Thread: Roth IRA vs IRA
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Old 06.07.2020, 20:25
Tox_Rat Tox_Rat is offline
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More information than you probably want to know

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My USA tax guy wants me to move money from my IRA to my Roth IRA.
Really? This seems odd.

In the case of a traditional IRA, you contribute to it using pre-tax funds, but then when you withdraw the money in retirement, you must pay income tax on the withdrawal. And once you reach a certain age, taking those distributions is mandatory. Withdraw the money early and you have to pay the taxes on all of it, plus a penalty (unless you roll it into another IRA). Swiss Pillar 2 is structured similarly.

In the case of a Roth IRA, you contribute using post-tax funds, meaning you have already paid your income taxes on the money before contributing. The money then grows tax-free and no taxes are due upon withdrawal. This is often a better deal, as many people move up to higher tax brackets with age. However, there are limits as to how much money you can put aside each year which varies depending on your tax situation.

For you to roll the funds in your traditional IRA into a Roth, you will need to pay income tax on all the funds that you are withdrawing from the traditional IRA, before putting the money into the Roth. There may be reasons to do this, e.g. to take advantage of a year with a lower tax bracket, but it is fairly unusual and if it were me, I would ask my accountant to explain his logic. Most people just start a 2nd IRA structured as a Roth and start contributing to that instead.

You ask a really complicated question though, because the Switzerland dimension makes this much more complex. Historically, the tax treaty between Switzerland and the US does not acknowledge each otherís retirement planning accounts. This is why you have had to add both your own and your employerís pillar 2 contributions to your income on your US taxes, so they can tax you on this (because Switzerland isnít). Eventually, once you claim your pension, you can get this tax deducted.

A new tax treaty which treats a Pillar 2 like a traditional IRA and vice versa was ratified in the US Senate last fall, but I donít know when it goes into force. Once it does, then you should be able to count the same retirement savings towards both sets of taxes and not be double jeopardized for your contributions.

In theory then, I think that this would mean that you could sell your traditional IRA, pay your US income taxes, declare this as worldwide income on your Swiss tax return (which affects your tax rate, but you wouldnít be doubly taxed) and put the money into a Roth IRA, but you would risk having to pay Swiss taxes on the investment growth as soon as you start withdrawing at retirement.

Personally, unless there were extraordinary circumstances for why this would be important to do this tax year, I would wait another year to see how the new tax treaty will be applied in practice.
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