401k to Roth IRA while living abroad on no income

[jcnyc]

401k to Roth IRA while living abroad and claiming FEIE

Hi all, have been trying to research this subject on the internet but can't find anything specific to my scenario so thought I'd enlist the expert advice of this forum.

I'm 30 now and planning on retiring in the next 5 years to pursue the good life. I suppose it's financial independence but honestly I think reitiring and FI are the same things.

Anyway, I will have about 300k in my 401k upon retirement baring any market crashes. My plan is to move abroad and at least start out my new life working in the dive industry. I have been reading about 401k to roth IRA conversions to minimize tax burdens. The question is, can I move abroad full time and claim the foreign earned income tax exclusion and have my conversions to Roth IRA as part of that "income"? So i was thinking something along the lines of:

1. Convert 401k to Traditional IRA as soon as I leave my employer
2. Move abroad starting at the beginning of the tax year, where I will only need about 20-25k to live how I want to live. This will either be financed by dividends, and/or income earned as a dive professional.
3. Since i"ll be abroad the entire year, i am able to claim the foreign earned income tax exclusion of around $101k.
4. Does this mean I can legitimately roll over $75-80k of my IRA to Roth IRA without it being taxed?

I feel like I must be missing something here because that's just too easy of a way of a way to avoid taxes on such large sums of money.

 

[kaneohe]

.............................................................
4. Does this mean I can legitimately roll over $75-80k of my IRA to Roth IRA without it being taxed?

I feel like I must be missing something here because that's just too easy of a way of a way to avoid taxes on such large sums of money.

FEIE = foreign earned income exclusion.........................The conversion is not Earned Income

 

[LOL!]

And it is not foreign either.

When I lived overseas, I used the FEIE, but none of my US-based taxable investments were foreign, so they were not excluded. But they were taxed at a very very low rate.

So Roth conversion is still the way I would go in your shoes, but you can figure out the taxes with tax software and maybe not convert so much every year.

 

[jcnyc]

Ah yes, that makes much more sense. I knew I wasn't smart where somehow I could think of how to game the system when few others have.

But ya, I reckon in this case, I will keep my stocks in the high growth low divi yielding (mostly tech stocks) portfolio for the first few years, earn enough money abroad to get by on a budget lifestyle, and work on converting the IRA. 15% bracket ends at $37.5k so that range seems like something decent to shoot for.

 

[pb4uski]

Just a guess, but if your foreign earned income is excluded and a goose egg on an income line on the 1040 then I would think you could do annual Roth conversions equal to the standard deduction and individual exclusion and pay $0 tax since your taxable income would be $0.

 

[Alan]

And it is not foreign either.

When I lived overseas, I used the FEIE, but none of my US-based taxable investments were foreign, so they were not excluded. But they were taxed at a very very low rate.

So Roth conversion is still the way I would go in your shoes, but you can figure out the taxes with tax software and maybe not convert so much every year.

Our son plans to move to England later this year and this what I have told him to do. Roll over his 401k then over the coming years do Roth conversions at very low taxes.

The key is to do the 401k rollover before leaving the country as it will be difficult if not impossible to do so as a nonresident.

 

[Koolau]

Not having a US address may be problematic with all of this. Some companies insist on it IIRC. I'm sure there are ways around this but a potential hickup which should be dealt with long before the end of the year (or cut-off date for conversion). YMMV

 

[evilanne]

Are you contributing to Roth IRA now? You can withdraw contributions tax & penalty free but the 5 year rule could be an issue depending on when you need make a withdrawal. I'm not sure how roll overs from 401K or IRA factor into the equation. See The Five Year Rule With Roth IRA Withdrawals | RothIRA.com

 

[NgineER]

Consider after tax 401k contributions if your plan allows it. These can be rolled over to a Roth IRA immediately helping you to balance your withdrawals later. It allows you to contribute beyond the $5500 limitation and any income limit for Roth contributions.

 

[jcnyc]

Our son plans to move to England later this year and this what I have told him to do. Roll over his 401k then over the coming years do Roth conversions at very low taxes.

The key is to do the 401k rollover before leaving the country as it will be difficult if not impossible to do so as a nonresident.

I actually worked abroad in South Africa for a few years, earning below the 101k threshhold. Didn't know about this at the time, which i'm really regretting now as that could have been at minimum, $6.3k a year completely tax free 401k to IRA rollover.