Roth Conversion Questions
I have a few questions regarding Roth IRA conversion:
1) Is there a limit to how much I can convert from my traditional IRA to Roth IRA? (Knowing that I will be paying the appropriate taxes on all pre-tax contribution and earnings.)
2) I am seriously looking at accepting an overseas position from my company. I was told that I can NOT contribute to a Traitional or Roth IRA with foreign earned income nor will I be able to participate in the 401k and Roth 401k programs (since they are us only programs). Is that true? If not, please let me know if there is any special procedure I need to follow.
3) Can I take advantage of my overseas position to lower my Roth IRA conversion tax responsbility? Here is what I have in mind. Please tell me if I am off. When converting from traditional IRA to Roth IRA, all pre-tax contribution and earning will be taxed as ordinary income (on top what I earn that calendar year). But that ordinary income is ordinary domestic income. If I accepted the overseas position, my annual salary will be ~100K USD. All of that will be foreign earned income (now I will be pay the local tax on the first 91K or so and the remaining 9K will be paid at US federal rates). Does that mean (leverging the 2010 federal tax brackets here) for the first $8500 taxable portion of traditional to Roth conversion, I will be paying 10% federal tax. Then the next $26,000, I will be paying 15% federal tax (ie. 15% bracket from $8501 to $34,500). Naturally, I will not have to pay any state income tax on the conversion since I will not be a resident of any state. If that is the case, it is a big advantage for me to take the positon for a few years to convert all my retirement to Roth.
I look forward to all your input. Thanks in advance.
Greg
Permalink Submitted by Peter Lingane on Sun, 2011-09-04 22:57
1. I am not aware of any limit on converting traditional IRAs or employer plans to Roth IRAs.
2. The IRS view is that compensation for purposes of contributing to traditional and Roth IRAs does not include include compensation which you exclude from income because of the foreign income exclusion. See Pub. 590, p. 8. I am not aware of any court case or regulation which supports this view but you probably don’t want to be the test case. If your salary is $100K and you get to exclude $91K, there should be $9K that you could use for IRA purposes.
I’m surprised that your company excludes you from the US pension programs but if that is what they do that is what they do. Many US firms keep their expats on the US payroll but apparently your firm treats you as if you quit your US job and were rehired by the foreign subsidiary.
3. Your US taxable income MIGHT be lower if you are working overseas but it might be considerably higher if you receive a housing allowance, cost of living differential, annual trips home, payment of foreign taxes, et cetera. The only way to know for sure is to pay someone to mock up your US tax returns for the next several years taking all of these things into account.
You say that you will not owe state tax. Maybe. I’m guessing from your screen name that you are a California resident. California takes a dim view of residents who leave temporarily and the FTB will assess tax if they find them. So, you should also talk to a tax professional about what you need to do and what you must not do so that there will be no doubt that you have left California “permanently.”
You should also think about what your professional opportunities will be when you eventually return. A foreign assignment can be a boon but it can also lead to your being forgotten about or passed over for stateside opportunities.
Good luck!
Permalink Submitted by Gregory Soloman on Mon, 2011-09-05 00:34
Thanks Peter. I will definitely have a professional evaluate my situation to ensure my plan and assumptions are correct.