It’s getting close to the end of the year and the final deadline for Roth IRS conversions. The rules have been relaxed quite a bit so that pretty much anyone can convert their “Traditional” IRA to a “Roth” IRA.

The cost of doing this for US purposes is that you need to include the amount converted in your income in the year of conversion, with a maximum tax rate of 35% for federal tax. The benefit is that you never need to pay taxes again on this account, so you take the tax hit now hoping the account will grow much larger by the time you retire. Roth IRA distributions are tax-free for US tax purposes, which can be a huge benefit for many people, and there are also other benefits which I won’t go into. There are plenty of articles on the web that discuss the pluses and minuses of Roth IRA conversions for a standard US taxpayer.

Unfortunately, Dutch tax residents have an additional set of rules, so you need to be cautious about IRA conversions. For Dutch tax purposes, the conversion will likely also be included in your “Box 1” income in the year of conversion, potentially with a 52% tax hit (you will get a credit for the Dutch tax against your federal tax in the US, likely bringing the US tax to zero). After the conversion, a Roth IRA is considered a “Box 3” asset, so you will pay a 1.2% tax on the current value of the account (which may now be only 48% of where you started) every year.

In general, a Roth IRA conversion doesn’t make sense for most Dutch tax residents. I wrote a detailed article on this subject earlier this year if you would like more information about this, click on this link.