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401k/IRA/Roth - a sensible strategy for our circumstances?

401k/IRA/Roth - a sensible strategy for our circumstances?

Old Jan 10th 2016, 6:41 pm
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Default 401k/IRA/Roth - a sensible strategy for our circumstances?

Hi all,
Can anyone throw opinion at potential best retirement investment strategy in our circumstances plse...

We are in mid-forties married couple 2 kids living in CA, permanent residents (EB1 since 2014), pay highest tax rate. One works, one doesnt (no USA earned income for non-working party). Working party has matched 401k and contribs to the matched limit with Schwab. No other US tax advantaged accounts. What else should we be doing / looking at in terms of 401k/IRA/Roth allocations? Any tips on execution also good to hear.

The complication is we do not know when or if we are returning to UK. Could be 5 years, might be never. This has created quite a lot of inertia in our US financial planning, given the multitude of associated rules and regs in this area.

Have always done UK SIPPs and ISAs in UK, but not got into any other products in USA. Am looking at low cost index options like Vanguard and/or Betterment for non-tax advantaged account. But have no real strategy in place and cannot find advice for our particular scenario with least exposure / risk if we return to UK in future.

Any thoughts appreciated!!!...
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Old Jan 11th 2016, 3:19 am
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

You can take this with a pinch of salt, but.... Tax rates are quite low, so it is best to pay into the 401k up to the match, then the Roth IRA max, then any pre tax IRA.

That's what I heard anyway. Best consult a qualified advisor.
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Old Jan 11th 2016, 3:35 am
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Savings plans for future college fees?
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Old Jan 11th 2016, 3:42 am
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

A ROTH is a good choice if you qualify and have a low current tax rate, but if you expect to have a lower tax rate in retirement a regular IRA might be better.
The ROTH has the advantage that it's gains and withdrawals are tax free in the US and the UK.

If you want to invest in taxable accounts I'd recommend Vanguard as they have low fees and offer some good tools for deciding on an appropriate asset allocation. If you set up a Vanguard account as a US resident they will allow you to use the account if you return to the UK and Vanguard ETFs have the added advantage of being HMRC reporting. They are also a good place to roll a 401k into an IRA if you leabve you current job.

Of course if you do not become a US citizen and return to the UK you might want to move your taxable money back to the UK. If you have questions about how to invest go here.

https://www.bogleheads.org/wiki/Main_Page

Finally you mentioned SIPPs and ISAs. If you currently own these be aware of the US reporting requirements on foreign accounts. The SIPPs probably have no negative issues for US taxation, but the ISA could if it is a stocks and shares ISA invested in UK based collective investment funds.
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Old Jan 11th 2016, 3:51 am
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Originally Posted by Pulaski View Post
Savings plans for future college fees?
Great if the OP intends to stay in the US, but if the OP returns to the UK a 529 plan would not get any special tax treatment from HMRC and would probably be taxed as a foreign trust and then you'd have to deal with all the offshore funds and reporting issues too.
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Old Jan 11th 2016, 4:38 pm
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Thanks. I did some follow up research on your comments. So first step is to max the 401k allowance of $18k, then a Roth or traditional IRA with a limit of $5.5k for my age group in either one of these.

The Roth seems more popular, but has income limits (MAGI). I did see someone suggesting you could do a traditional IRA (taxed on withdrawal) then roll that into a Roth (no tax on withdrawal) at a later point in time. Is that possible to have cake and eat it?? seems unlikely based on experience of tax here to date.

I think Vanguard is a good choice - seems there is evidence/reports they allow accounts to remain open if you leave USA. Betterment / Wealthfront insist on account closure but did respond that they would facilitate a DTC transfer on everything except fractional shares to minimize any tax impact of a move to another provider. I like the look of the tlh (tax loss harvesting) claims made by these companies and the rebalancing but there are the extra fees. Still compared to the historic UK rates on ISA funds I paid and even the current rates on UK index products these 'robo-advisors' look quite interesting. Betterment is 0.15% over 100k invested plus the Vanguard ETF fees (say 0.05-0.2). Not bad.
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Old Jan 11th 2016, 4:40 pm
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Originally Posted by nun View Post
Great if the OP intends to stay in the US, but if the OP returns to the UK a 529 plan would not get any special tax treatment from HMRC and would probably be taxed as a foreign trust and then you'd have to deal with all the offshore funds and reporting issues too.
Sounds painful, will look at these. Are there any onerous tax or reporting issues with the basic US retirement products (401k / IRA's) if you return to UK??
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Old Jan 11th 2016, 5:11 pm
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Originally Posted by Mcodox View Post
I did see someone suggesting you could do a traditional IRA (taxed on withdrawal) then roll that into a Roth (no tax on withdrawal) at a later point in time. Is that possible to have cake and eat it?? seems unlikely based on experience of tax here to date.
If you roll an IRAS into a ROTH you must pay tax on the rollover.

Still compared to the historic UK rates on ISA funds I paid and even the current rates on UK index products these 'robo-advisors' look quite interesting. Betterment is 0.15% over 100k invested plus the Vanguard ETF fees (say 0.05-0.2). Not bad.
The robo-advisors don't get you much value over a regular Vanguard account. Just read a bit about asset allocation and rebalancing and you can do everything the robo-advisors charge for, for free yourself.
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Old Jan 11th 2016, 5:14 pm
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Originally Posted by Mcodox View Post
Sounds painful, will look at these. Are there any onerous tax or reporting issues with the basic US retirement products (401k / IRA's) if you return to UK??
No, there are no US or UK tax implications until you make withdrawals. If you are NOT a US citizen and live in the UK you would file a W-8BEN with the 401k/IRA administrators so that they know you are a Non-Resident Alien and you would claim tax treaty exemption form US tax. Your income would be paid US tax free and you'd get taxed on 90% of it in the UK. You would have to file a UK self assessment to declare the foreign pension payments.
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Old Jan 11th 2016, 5:34 pm
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Originally Posted by nun View Post
If you roll an IRAS into a ROTH you must pay tax on the rollover.
So what would the benefit of doing this rollover? Surely better to optimise income withdrawals over time to minimize tax...?
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Old Jan 11th 2016, 5:53 pm
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Originally Posted by Mcodox View Post
So what would the benefit of doing this rollover? Surely better to optimise income withdrawals over time to minimize tax...?
It works as a strategy to take advantage of any years where you have very little taxable income, such as if you lose your job, or retire early and live off savings prior to claiming and pension or 401k income. It is also considered to be a hedge against future tax rises, for those who fear draconian income tax rates, or who anticipate substantially greater income, and therefore tax rates, in their own personal future.
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Old Jan 11th 2016, 6:06 pm
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Originally Posted by nun View Post
If you roll an IRAS into a ROTH you must pay tax on the rollover.
Since the OP says he's in the highest tax bracket, I'm assuming he'd be well above the income limits for a deductible IRA. He's talking about a Backdoor Roth, where you pay into a Traditional IRA, then immediately roll it over into a Roth so it can continue to grow tax-free indefinitely and be left to future generations. It's a good trick. As the income is already taxed - no deduction having been taken - then no tax is due on the rollover.

mcodox - if you can get your income down to $194k or below, your wife can put $5.5 into a Traditional IRA, and depending on your income, deduct all or part of it. It's called a Spousal IRA; I do one each year.
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Old Jan 11th 2016, 6:12 pm
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Originally Posted by Pulaski View Post
It works as a strategy to take advantage of any years where you have very little taxable income, such as if you lose your job, or retire early and live off savings prior to claiming and pension or 401k income.
We're planning to do this for early retirement. Hubby is currently a high earner, so we max out everything we can to reduce our taxes now. When he retires in his mid-50s, we'll have some years during which we can roll chunks of money from his IRA to a Roth, so it shows up on the tax return as income but we never go above a 15% marginal rate. This will not only mean we pay less taxes than we would've now, but also help with having enough income to be able to buy Obamacare insurance on the exchange.
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Old Jan 11th 2016, 6:17 pm
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Originally Posted by kodokan View Post
Since the OP says he's in the highest tax bracket, I'm assuming he'd be well above the income limits for a deductible IRA. He's talking about a Backdoor Roth, where you pay into a Traditional IRA, then immediately roll it over into a Roth so it can continue to grow tax-free indefinitely and be left to future generations. It's a good trick. As the income is already taxed - no deduction having been taken - then no tax is due on the rollover.
I was hoping we would get the benefit of the deductions. If not, then is what your saying we don't take (can't take) deductions but do immediate rollover 'Backdoor Roth'? (We are well above the AGI for normal Roth IRA)


Originally Posted by kodokan View Post
mcodox - if you can get your income down to $194k or below, your wife can put $5.5 into a Traditional IRA, and depending on your income, deduct all or part of it. It's called a Spousal IRA; I do one each year.
I thought I read there were no income limits for Spousal IRA, just a requirement to be married filing jointly?
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Old Jan 11th 2016, 6:21 pm
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Default Re: 401k/IRA/Roth - a sensible strategy for our circumstances?

Originally Posted by kodokan View Post
We're planning to do this for early retirement. Hubby is currently a high earner, so we max out everything we can to reduce our taxes now. When he retires in his mid-50s, we'll have some years during which we can roll chunks of money from his IRA to a Roth, so it shows up on the tax return as income but we never go above a 15% marginal rate. This will not only mean we pay less taxes than we would've now, but also help with having enough income to be able to buy Obamacare insurance on the exchange.
This makes sense and was broadly what I was hoping was possible. In the same way create a taxable investment account where the withdrawals are managed to keep the marginal rate to a minimum.

Of course the difficulty is planning for a possible exit back to UK whilst trying to plan the best USA based retirement future....
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