# renunciation - roth ira conversion ?



## cuerna1 (Mar 7, 2015)

I would never renounce my US citizenship without another - and my wife will never renounce (mid west girl) - but does it make sense to convert all sep/ira holdings into roth ira holdings beforehand ?


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## BBCWatcher (Dec 28, 2012)

cuerna1 said:


> I would never renounce my US citizenship without another


I don't think the U.S. lets you renounce U.S. citizenship without possession of another citizenship. Or, at least, the consular officer makes a reasonable attempt to verify that you possess another citizenship. If you screw up or misrepresent facts, that's then your problem of statelessness.



> - and my wife will never renounce (mid west girl) - but does it make sense to convert all sep/ira holdings into roth ira holdings beforehand ?


I'm not quite sure what you're driving at. All U.S. IRAs are U.S. source income, so they're going to be U.S. taxable (or not) either way. Post-renunciation they generally become subject to 30% withholding, which isn't _too_ bad for Traditional IRAs (some tax owed anyway, at ordinary earned income rates) but is kind of ugly for Roth IRAs. Presumably you'd get the money back when you file a 1040NR, but the IRS doesn't pay interest on that withheld money.

The tax calculation ends up being different (read: generally less favorable) on a 1040NR versus a 1040, particularly on a Married Filing Jointly 1040, as I understand it. In other words, that U.S. source income can be taxed at a higher effective rate on a 1040NR than the rate it would get on a 1040. (Citizens enjoy certain tax privileges, notably access to certain refundable tax credits.) But of course on a 1040NR non-U.S. source income isn't taxed.

The U.S. tax advantages of Roth IRAs do not always (or even frequently) extend to other countries with income taxes. If you live in Australia, for example, Australia might want to tax the capital gains and dividends on that Roth IRA account even if the United States doesn't. And if you've renounced you no longer have the option to live in the United States and enjoy the Roth IRA's tax advantages on home turf. So you might be better off with a Traditional IRA in that sense, because then the U.S. would tax first and presumably you'd get a foreign tax credit on that income in your country of residence.

Similarly, a renunciant might effectively lose the U.S. estate tax advantages of a Roth IRA, though I'd have to think that one through a bit more.

A conversion might mean a U.S. citizen could spend down accumulated excess Foreign Tax Credits in the same category of income, thus reducing or eliminating the U.S. income tax on the conversion. I don't know what happens to excess U.S. Foreign Tax Credits with renunciation, but it might not be good.

"It's complicated," but no, I don't think it's at all obvious whether one should convert a Traditional IRA to a Roth just prior to renunciation. I could see where it might make sense, and I could see where it wouldn't make sense at all. It depends.


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## Bevdeforges (Nov 16, 2007)

Only if you want to pay the income taxes on all that stuff up front! To convert to Roth plans, you basically take all your funds out of the respective funds and pay the income tax on the money (plus penalty if you haven't hit the magic age yet). Just to pull figures out of the air, it's going to cost you a LOT to withdraw $200,000 or $500,000 in one big whack from an IRA than to take it a few thousand at a time when you actually need it.

And if you withdraw money from a Roth IRA as a "foreigner" they'll still withhold 30% - which you may or may not be able to get back by filing a NR return. 

This, I might add, is one of the "negative" aspects to renouncing. Up to you to decide if the advantages outweigh this sort of thing.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Bevdeforges said:


> Only if you want to pay the income taxes on all that stuff up front! To convert to Roth plans, you basically take all your funds out of the respective funds and pay the income tax on the money (plus penalty if you haven't hit the magic age yet).


There's no penalty on a qualified conversion, at any age. Non-qualified withdrawals trigger the 10% penalty.

Another thing I thought of is that, if you had 4 years with U.S. tax liabilities of about $150K or more, and an IRA conversion would push you into $150K territory (or beyond) in that 5th year, but your net worth is under $2 million, then the conversion could end up qualifying you for "covered expatriate" status. But the conversion itself resets your cost basis on those IRA assets, so there's probably not going to be an Expatriation Tax owed (though there are other disadvantages to being a "covered expatriate").


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