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Tax Form confusion
Old 12-12-2017, 06:54 AM   #1
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Tax Form confusion

Hello

I'm hoping someone with a similar situation can help.

I'm 52, my wife is 46. We retired overseas in 2015 and currently live on savings from the sale of our house. Most of it is invested in CD's in US banks and some is in local currency. We have always filed joint but didn't earn enough worldwide income to make the threshold for filing a return in 2016 and we won't again for 2017.

As we plan on not passing the filing threshold until I'm past age 59 1/2 when we begin small pensions, I want to use the strategy of converting about 10K a year from my Traditional IRA to my ROTH IRA for the next few years to decrease taxes later. I'd keep it small enough so that when the "conversion contribution" is added to our taxable income we'd still be too low to file a return. This would allow a rare exception to having to pay tax on the entire converted amount and the small amounts add up to a lot over 8 or 10 years.

My question is about the Form 5329. (additional taxes on qualified plans). The instructions state that the early distribution tax of 10% does not apply to a rollover (or conversion) from a qualified plan to a ROTH IRA but also states under "who must file" that if you aren't filing a tax return, you need to file the form 5329 and physically mail it to the IRS along with any tax due. If I don't need to file a 1040 due to not having enough taxable income, there's no tax due on the conversion.

While I wouldn't mind filing that form (we file a FBAR with all our foreign assets every year), I'm confused as follows: The custodian should report the distribution code 2 on the 1099-R (under 59 1/2 with an exception). And the form is simple enough; simply report the conversion distribution amount on line one and how much can be excluded along with an "exemption code" from 1 to 12. Here's my issue: I don't see ANY code with an explanation that covers "conversion (or distribution) from a traditional IRA or other qualified plan to a ROTH IRA".

Do I need to file this form at all and if so, what is my exemption code? I'm concerned that filing it incorrectly might open a can of worms since we have and report assets in four countries but don't earn enough income in retirement to file a tax return due to having zero liability.

I only have until year end to decide if I want to do this so if anyone has any experience or input, it would be greatly appreciated. Thanks
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Old 12-12-2017, 07:04 AM   #2
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Why not just file a full tax return. Then you are covered.

I am sure the IRA custodian will fill out the 1099 correctly. A conversion is pretty straight forward.
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Old 12-12-2017, 07:29 AM   #3
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It costs cash to use an Expat tax guy and with assets and income from four countries I’m never willing to chance it. Yes that would solve the problem but at a nominal cost and I’m trying to keep costs down. We also have tax sheltered assets in canada so I’d rather use a qualified Expat tax specialist if I did file.
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Old 12-12-2017, 08:58 AM   #4
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I agree with Senator, just file the 1040 that shows no tax liability. Then you are covered for any questions. As to needing the tax pro, it seems you could do this yourself with a tax program like TurboTax or similar. No need for a tax pro and the associated costs.
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Old 12-12-2017, 09:17 AM   #5
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Welcome to the site

I’m also an expat living in another country but I only have assets and income in 2 countries and that is complicated enough, dealing with the US/UK DTA tax treaty. However, TurboTax is still my friend as an overseas filer, and what I would propose you do is use tax prep software of your choice and go through the filing process but you don’t have to file. You can look at the forms and see how the software has completed the forms including 5329 and confirm your belief that you don’t have taxes to pay.

ETA
I just looked at one of the Roth conversions I did before I was 59.5 and the 1099-R simply has a 2 in box 7. The tax software then asks what I did with the money and one of the options is “ rolled it in into a Roth.” It then completes the appropriate forms and deducts no penalty.
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