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Here I have an interesting situation. I am a former American citizen, expatriated (non-covered). I still have my Roth IRA account. I earn money working for a UK company with a US parent, listed on the NYSE. The employer issues me RSUs periodically, upon which I pay UK income tax at the time of the RSU distribution.

The shares end up in my US based brokerage account, from which I typically sell quickly to avoid capital gain/loss, and transfer the money to a US based USD-denominated account.

I do not consider that I earn any money in the United States so I do not file American taxes. So here comes my question:

Can I choose to consider that some of my RSU funds are earned in the USA, and therefore put that money into my Roth IRA? For example, if USD 10,000 post-tax income appears annually in my accounts, can I elect to say that I feel $1000 of this was earned in the USA, file a 1040 for line 21 "Other Income" $1000 earnings, pay $0 tax because that's beneath the threshold, and then deposit $1000 into my Roth IRA?

Alternately, if I were to hold onto the shares and they generate $1000 in short term capital gain, can I then file this as earned income in the USA and pay that $1000 into the Roth IRA?

  • What would you be hoping to achieve - wouldn't you still be taxed in the UK? – Ganesh Sittampalam Oct 3 '18 at 11:29
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    I would hope to gain more tax-free investment growth in the Roth IRA account. Growth is limited since I don't contribute to it. The UK doesn't tax income that is not earned in the UK. – Anonymous McNonymous Oct 3 '18 at 11:42
  • I thought that was only if you have non-domiciled status? And it gets expensive/expires after a while and might be hard to justify if you gave up your US citizenship to move to the UK. – Ganesh Sittampalam Oct 3 '18 at 13:36
  • If you are non-domiciled then you don't pay UK tax for money earned in the UK. Different topic. – Anonymous McNonymous Oct 3 '18 at 19:13
  • No - it only allows you to use the "remittance basis" for money earned outside the UK: gov.uk/government/publications/… – Ganesh Sittampalam Oct 3 '18 at 20:02
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In order to contribute to a Roth IRA you need "Taxable compensation".

From the IRS website, these are not considered taxable compensation:

  • Earnings and profits from property, such as rental income, interest income, and dividend income.
  • Pension or annuity income.
  • Deferred compensation received (compensation payments postponed from a past year).
  • Income from a partnership for which you don’t provide services that are a material income-producing factor.
  • Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b.
  • Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs.

So, no, until you earn actual wages that are taxed in the US, the Roth is off limits. Can you do a back door Roth? Probably, but you may want to consult an accountant for that.

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    Backdoor Roth requires a contribution to a Traditional IRA which has the same taxable compensation requirement as a Roth IRA. So, No, a backdoor Roth is not feasible either. – Dilip Sarwate Oct 3 '18 at 11:28
  • Which one of the blacklisted categories are you suggesting matches my RSU proceeds? – Anonymous McNonymous Oct 3 '18 at 11:52
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    @AnonymousMcNonymous. The first. Its just MHO, you may want to consult with an accountant. Just as retirees cannot sell their RMDs in stock, and then use that to fund their ROTH. – Pete B. Oct 3 '18 at 12:15

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