backdoor roth IRA for US and non-US expatriate (non-resident

For residents of Spain.
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schlum
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Joined: Mon Jun 02, 2014 7:46 am

backdoor roth IRA for US and non-US expatriate (non-resident

Post by schlum » Mon Jun 02, 2014 7:51 am

Hello there,
I am looking for using the backdoor roth IRA conversion for my wife and for myself, and have several questions. We both leave in Madrid (Spain) and have only Spanish originated income.

Background /situation:
1. My Wife: US citizen, living abroad in Madrid (Spain). Has $15,000 in a 401(k) from our former company. Declares her taxes in the US, but has an income ($55,000) far below Foreign Earned Income Exemption of $90,000 or so, so end up paying nothing additional to her Spanish taxes.
2. Myself: French citizen, living in Madrid. Have $ 64,000 in a 401(k) from our former employee. Income around $ 170,000 (including variable salary and favourable EUR/USD exchange rate).
Do not have to declare anything to IRS as being non resident alien.

Strategy:
1. for my wife: rollover her 401(k) to a traditional IRA, and convert it to Roth IRA. This would add up to $ 70,000 as income for the year ($ 55,000+$ 15,000) which is below the FEIE. Question: Can she make the $15,000 conversion even though I understand that she has a MAGI of $ 0? If not, how can she make conversion to Roth IRA ? if she does not take the FEIE, she will likely have to pay taxes both in Spain and in the US, right ? or am I missing something ?
2. for myself: rollover partially ($ 3,900 the first year) my 401(k) money to a traditional IRA, then convert to roth IRA declaring this as my only source of US income, which will be 100% covered by the $3,900 personal tax exemption. Repeat each year with the updated amount of the personal exemption, or even potentially a higher amount, but paying taxes with the tax rate on my bracket. For single and MFS, the next $8925 of income is taxed at 10%, then next $27325 of income is taxed at 15%, and so on. Is that legal ? do I have to have other sort of US generated income in order to make the conversion to Roth IRA ?

many thanks in advance for your help and comment. I have been researching this for quite a long time but am not able to find a definitive answer.

long live the Bogleheads forum !!!
Marc.

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Epsilon Delta
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Re: backdoor roth IRA for US and non-US expatriate (non-resi

Post by Epsilon Delta » Mon Jun 02, 2014 10:10 am

My recollection of the rules for a US person is hazy and somewhat dated, my knowledge of the rules for a non-resident alien are even worse. That said:

A Roth conversion is not Foreign earned income and you can't apply the FEIE against it, so it will be taxable income on your wife's US return. IIRC the "stacking rules" mean that the Roth conversion will be taxed at about 25%. This conversion may or may not make sense, but you should research the rules before proceeding. I believe "FEIE stacking rules" would be a useful Google search.

Topic Author
schlum
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Joined: Mon Jun 02, 2014 7:46 am

Re: backdoor roth IRA for US and non-US expatriate (non-resi

Post by schlum » Thu Jun 05, 2014 9:24 am

many thanks Espilon Delta for your leads.

if using the FEIE, indeed, the stacking rules applies, and you have to earn more than the FEIE to have income going against the Roth contribution.

It looks like I had it wrong in my past strategy. Living in a country with higher income tax than the US, I should not have advised my wife to take the FEIE, but rather make a standard declaration with the Spanish Income tax paid computed as a tax credit. With the past years, she would have had accumulated a substantial tax credit which could be used apparently for the next 10 years, in the event we go back to the US...

Well, good to know... I believe she will now declare her income as such in a regular form 1040, revoking the FEIE. There, if i understood correctly, she will have an income to go against the Roth Contribution. I will try preparing her tax now and see whether this works as I am saying here. Does any of you guys know whether she can revoke "retroactively" the FEIE and file modified income tax forms for past years to recollect the lost tax credit ? Probably not but, who knows...

If anybody has hints on the second part, the strategy I would like to conduct for myself, thanks for sharing.
"rollover partially ($ 3,900 the first year) my 401(k) money to a traditional IRA, then convert to roth IRA declaring this as my only source of US income, which will be 100% covered by the $3,900 personal tax exemption. Repeat each year with the updated amount of the personal exemption, or even potentially a higher amount, but paying taxes with the tax rate on my bracket."

FoolishJumper
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Re: backdoor roth IRA for US and non-US expatriate (non-resi

Post by FoolishJumper » Thu Jun 05, 2014 10:00 am

http://www.irs.gov/Individuals/Internat ... -Exclusion

Hope that helps. Foreign tax credit carry-over can be extremely useful, but she can't use it for income she earns in the future in the US. That said, there are scenarios she could use it for foreign income which may be untaxable outside the US, but taxable on her US return.

Topic Author
schlum
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Joined: Mon Jun 02, 2014 7:46 am

Re: backdoor roth IRA for US and non-US expatriate (non-resi

Post by schlum » Sat Jun 07, 2014 5:06 am

understood, I thought that she could use it against income she earns in the future, but it looks like you are right, and they can be used only on another form 1116 against future foreign taxed income.

Still, I believe the strategy is useful if she wants to transfer part of her 401 (k) into Roth IRA since the taxes paid here in Spain are (much) higher than in the US, she can probably use that to gradually convert traditional IRA to Roth IRA, tax and penalties-free like suggested in another scenario by the Mad Fientist in this article:

http://www.madfientist.com/traditional-ira-vs-roth-ira/

I still need to figure out if I can do something similar myself, being a non resident alien. If someone sees something forbiden by the US Tax laws, about my idea to declare as my only source of US income my conversion from traditional to Roth IRA of $3900, and have it fully covered by my personal tax exemption, or any limitation that I do not foresee, thanks for sharing !!!

Cheers.

TedSwippet
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Location: UK

Re: backdoor roth IRA for US and non-US expatriate (non-resi

Post by TedSwippet » Sat Jun 07, 2014 6:10 am

schlum wrote:I still need to figure out if I can do something similar myself, being a non resident alien. If someone sees something forbiden by the US Tax laws, about my idea to declare as my only source of US income my conversion from traditional to Roth IRA of $3900, and have it fully covered by my personal tax exemption, or any limitation that I do not foresee, thanks for sharing !!!
AFAIK you have it right on the US side. The part you might have missed is how Spain will view your IRA rollover, and for this I think you'll need to spend quality time with the US/Spain tax treaty.

A lengthy discussion last year suggested that UK residents might be able to (gradually!) rollover to Roths free of taxes on both sides. It relies on specifics of both the US/UK treaty and general UK taxation rules though, so you would need to check these same things from the Spanish perspective.

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