Offshore Roth Conversion

Offshore IRA Roth Conversion to cut taxes

Are you ready to retire with a large offshore IRA?  Consider an offshore IRA Roth conversion.  You have Romney sized IRA issues?  This article will show you how to deal with your offshore IRA without getting crushed by the new higher tax rates with an Offshore IRA Roth Conversion.

  • Real Estate: For details on how to distribute real estate from an offshore IRA, see my offshore IRA real estate article on this site.  The analysis below is focused on cash and stock accounts.

So, you took your IRA offshore a number of years ago and reaped the rewards of high returns and diversification.  Now, you are facing forced withdrawals from that offshore IRA at ordinary income tax rates plus the multitude of Obama taxes.

We in the industry affectionately refer to the problem of how to extract money from an oversized offshore IRA as Romneyitis.  You might read that much was made in the press of Mitt Romney’s (allegedly) $20M offshore IRA LLC structure . . .what a shame that all that money will come out at ordinary tax rates of nearly 40% when all the new taxes are added onto the typical 35% rate.

You don’t need to be a 1% to be crushed by the new tax rates.  Most of these taxes hit families with incomes between $20K and $500K.  If you take a withdrawal from an offshore IRA and get pushed into these brackets, an offshore IRA Roth Conversion might be in order.

Offshore IRA Roth Conversion Bracketology

The key to minimizing tax on forced withdrawals from an offshore IRA is managing your tax brackets.  One of the best ways to play the IRA bracketology game is to prepay your tax now with an Offshore IRA Roth Conversion.

Yeah, I know a number of you just stopped reading.  None of us like the idea of giving cash to Uncle Sam today for a benefit tomorrow.  Those of you who are still with me, (thank you) and, prepaying your tax with an Offshore IRA Roth Conversion, this can lead to big savings.  Here’s how:

In its most basic form, the Offshore IRA Roth Conversion is great for those with quickly appreciating accounts.  It allows you to pay tax today and for your accounts to appreciate tax free thereafter with no withdrawal requirement.  If the majority of your retirement account is locked in offshore real estate, ad you can afford to pay the tax, the Roth conversion cane make life much easier for your offshore IRA.

No matter how hard it is to accept, prepaying tax can be a solid tax reduction plan.  So long as you can make the payment with cash that’s outside of your offshore IRA, and your tax bracket in retirement is likely to be the same or higher than it is now, IRA Bracketology is for you.  Even better, if you’re in a lower bracket this year than you expect to be at age 70, convert your offshore IRA to a Roth immediately.  You might be in this lucky group if you recently retired but are not yet collecting social security.

Slice and Dice Your Offshore IRA Roth Conversions

If you buy my argument that paying tax today can save you big in the long run (to be continued below), then you might consider slicing and dicing your offshore IRA to maximize the value of your Roth conversion.  Put simply, you can divide your IRA into multiple accounts, convert them all to Roths and selectively revoke these conversion, on accounts that have gone down in value, by the due date of your return (October 15 on extension).

  • Much like the Offshore IRA LLC and the inherited IRA, I don’t believe this tax loophole will be around for long.

Let’s say you have $500K in an offshore IRA you want to convert to a Roth.  First, slice this into five accounts of $100K each.  Next, invest each into different (high return) opportunities.  Maybe one goes into rental real estate in Panama, one into a currency trading account in Cayman, one into hardwood in Brazil, one to merging market debt and one into a BUI hedge fund.

Assuming you file an extension for your personal return, you have until October 15 to see how these investments perform.  If you lost money trading currencies (as I always do), then you should undo that conversion.  If your hardwood and real estate investments are appreciating nicely, keep them as Roth accounts and send the IRS a check.

Back to Offshore IRA Roth Conversions

If you are 55 to 70, an Offshore IRA Roth Conversion is probably a great move . . .but always a tough sell.  The fact that you’ve read this far is much appreciated.  I’ve seen cases where clients could save $500K in taxes over a number of years by converting a $1M offshore IRA, but just would not pull the trigger.  Noone likes to pay the IRS today for a future benefit.

For those of you on the fence, here’s a look at the numbers:

You probably have a good understanding of your tax bracket.  From her on, I’ll assume it’s 35%.  Now, let’s talk about the bracket busters – four taxes that push you up over 35%.

First is the Obamacare tax.  In order to cover the cost of the healthcare remodel, a 3.8% bonus tax applies to investment income if your AGI is above $250K (joint).  For example, if your salary is $240K, plus capital gains and dividends of $35K per year, your AGI is $275K and the 3.8% bonus tax applies to $25K.

In the case of the Obama tax “investment income” does not include earnings in your retirement account or a withdrawal from an offshore IRA (or any IRA for that matter).  It bumps up the tax rate on unsheltered assets like your after tax offshore brokerage account.

The same is true of withdrawals from an offshore Roth.  These are not considered income.  However, a withdrawal or conversion from a traditional IRA (pre-tax account) is added to AGI and counts toward the 3.8% healthcare tax.  Therefore, a mandatory withdrawal from an offshore IRA can bump other income, such as dividends into the Obama tax bracket.  If your only “income” is from an Offshore IRA Roth Conversion, this 3.8% tax does not apply.

If you have a Romney sized IRA, where your forced distributions are $100K-$200K per year, or your finances are such that these forced withdrawals from an offshore IRA will push you over the $250K threshold year over year, a Roth conversion might be just what the doctor ordered.  Yes, you will pay the 3.8% tax on your 2014 unprotected income, buy you limit the pain to only one year of dividends and capital gains.  In this situation an Offshore IRA Roth Conversion could save 20 years of bracket busting taxes of 3.8% on unprotected income.

The Obama tax is the biggest, but not the only bracket buster.  For example, if your joint income is over $305K to $428K this can add 4% to your marginal tax rate (I’ve assumed a family of 4 and simplified the calculations a bit).  If your income is just below this range, you will probably benefit from an Offshore IRA Roth Conversion.

The last bracket buster I’ll consider is the Medicare slam dunk.  If your income is b3tween $170K and 428K, your Medicare premiums increase.  In essence, this boosts your taxes by 2%.  You can eliminate this tax by converting your offshore IRA to a Roth before you hit age 65.

If the above tax bracket busters apply to you, consider an Offshore IRA Roth Conversion.  Also, if you are in a high tax state, or subject to AMT, then the benefits of converting are multiplied.  AMT usually hits those with incomes of $200K to $500K.

Expat Tip: If you’re planning to move out of the U.S. (or to a low tax state), hold off on the Offshore IRA Roth Conversion.  Wait until you obtain tax residency in your new country and then convert.  This should keep the ex state out of your pocket.

I hope you have found this article helpful.  Thank you for sticking with me.  Feel free to phone or email to anytime.  We will be happy to help you move your IRA or other retirement account from a previous employer out of the United States.