Taxes for conversion from Reg IRA to Roth Ira
Since I’m a non resident US citizen and I get a $58,000.00 tax deduction, would that cover all taxes up to that amount if I converted from a reg. IRA to a Roth IRA?
And is it true that after making the converion that I would not be able to touch the money in that account for five years?
Permalink Submitted by Alan Spross on Thu, 2008-07-17 22:42
Due to a recent change, the tax on the remaining amount of income including any Roth conversion is based on the amount you would have paid on the non excluded income if you did not elect the exclusion. Basically, that means that higher rates would apply on the non excluded income including the conversion. Therefore, whatever your exclusion is would not fully offset the taxes due for a conversion of the same amount. But it would still help quite a bit and make a conversion more attractive. You would really have to crunch the actual numbers to determine the actual difference in tax with and without the conversion. You also must add the excluded foreign income and housing amounts to your AGI to determine if you qualify for the conversion in the first place. That income limit is 100,000 until 2010 when it goes away.
If you convert and withdraw the funds before you are 59.5 AND have completed 5 years since the year of conversion, you would pay a 10% early withdrawal penalty on the distributed amount. You have full access to the funds, but you would owe the penalty. If you have ever made regular Roth contributions or previous conversions, those amounts come out prior to the converted amounts and could help you avoid the penalty.