Roth IRA conversion for US citizen in Switzerland

Finance, Taxes, Banking, Insurance and Retirement
1
Hi,

I am trying to understand how a conversion from IRA to Roth IRA would be taxed for a US citizen in Switzerland.

I understand Switzerland would get to tax first and the US would give a foreign tax credit but it is not clear to me how Switzerland treats an IRA and a conversion.

Is the conversion viewed as a lump sum distribution from a pension ? An annuity ? Regular income ?

What tax rate is applied and can I do a conversion every year ?

2
There was a discussion on this some years ago:

https://www.englishforum.ch/finance-...-roth-ira.html

It seems to me that this is the kind of operation that should be undertaken under a pre-emigration plan.

My Swiss-British daughter (who renounced her US citizenship) has a substantial Roth IRA. One of the reasons she is staying in Britain and not spending time in Switzerland (we have homes in both). A Roth IRA is not taxable, ever, in the UK. Conversion is the troublesome issue and I look forward to any comments.

3
Thanks.

My problem is kind of opposite of the usual :

I am still in the US and have a very substantial IRA, and a high income. If I do the conversion to Roth IRA now the distribution will be hit at a high tax rate.

On the other hand, if I do it after I move to Switzerland and do not work anymore or only part time, then I can claim the Foreign Tax credit to eliminate the Swiss income and I can do the IRA -> Roth IRA conversion gradually over a few years using a lower tax bracket so the US side of taxes will be lower than it would be now.

My main question is : how does Switzerland tax the conversion, especially as I am not retirement age yet.

If the Swiss tax rate is lower than the US one, with the tax agreement I would anyway only pay it in the US and at a lower rate than now.

If it's a high tax rate similar to what I would pay now in the US, then waiting has no benefit.

4
Your comments in post 1 regarding U.S. and Swiss taxes seem to be correct. Also see this article:

https://hodgen.com/ira-distribution-...ntry-taxes-it/

The canton/ community will tax your regular IRA distribution at Kapitalleistungen rates. For Ct. Zurich, please see this calculator:

https://www.zh.ch/de/steuern-finanze...errechner.html

You should also expect to pay Swiss Federal taxes on the distribution. The above calculator can also determine this tax.

After the switch from a regular IRA to a Roth IRA, the funds and income will be taxed at ordinary cantonal/ community capital and income tax rates. The above calculator can assist you in determining these taxes for Ct. Zurich and a community in Ct. Zurich.

Hope this takes you a step forward.

5
Looks to me like the OP is a US resident at the moment planning according to his mother tongue to return to the French part of CH. If this is so then the OP should only be affected by US tax.

6
I might be reading your post incorrectly, so please correct me if I am. AFAIK pensions do not count as "earned income" for the FEIE when you file your US taxes. Pensions are unearned (and therefore taxable) income. Or do you mean that you'll pay the US tax on the pension but then deduct that amount from Swiss tax?

7
My thinking is the following :

I move to Switzerland get a job, that earns X CHF / year

At the same time, I start my IRA conversion, converting $Y / year to a Roth IRA

The X CHF would count towards my FEIE and be lower than the limit so I pay income tax / AVS in Switzerland on that but nothing in the US.

The Y $ would be taxed in the US as income, but as my FEIE eliminated the swiss income, the Y $ would be taxed starting at the bottom of the tax brackets.

The Y $ would also be taxed in Switzerland, at pension rate so a low rate. With the tax treaty I can get the US credit the Swiss taxes I paid on the conversion.

Result :

- Only Swiss taxes on my Swiss income

- Low tax rate both in the US and in Switzerland on my IRA -> Roth IRA conversion

Does it make sense ? Am I missing something ?

8
Not to me.

Is a conversion actually necessary.

Seems like a lot of expense in accounting fees and time to save some tax $$$.

9
The thing that you are missing is that by the time you apply the FEIE to your Swiss salary, you will most likely no longer qualify for a Roth IRA. (Many of us don't.) My advice is to use your current tax preparation software or tax professional to mock up a theoretical return using the data from Salarium to determine a hypothetical salary based on your profession and experience. You should be able to know if you still think your proposal is feasible and advisable based on that document.

10
My main interest is not to have a Roth IRA or contribute to one but rather to avoid getting hit with a massive income tax bill by the US if I ever decide to go through dropping my US person status for some reason. My IRA is pretty large and according to exit tax rule I would have to pay taxes on all of it.

So my thinking is to gradually turn it into a Roth IRA over a few years.