Puerto Rican IRA transfer to US?


B

Bill Brown

I saw this question on another forum. A friend of the guy posting the
original question has an IRA from monies earned while residing in
Puerto Rico. He has moved to the US permanently and is now trying to
transfer his IRA to an account in Florida. His broker is telling him
that the Puerto Rico IRA must be liquidated and subject to the 10%
early withdrawal penalty and then reinvested in a US IRA account. Is
this correct? Can he make a trustee-to-trustee transfer of his IRA
funds?

Another responder said he couldn't find anything in Pub 590 or the
instructions for Form 5329 that suggested special rules for Puerto
Rico. Looking in more places (CCH Tax Research Network), I couldn't
fing anything, either, but I was reminded that there are a lot of
special rules for Puerto Rico. One is that most income of a resident
of Puerto Rico earned from sources within Puerto Rico is excluded from
U.S. income tax. (See Reg §1.933-1)

Combine that with the general rule that valid contributions to an IRA
require earned income subject to U.S. taxation and you have a
plausible argument for the broker's claim.

I won't ask you to prove a negative so, does anyone have a cite that
supports the broker's claim?
 
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A

Alan

Bill said:
I saw this question on another forum. A friend of the guy posting the
original question has an IRA from monies earned while residing in
Puerto Rico. He has moved to the US permanently and is now trying to
transfer his IRA to an account in Florida. His broker is telling him
that the Puerto Rico IRA must be liquidated and subject to the 10%
early withdrawal penalty and then reinvested in a US IRA account. Is
this correct? Can he make a trustee-to-trustee transfer of his IRA
funds?

Another responder said he couldn't find anything in Pub 590 or the
instructions for Form 5329 that suggested special rules for Puerto
Rico. Looking in more places (CCH Tax Research Network), I couldn't
fing anything, either, but I was reminded that there are a lot of
special rules for Puerto Rico. One is that most income of a resident
of Puerto Rico earned from sources within Puerto Rico is excluded from
U.S. income tax. (See Reg §1.933-1)

Combine that with the general rule that valid contributions to an IRA
require earned income subject to U.S. taxation and you have a
plausible argument for the broker's claim.

I won't ask you to prove a negative so, does anyone have a cite that
supports the broker's claim?
The Puerto Rico (PR) Internal Revenue Code (IRC) defines a Puerto
Rico IRA (I am assuming that this taxpayer has a PR IRA.). It is
unfortunate that they chose to use the same name as the US IRC
uses. A PR IRA is not a US IRA. It has different tax rules. In
addition, the US IRC defines an IRA as being "a trust created or
organized in the United States." The US IRC (Sec. 7701) defines
the United States as being the 50 states and the District of
Columbia.

I must conclude, that the PR IRA has to be treated in the same
manner as any other foreign retirement account. One can not
perform a tax-free rollover from a PR IRA to a US IRA.

Also, the statement by the broker that the PR IRA must first be
liquidated, taxes and penalty paid and then reinvested in a US
IRA doesn't make sense to me. Once one concludes that you are
dealing with a foreign retirement account, there is no way to
create a US IRA into which one can deposit the funds obtained by
liquidating the foreign account. The taxpayer is limited to the
rules relating to making annual contributions to an IRA.
 
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