🇬🇧Roth abroad: the one US wrapper that survives relocation

Lawyer, Family Office

Concept

A Roth IRA is §408A of the Internal Revenue Code: you contribute already-taxed money, and from there the account grows and qualified distributions are not taxed in the US at all. The tax on this money is paid once, on the way in, and never again — not on the growth, not on the way out.

What makes the Roth genuinely rare is that it can survive a move out of the US. Almost every US tax break is tied to US tax and falls apart abroad. The Roth is the exception — but only where a tax treaty expressly props the exemption up: in the United Kingdom that is Article 17 of the US-UK income tax treaty; in Canada it is a separate election. Where there is no such support, the relief hangs in mid-air.

What follows: how this works country by country, where the Roth breaks on the way in (the FEIE versus your contribution room), and why the aggressive «Thiel play» with founder shares runs into §4975. The legal anchors: IRC §408A, Article 17 of the US-UK treaty, Article XVIII(7) of the Canada-US treaty, and IRC §4975.

How a Roth works, and why it is unusual

Inside the US the picture is simple: you contribute post-tax money, a qualified distribution (after age 59½ and once the five-year rule is met) carries zero federal tax, and there are no required minimum distributions during the owner's lifetime. You cannot «credit» this relief against anyone else's tax, because there is nothing to credit — the US tax here is zero by definition.

Why the Roth, of all wrappers, survives relocation

Compare it with QSBS under §1202 or the preferential long-term capital gains rate: those are deductions from US tax, and the moment you become tax-resident somewhere else, the local system taxes the gain on its own terms with nothing to credit against it. The Roth works the other way round. Its qualified distribution is already exempt in the source state (the US), and a well-drafted treaty obliges the residence state to mirror that exemption rather than tax the payment afresh.

The United Kingdom: Article 17 and why the relief held in 2025

The mechanics rest on Article 17(1)(b): a payment from a pension scheme in one state that is exempt from tax in the source state is also exempt in the residence state. A qualified Roth distribution is exempt in the US — so, on this logic, it should be exempt in the UK too. In practice the relief is claimed by disclosure on Form 8833.

The key development of 2025. On 12 March 2025 HMRC hardened its position on lump sums from taxable US pensions: applying the saving clause (Article 1(4)), it overrode the exemption in Article 17(2), so the UK now taxes such lump sums, giving a foreign tax credit for US tax paid. But the blow landed on Article 17(2). The basis the Roth relies on — Article 17(1)(b) — is not undone by the saving clause. So the footing on which a qualified Roth distribution is treated as exempt survived the 2025 tightening. A caveat: this is a treaty interpretation, and some advisers read the clause more cautiously.

Canada: a one-time election and a ban on contributions

Canada recognises the Roth through Article XVIII(7) of the Canada-US treaty. A resident files a one-time, irrevocable election by the filing deadline for the first Canadian tax return of the year they became resident, and the Roth is treated as a pension: growth and qualified distributions are not taxed in Canada. The condition is strict and easy to breach — after becoming a Canadian resident you must not contribute a single dollar to the Roth. Any such «Canadian Contribution» taints the election and permanently splits the account into a protected portion (the balance before the contribution plus its growth) and an unprotected one.

France: why «treaty-specific» is not a figure of speech

France is the counter-example. There is an argument for exemption: under Article 18 of the US-France treaty, distributions from US retirement accounts can be treated as taxable only in the US, and the Roth is brought under that heading. But the French tax authority does not recognise the Roth's tax-free status automatically — the position is not guaranteed, needs documentary support, and if the authority decides the provision does not apply in your case, the distribution lands in the French base. So the UK and Canada offer a workable path, while France is a grey zone you cannot treat as a given. And in any event the Roth account is reportable: Form 3916 in France, FBAR and Form 8938 in the US.

Getting in: the FEIE versus your contribution room

This is the subtlety that trips up half of all Americans abroad. To put money into a Roth at all you need «taxable compensation» — earned income that stays in the US tax base. If all your earnings are excluded through the Foreign Earned Income Exclusion (Form 2555), no compensation is left, and your contribution room disappears or is cut back.

The fix is the method you choose: compute your tax through the Foreign Tax Credit (Form 1116) instead of the FEIE — then the income stays in the US base as compensation, and the contribution right survives (within the Roth MAGI limits). The alternative is to exclude only part of your income under the FEIE. Keep in mind that this is the contribution layer; the treaty protection of distributions discussed above is a separate matter.

The «Thiel play»: where the Roth breaks on §4975

The most cited case: a founder puts his own founder shares into a self-directed Roth while they are worth pennies, and all the multi-billion-dollar growth that follows comes out untaxed. It can be repeated, but the corridor is narrow, and it has two walls.

The first is §4975 prohibited transactions: direct or indirect dealings between the IRA and a «disqualified person», and any use of the account's assets for the personal benefit of the owner, are barred. The crucial threshold: if the Roth owner together with related persons holds 50% or more of the company, the company itself becomes a disqualified person and the account can no longer invest in it. Thiel's stake in PayPal was below 50%, so the company was not disqualified — and that is not a detail but the central condition of the whole structure.

Where it fits

The practical point is for an American planning a move who wants the Roth to stay useful afterwards. Before leaving, it makes sense to fill the Roth as much as possible, including through traditional → Roth conversions, while you are still inside the US system. Living abroad, compute tax through the FTC rather than the FEIE so as not to lose the contribution right. Moving to Canada, file the election in time and never contribute again. And in choosing between jurisdictions, understand that the UK and Canada give a workable treaty footing, whereas France and a number of other countries do not.

Risks

A separate layer is aggressive structuring. The «Thiel play» breaks not on a tax rate but on §4975 (self-dealing, the 50% threshold) and on the requirement to buy non-public shares at fair market value: under-pricing the «entry» is the IRS's prime target. Add the political backdrop: very large mega-Roths have been in the crosshairs for years — caps were proposed both in Build Back Better and in Senate Finance initiatives — but these are proposed measures, not enacted law; what you should price in is simply that the rules may tighten. And remember expatriation: giving up US citizenship triggers its own regime (§877A), which the Roth does not switch off.