Roth IRA Conversions While Living Abroad: Planning Opportunities

Converting a Traditional IRA to a Roth IRA while living abroad creates a taxable event in the US, but the interaction with the Foreign Earned Income Exclusion can create useful planning opportunities. If you use the FEIE to exclude most or all of your foreign earned income from US tax, your US taxable income may be very low, leaving room in lower tax brackets to do a Roth conversion at reduced rates. The stacking rule for the FEIE means excluded income still pushes your remaining taxable income into higher brackets, but in years where you have little income above the exclusion, a Roth conversion can be done at a fraction of what you'd pay after returning to the US. The conversion is reported on Form 8606, and the converted amount is taxable in the year of conversion at your marginal US rate. One additional benefit: Roth accounts are not subject to required minimum distributions during the owner's lifetime, so converting while abroad also reduces the RMD burden in retirement.