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I'd like to sense-check the following scenario, to make sure I don't do something phenomenally stupid and irreversible. I'm hoping that I've correctly understood what I've read on this site & elsewhere. I am only asking about US taxation (ignore UK taxes for now).

I am a dual US+UK citizen living in the UK. I have $340k in my 401k (all contributed while working in the UK for an American company). I will roll over my 401k into a traditional IRA (no tax implications here). I do not have any other US-sourced income.

I currently have $77k in general limitation foreign tax credits carried forward.

I plan to expatriate on 8 January, and will arrange to have zero UK or US income during the first week of January.

HOPING TO CONFIRM / SENSE-CHECK

  1. If I do a $300k Roth conversion on 5 January (just before expatriating), my entire US taxable income for the year will be $300k. The US tax on this is amount is $74k. This can all be classified as foreign-source income, and so the $77k I have in tax credits should entirely cancel out this US tax liability?

  2. The following year, I convert the remaining $40k to Roth. Now as a nonresdient alien, I no longer have tax credits or a personal deduction, but my US tax liability (Form 1040NR) for this amount is ~$4,807. I think this is more tax-efficient than converting the full $340k all at once?

  3. Do I even need to wait until the next year, or can I Roth convert $300k as a US person in January, $40k as a non-resident alien in February, and these two transactions will still be considered entirely separate?

Thanks for any confirmations/corrections/critiques of the above game plan!

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    If by expatriation you mean that you will surrender your US citizenship, then be aware that there are special rules regarding what happens with respect to your US tax liabilities during the next ten years especially if the Consular official suspects that the reason for surrendering US citizenship is to avoid/evade US taxation.
    – Dilip Sarwate
    Commented May 27, 2023 at 21:41
  • Thank you: yes, I do mean surrendering my US citizenship, and I am aware of the rules and consequences relating to this. My question here is how to "use up" my foreign tax credits before doing so.
    – ckp
    Commented May 28, 2023 at 19:09

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I suggest you work with a tax professional. You're trying to do tax planning, and you may not be aware of all the rules and edge cases, how treaties affect your situation, and what other potential pitfalls you may need to consider.

Specifically to your plan, I'm not entirely sure that the 401k to Roth conversion would be classified as foreign source income.

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  • That's why I'm asking on here!! I am solely asking about the US taxation, which is not impacted by any tax treaties. If there is guidance out there that a Roth conversion (of foreign-source contributions, by a UK resident) should be classified as US-source income, I have yet to find it, but I would very much like to know if it exists.
    – ckp
    Commented May 28, 2023 at 19:13
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    @ckp first of all treaties very much affect US taxation, that's their main purpose. Second, your situation is very specific and quite rare, so I strongly advise to not rely on some anecdotal evidence you may find or some anonymous idiots like myself rambling on the Internet. You're talking about a difference of some $70K+ in taxes, surely you can afford several hundreds for a professional advice. Third, you're asking for the wrong thing. You need to look for a precedent where a conversion would not be classified as a US-sourced income. Why would you even think that you can find one?
    – littleadv
    Commented May 28, 2023 at 20:21
  • @ckp: It's not clear that your 401(k) contributions are "foreign-source" in the first place. They are elective paycheck deferral, into a USA retirement plan sponsored by a USA company, deferred from pay coming from a USA company. I am not an expert, but to me that sounds like "USA-source" income. An IRA might have been different, because IRA contributions are completely separate from pay.
    – Ben Voigt
    Commented May 30, 2023 at 15:36
  • @Ben Voigt: thank you. I was living in London at all times: my income was foreign-sourced, so I'd expect my 401k contributions to be the same. In any case, I will be rolling over the 401k into a traditional IRA, so the actual taxable event is an IRA conversion (traditional to Roth). Answering this question does require input from someone who knows rather than guesses, but my situation (US Person living overseas with an IRA or 401k) is not such an unusual situation.
    – ckp
    Commented May 31, 2023 at 16:26
  • @Ben: I've seen commentary out there I trust suggesting that for expats like me, 401k withdrawals can use up foreign tax credits - the main difference in my case is that I want to convert to Roth rather than withdraw.
    – ckp
    Commented May 31, 2023 at 16:30

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