PR Act 20/22; Roth Conversion Ladder, FIRE Tactics?

Please be patient with my lengthy consideration here. I'm trying to import some of the strategies used by the FI/RE folks, which are largely stymied by US/PR differences.

First, I understand that IRA/401k distributions are considered taxable income in both US mainland and PR (at same time); and, also that Roth IRA distributions are still taxable income in PR (somewhat defeating its point); and, lastly, that neither 401k nor a US IRA can be rolled over to PR IRAs.

That said, I still have these accounts and I'm still looking for tax minimization strategies. I'm assuming I'll be a PR resident for 10-15 years under Act 60 [Act 20/22 replacement] and then move back or abroad. (I'm 40 now and want to assume I'll have little to no active income.)

My main question here is whether some limited capacity of the "Roth Conversion Ladder" can work -

specifically,

1.  Will re-balancing funds inside a 401k or Roth IRA be taxed in PR?  (some have claimed it's "passthrough", and a sale to rebalance doesn't get shielded, so it's taxed not just on on distributions). 

2. Will Roth IRA contribution withdrawals still be untaxed by PR and US? (i.e., it's not a distribution)

3. And, while on an Act 20/22/60 decree, can a US-based 401k still be converted to a US-based Roth IRA? (which would be taxed at US income rates, and thus simultaneously taxed as Puerto Rican income at time of conversion)

Now, I understand that in the long run converting to a Roth IRA offers no benefit to Puerto Ricans (i.e., me), but AFAICT that is WRT gains that are realized during a distribution.  However, a staple of mainland FIRE tactics is to escape the 10% early withdrawal penalty from 401k by converting it to a Roth IRA and waiting 5 years to withdraw it as a contribution.  I.e., as I understand it, that conversion is treated as a contribution and as long as 5 years are met, its subsequent withdrawal has no taxes/penalties due (avoiding the 59.5 rule on gains/distributions).  Is it still true in PR?

4.  So, the crux of the matter here is -- on small conversions, shouldn't it still be possible to pay little or no tax to either US or PR for a Roth Conversion ladder? (e.g., 0% for 9,000 each year)

5. The next question would be if it's 20k converted, what's the total tax bill?   I.e., the calculations get hard to follow

Thanks for any help! This is very tricky to navigate

Great that young people try to live by FIRE philosophy.
I think that Act 20/22/60 decree program was created for the individuals who are loaded and it is not a program for one trying to save on not paying taxes on distributions from the retirement accounts if it even possible.
But it is a good idea to consult a good accountant.

Singularitynear is correct that you should consult a good CPA, one with experience in this matter.  Better odds of finding one on the island than the mainland.

I disagree that Act 20/22 was made for those who are "loaded", but that's not relevant here.  Or it may simply be that we have different ideas of what it means to be "loaded".

The primary question regarding your exposure to income tax from either US or PR is the source of the income.  For investment income, the source is determined by the location of the corporation, i.e. whether the investment fund is incorporated in PR or in one of the states.

If you are thinking of a Roth ladder and your 401K is located in the US, then any conversion you make will be subject to US income tax.  So if while living in PR you rollover $20,000 to a Roth, you will pay US income tax on the $20,000.

If you retire early, live in PR, and withdraw the contribution from the Roth, there will be no tax.

If after age 59 1/2 you take earnings from the Roth, there will be no tax.

IRS guidance on tax for residents of Puerto Rico can be found in Publication 570.

Hope this helps!

My understanding is that the mainland retirement accounts are not recognized in PR, and as such distributions (even from Roth IRA) are taxed by PR.   

It might be true that income taxed from one jurisdiction has some kind of exclusion such that you only pay the higher of the two.  The operative question is here is how that applies to 20k in 401k to Roth conversion while under Act 20 decree (assuming no active income).   Clarity on that would be helpful

Obviously I'll be consulting a tax lawyer for the final word.  I'm not the kind of guy to go to the mechanic without learning a little about the car and car lingo first.

BoricuaWannabe wrote:

My understanding is that the mainland retirement accounts are not recognized in PR, and as such distributions (even from Roth IRA) are taxed by PR.


If you are an Act 20/22 holder you only pay no taxes on capital gains and interest.
My understanding is that you pay taxes only to the U.S. on IRA distribution.
You pay 10K/year to PR and you would need yo weigh this payment against your gains.