How Expats Can Use Roth Conversions to Save on Taxes

Living overseas can create tax-planning opportunities that simply aren't available while you're living in the United States, especially when it comes to Roth conversions.

In Episode 34 of the Divorce the IRS Podcast, we continue our conversation about living, working, and retiring abroad by exploring Roth conversion strategies Americans overseas may be able to use to reduce their future tax burden.

One potential advantage is simple: while Americans abroad generally remain subject to U.S. federal income taxes, they may no longer owe state income taxes.

For someone who previously lived in a high-tax state such as California or New York, that can create an attractive window for moving money from tax-deferred retirement accounts into Roth accounts.

But the opportunities don't stop there.

Americans who qualify for the Foreign Earned Income Exclusion (FEIE) may also have situations where their standard deduction can offset income created by Roth conversions. With the right circumstances and careful planning, this could allow someone to move money from a tax-deferred account into a Roth while paying little or potentially no U.S. federal income tax on the conversion.

In this episode, you'll learn:

• Why living abroad can create unique Roth conversion opportunities
• How eliminating state income taxes can make conversions more attractive
• Why properly ending residency in a high-tax state matters
• How the Foreign Earned Income Exclusion can affect your Roth strategy
• How your standard deduction may create room for Roth conversions
• Why your income level determines which strategies are available
• How a move from a high-tax state could potentially produce significant tax savings
• Why the country you're living in matters before completing a conversion
• How foreign countries may treat Roth IRAs differently than the United States
• Why FATCA and FBAR reporting requirements shouldn't be ignored
• Why expat-specific financial and tax planning becomes increasingly important as your strategy gets more complex

We'll also walk through the example of the Smith family, who moved from California to Dubai for a five-year work assignment.

Because the Smiths properly broke their California residency before leaving and the UAE doesn't impose an income tax, they have an opportunity to execute Roth conversions without paying the 9.3% California marginal state income tax they would have faced back home.

But there's an important warning: just because a Roth conversion makes sense from a U.S. tax perspective doesn't mean it will make sense in the country where you're currently living.

Some countries may treat Roth conversions, Roth IRA growth, or distributions as taxable income. That's why understanding both sides of the equation is essential before making a move.

Living abroad can create powerful opportunities to divorce the IRS, but international tax planning can become complicated quickly.

FREE EXPAT GUIDE

Thinking about living, working, or retiring overseas? Download the free U.S. Expat Guide for a deeper look at the financial and tax considerations Americans should understand before making the move.

Download the Expat Guide:
https://baobabwealth.com/financial-planning-for-americans-overseas/?guide=expat-guide-download

And stay tuned for the next episode, where we'll look at investing overseas and whether moving your investments outside the United States can actually help you avoid U.S. taxes.

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