Giantaxe

So I guess another key thing is to move retirement money into a Roth IRA as well? Assuming that such a move can be done without too big a tax hit doing the conversion.

nun

Yes that would be a good thing if expatriation would force you to do the virtual IRA distribution and pay tax on it. Rather than paying income tax on a virtual IRA distribution and then presumably having a large tax free basis in it, but still having to pay income tax on any gains, just rollover the IRA to a ROTH. You'd pay the same amount of income tax, but the roll over amount AND all gains would be US tax free.....and, by the way, also UK tax free.

The ideal way to do IRA to ROTH roll overs is in years when you have low income. If you are living off savings you could well have very little taxable income and you could use tax deductions to rollover without paying any tax at all.

dunroving

Do you have to rollover in one go, or can you phase it (to spread the tax-free deductions over more than one tax year)?

nun

Usually it's best to do a number of small rollovers rather than a single big one so that you don't declare a lot of income in a single year that would take you into a higher tax bracket. If you are expatriating you don't get that option.

Here's a simple example:

Consider a single person taking a single deduction ($5950) and the personal exemption ($3800). This means their first $9750 of income is tax free.

Now suppose the person is living off savings and has no other income, so no tax liability, and has $50k in an IRA that they want to rollover into a ROTH.

Option 1) Rollover $9750 each year until every thing is in the ROTH. This will result in zero tax paid.

Option 2) Rollover $50k all in one year. Taxable amount will be $50k - $9750 = $40.25k. The tax on that is $5991

So Option 1 is obviously better.