. Dont roll that into an IRA , I would think?

[fh2000]

The current (2012) foreign earned income exclusion amount is now: $95,100.

http://www.irs.gov/businesses/small/int ... 30,00.html

Converting IRA to Roth IRA is not qualified for this, I don't think, since the money is not earned income during the year of your conversion. Normally, you will only want to convert if you expect your future tax rate is higher than your current one.

I plan to convert after I retire and before I reach 65 when I begin receiving social security. I think those will be my low tax rate years since I will not have any income hence my tax rate will be low.

[PapaAzucar]

Here is the original post that I was referring to
http://www.forumosa.com/taiwan/viewtopic.php?f=69&t=106903&start=10#p1403353

And sorry if this is obvious, but if you have a traditional IRA, it might be worth looking into converting it to a Roth IRA. Conversions are taxable events, but if you keep the combined amount of the conversion and any US income (interest or investment income) under the personal exemption and deduction, then it's all tax-free.

I think the theory is this.

Since most of us will be making less than 95,100US in Taiwan, what you make in Taiwan is US "foreign earned income exclusion", but we still need to file it on the 1040 each year.

On the 1040 tax form, you are still allowed the standard deduction (like 4500 for single, etc), of which your Taiwan income of less than 95,100US is still exempt, therefore, does not show up for the need of standard deduction.

A traditional IRA rollover to Roth IRA does count as a taxable event, of which can qualify for standard deduction.
So if you rollover 4500 from your traditional IRA to your Roth IRA during that tax year, and your standard deduction is 4500, then you essentially pay no taxes on the 4500 rollover for that year.

And when you retire, your Roth IRA is distributed to you as tax exempt, whereas, your traditional IRA is distributed as taxable income.

So if you have 45,000 tied up in traditional IRA, you can rollover 4500 each tax year to a Roth IRA over a 10-year span and essentially not paying any taxes--at least that is the theory.

Has anyone tried this or can correct my faulty analysis, or maybe I misunderstood the OP?
Thanks.

[PigBloodCake]

Someone mentioned before that since the USA does not tax on the first 80K of overseas employment, you can essentially rollover under the 1040 standard deduction amount from your IRA to Roth IRA each year tax free if you make less than 80K (US equivalent overseas).

Only if you roll less than or equal to your standard deduction plus whatever Fed deductions (i.e. exemptions) you may have on your 1040.

Go over that and you need to pay regular income tax on the amount over the deduction/exemptions.

[PigBloodCake]

Here is the original post that I was referring to
http://www.forumosa.com/taiwan/viewtopic.php?f=69&t=106903&start=10#p1403353

And sorry if this is obvious, but if you have a traditional IRA, it might be worth looking into converting it to a Roth IRA. Conversions are taxable events, but if you keep the combined amount of the conversion and any US income (interest or investment income) under the personal exemption and deduction, then it's all tax-free.

I think the theory is this.

Since most of us will be making less than 95,100US in Taiwan, what you make in Taiwan is US "foreign earned income exclusion", but we still need to file it on the 1040 each year.

On the 1040 tax form, you are still allowed the standard deduction (like 4500 for single, etc), of which your Taiwan income of less than 95,100US is still exempt, therefore, does not show up for the need of standard deduction.

A traditional IRA rollover to Roth IRA does count as a taxable event, of which can qualify for standard deduction.
So if you rollover 4500 from your traditional IRA to your Roth IRA during that tax year, and your standard deduction is 4500, then you essentially pay no taxes on the 4500 rollover for that year.

And when you retire, your Roth IRA is distributed to you as tax exempt, whereas, your traditional IRA is distributed as taxable income.

So if you have 45,000 tied up in traditional IRA, you can rollover 4500 each tax year to a Roth IRA over a 10-year span and essentially not paying any taxes--at least that is the theory.

Has anyone tried this or can correct my faulty analysis, or maybe I misunderstood the OP?
Thanks.

Moi...every single year since 2009 ....but then I have more than your $45k example above

I had to pay $3k in Fed income tax every year since I convert way, way more than whatever deductions I can get my hands on (i.e. standard+exemptions+child tax credit....and, oh, BTW....avoided CA like a plague cuz my last employment was there by opening up a mailbox address in Sin City ) and will continue to do so until the day that I move my a$$ back there along with my family...in which all my Rollover IRA will become Roth (and froth...and smoooooooooooth........and ripe for taking after 5 years ).

[CraigTPE]

I have done this each of the last 3 years. Keep the rollover amount (plus any interest income you may already have in the US) under the standard deduction and personal exemption amount, then your Roth (principle plus earnings) will be tax-free for life. Wish I had started earlier.

[tommy525]

I have done this each of the last 3 years. Keep the rollover amount (plus any interest income you may already have in the US) under the standard deduction and personal exemption amount, then your Roth (principle plus earnings) will be tax-free for life. Wish I had started earlier.

details pls , the curious may want to follow

[CraigTPE]

I have done this each of the last 3 years. Keep the rollover amount (plus any interest income you may already have in the US) under the standard deduction and personal exemption amount, then your Roth (principle plus earnings) will be tax-free for life. Wish I had started earlier.

details pls , the curious may want to follow

What details? I thought I wrote them....

Rollover from IRA to Roth IRA. Make sure the amount you rollover each year (plus any other income in the US) is less than the combined total of the standard deduction and personal exemption. This way your net taxable income is zero. Future Withdrawals from Roth IRA's are tax free, assuming you've met the age and/or wlength of account requirements.

[PigBloodCake]

I have done this each of the last 3 years. Keep the rollover amount (plus any interest income you may already have in the US) under the standard deduction and personal exemption amount, then your Roth (principle plus earnings) will be tax-free for life. Wish I had started earlier.

You should have. I already figured this out before I moved back to the 'wan since I know the taxman will be after my pre-tax retirement account when I hit the golden age. I expect to have $0 in my pre-tax retirement account when I move back to US (and then replenishing it with 401ks from my future employers).

However, don't bet on Congress to be passive about NOT help 'emselves to your Roth stash.