Roth IRA's for taxpayers abroad

[Guest jmelamed]

US citizens abroad may be able to convert regular IRAs into ROTH's without paying any tax upon conversion, especially with the advent of the child tax credit !!!

Think of that, the benefits of a ROTH conversion without paying any tax up front !

[Guest jmelamed]

1. US taxpayers living abroad may elect to exclude their earned income from taxation by filing IRS Form 2555 (foreign earned income exclusion).

Thus, when converting the IRA to a ROTH, even though one would produce "taxable income", the taxable income could be offset by the standard deduction & exemptions

2. In certain instances, the child tax credit can help shelter even MORE taxable income (up to $1,000 per child in 2003)

[Appleby]

1. US taxpayers living abroad may elect to exclude their earned income from taxation by filing IRS Form 2555 (foreign earned income exclusion). 

Thus, when converting the IRA to a ROTH, even though one would produce "taxable income", the taxable income could be offset by the standard deduction & exemptions

2. In certain instances, the child tax credit can help shelter even MORE taxable income (up to $1,000 per child in 2003)

jmelamed

it appears that you misunderstand the rules. This relates to excluding qualified foreign income…not US income .

If you were right , then we should all accumulate our retirement funds until certain time and go live overseas when we are ready to distribute the assets ...but unfortunately, you are not

[WDIK]

DH: Obviously, you have strong political opinions. I have been sitting here trying to determine how I could respond and keep with the topic of this thread. I have decided that I can't.

I find this forum very useful as a means of interacting and getting input pertaining to employee benefit topics. I'm sure that there are other places where you can discuss political ideology.

[BPickerCPA]

I think I understand what jmelamed is trying to say.

IF one's ONLY income if foreign earned income, qualifying for the form 2555 exclusion, and not over $80,000, then one still has the standard deduction and exemption. IF one then converts IRA funds to a Roth IRA up to the amount of the standard deduction and exemption, one has successfully converted that amount to a Roth and avoided paying income tax on the conversion, due to the fact that taxable income is zero. If one has other deductions and/or credits available, a further amount can be converted and still have an income tax liability of zero.

This technique is not limited to foreign earned income. It also applies in any situation where taxable income is below zero (or there are unused tax credits), and a Roth conversion in an amount that will bring taxable income up to zero (or will utilize tax credits), will be income tax free.

No big mystery.

[John G]

As one of the moderators of this message board, I have decided again to delete some posts on this thread from DH003i. This is not the proper forum to express political views, give web references that are off topic or to act as an expert with no apparent experience in the issues being raised.

This is not the free wheeling Yahoo or MSN message boards... thankfully. Benefits Link is aimed at addressing problems and issues related to retirement accounts, tax planning, investment options, legal issues and accounting issues. All the accountants, lawyers and financial planners who post here do so as volunteers, they should not have to waste time correcting erroneous information from the same author. If this message board were to deteriorate in quality, we would lose both our experts and the general public.

DH003i - please look to other forums to express your opinions and political views.

[dh003i]

If you wish to take advantage of the mentioned strategy, you will have to meet IRS requirements for being eligible for Form 2555. If you don't meet these requirements, you shouldn't plan on obtaining the benefits of this strategy; alternatively, if you are disqualified because of a technicality, you may wish to modify your behaviour. To summarize relevant instructions for Form 2555 in a shorter and more easily readable format:

Overview of Form 2555

• Can exclude up to $80,000 of foreign income.
  
• Can't exclude or deduct more than your foreign income.
  
• Can claim a housing exclusion or deduction.
  
• Does not include income earned in US possessions or territories.
  

To qualify for Form 2555, all of the following conditions must be met...

• Your tax-home must be in a foreign country or countries* throughout your bonafide period of residence or physical presence, for 330 full days. Your tax-home is your regular place of business. If you have no regular place of business, your tax home is where you regularly live. (* All cases refer to country or countries, so I will just say "country").
  
• You must have either bonafide residency or physical presence in the foreign country:
  • Bonafide residence. You must either be:
    • A US citizen who is a bonafide resident of a foreign country from Jan 1 - Dec 31, uninterrupted...or...
      
    • A US resident alien who is a citizen or national of a country that has an income-tax treaty with the US and who was a bonafide resident of a foreign country from Jan 1 - Dec 31, uninterrupted.
      

    [*]Physical presence. A US citizen or resident alien physically present in a foreign country for 330 full days 12 months in a row. Periods in which you are are not in a foreign country do not count.

  [*]You must have earned income from sources other than the US government as it's employee.

  [*]Minimum time periods may be waived if you had to leave a foreign country due to severe adverse conditions, and can show you would have otherwise been there for the required time-period. The IRS lists the countries and time-frames during which it thinks citizens had to leave due to adverse conditions.

Some other notes

• Foreign earned income -- compensation received for work in a foreign country. Does not include:
  
  • Amounts that are a distribution of corporate earnings or profits.
    
  • Pernsion and annuity income.
    
  • Interest, ordinary dividents, capital gains, alimony, etc.
    
  • Portion of previous year's moving expense deduction allocable to this year that is included in this year's gross income.
    
  • Amounts paid to you by the US government or its agencies, if you were its employee.
    
  • Amounts received after the end of the tax-year.
    
  • Amounts that must be included in gross income because of employer contributions to a nonexempt employees' trust or a nonqualified annuity contract.
    

  [*]Income is earned in the tax-year you performed the services you were paid for.