tax on us retirement accounts for people living abroad

[Joe Vanilla]

My wife, an Australian citizen, and I, a US citizen
currently work in the US. We contribute to varous types of
retirement accounts here. We are considering moving to
Australia in the future which raises some tax questions
related to these accounts, which are

For a US citizen living abroad with US retirement accounts,
are any of the gains on these funds taxed prior to when
money is withdrawn? I'm assuming not. After withdrawals
start at the appropriate age, will any tax be withheld "up
front", that is, will the company holding the money send any
of it to the US treasury when a withdrawal is made, or will
the US citizen pay it by the normal means (filing a US
income tax return)? Will withdrawn funds be taxed at a
higher rate based on if one lives abroad vs. if one is
living in the US? I have money in traditional IRAs, Roth
IRAs, and 403(b) accounts so would appreciate information on
these questions for these types of accounts.

My wife may not be a US citizen by the time we move, so I
also need the above questions answered for the case of a
non-US citizen living abroad who has money in US retirement
accounts. In her case, a 401(k), tradition IRA, and Roth
IRA.

Thanks
Joe

 

[David Woods, EA, ChFC, CLU]

My wife, an Australian citizen, and I, a US citizen
currently work in the US. We contribute to varous types of
retirement accounts here. We are considering moving to
Australia in the future which raises some tax questions
related to these accounts, which are

For a US citizen living abroad with US retirement accounts,
are any of the gains on these funds taxed prior to when
money is withdrawn? I'm assuming not. After withdrawals
start at the appropriate age, will any tax be withheld "up
front", that is, will the company holding the money send any
of it to the US treasury when a withdrawal is made, or will
the US citizen pay it by the normal means (filing a US
income tax return)? Will withdrawn funds be taxed at a
higher rate based on if one lives abroad vs. if one is
living in the US? I have money in traditional IRAs, Roth
IRAs, and 403(b) accounts so would appreciate information on
these questions for these types of accounts.

My wife may not be a US citizen by the time we move, so I
also need the above questions answered for the case of a
non-US citizen living abroad who has money in US retirement
accounts. In her case, a 401(k), tradition IRA, and Roth
IRA.

Residency is irrelevant to taxation of a US citizen.
Nothing changes. Your account will be taxed upon
distribution. There may be mandatory withholding in your
wife's case if she is not a citizen, but you should check
the IRS pubs for that.

 

[Andy]

Joe,

A US citizen is taxed by the US on their worldwide income,
regardless of where they live or the source of their income.

If you have income from Australia, the US will tax it,
subject to any tax treaty which allows you to offset the tax
by taxes paid to Australia.

If you renounce your US citizenship, officially, in
accordance with the US laws, and become a citizen of
Austrailia (for instance), your income will still be taxed
by the US for five years.

These rules came into law in the late 1990s to keep people
like Bill Gates from taking their fortunes overseas. It also
applies to everyone else, including retirees living on
social security. Bummer, huh ????

But you really need to talk to a tax man who is familiar
with international tax matters --- the local HR Block
probably doesn't deal with this.

You can look all this stuff up in the IRS tax code . There
are several pamphlets on the subject (Expats living abroad,
etc. ). go to www.irs.gov

If your wife become a US citizen, the US gov will have an
automatic claim on her earnings , too.....

Good luck.

Andy

 

[Christopher Ballard]

Residency is irrelevant to taxation of a US citizen.
Nothing changes. Your account will be taxed upon
distribution. There may be mandatory withholding in your
wife's case if she is not a citizen, but you should check
the IRS pubs for that.

While this is generally true, you also have to take a look
at the tax treaty between the US and the country you're
looking at. Sometimes the rules change under the terms of
the tax treaty. (In this case, nothing changes, but in
other cases the result could be different).

For Australia, you can find a copy of the tax treaty here:

http://www.irs.gov/pub/irs-trty/aus.pdf

Tax treaties are bizarre things. They often state one rule,
and then take it back in another section, and then give it
back again in another section.

Regarding your specific situtation:

Article 18(1) of the treaty says that pension income (this
would include 401(k) income) is taxed only in the country
where the recipient is a resident.

Article 4 defines residency. If you are a US citizen
residing permanently in Australia, you are considered to be
a resident of both countries. In that case, the "tie-break"
rules of Article 4(2) apply. Under the tie-break, a person
with dual residency is deemed to be a resident only of the
country in which the person has a permanent home. I'll
assume that you would have a permanent home only in
Australia after your retirement. That would make you a
resident of Australia for purposes of the tax treaty.

Article 18(1) would therefore seem to imply that your 401(k)
distributions are taxable only in Australia. However, you
then need to look at the "savings clause" found in Article
1(3). The "savings clause" says that for a US citizen,
ignore the terms of the treaty--the US citizen is taxed on
all income worldwide. Article 1(4) provides some exceptions
to the "savings clause", meaning that US citizens do get to
take advantage of the treaty provisions for some types of
income. Unfortunately for you, pension income is not
included in the exceptions to the savings clause.

To make a long story short, the US will tax you on your
401(k) distributions even if you move to Australia.

Note that tax treaties with other countries have different
provisions. 401(k) distibutions are not always subject to
US tax, depending on the particular tax treaty (see the UK
tax treaty, for example).

For your wife, if she still holds a green card, she will be
subject to US tax as if she were a US citizen. If she gives
up her green card (and does not gain US citizenship), her
401(k) distributions would be taxable only in Australia, and
not in the US. Note, however, that giving up a green card
could cause additional tax problems if her net worth is
above $500,000 or if her income is above $100,000 (see
Internal Revenue Code section 877(e)).

This is a very complex area of international tax law. Please
consult with a tax professional before relying on anything
you read on the internet.

Chris Ballard

 

[Lanny Williams]

My wife, an Australian citizen, and I, a US citizen
currently work in the US. We contribute to varous types of
retirement accounts here. We are considering moving to
Australia in the future which raises some tax questions
related to these accounts, which are

For a US citizen living abroad with US retirement accounts,
are any of the gains on these funds taxed prior to when
money is withdrawn? I'm assuming not. After withdrawals
start at the appropriate age, will any tax be withheld "up
front", that is, will the company holding the money send any
of it to the US treasury when a withdrawal is made, or will
the US citizen pay it by the normal means (filing a US
income tax return)? Will withdrawn funds be taxed at a
higher rate based on if one lives abroad vs. if one is
living in the US? I have money in traditional IRAs, Roth
IRAs, and 403(b) accounts so would appreciate information on
these questions for these types of accounts.

My wife may not be a US citizen by the time we move, so I
also need the above questions answered for the case of a
non-US citizen living abroad who has money in US retirement
accounts. In her case, a 401(k), tradition IRA, and Roth
IRA.

Your situation does not change because you will be living
outside the U.S. Under U.S. tax law, you must file a return
and pay your tax regardless of where you live. Tax rates
and withholding requirements do not change

As for your wife, the answer depends on her U.S. status at
the time; whether she becomes a citizen or retains her green
card (in which case the rules are the same as for you) or if
she only has Australian citizenship. Then, it depends on
what the tax treaty between the U.S. and Australia has to
say about such payments.

I am not familiar with the Australian treaty but many U.S.
tax treaties have provisions that exempt retirement payments
made to citizens of the other country. If the Australian
treaty contains such a clause, you wife would only owe
Australian taxes on her income from retirement accounts.

By the same token, many treaties have provisions which also
exempt retirement payments to citizen of once country from
tax in the other. So, you would still be liable for U.S. tax
but might not have to pay Australian tax on your income.

Lanny K. Williams, Co.
Nawarat, Williams & Co.
Income Tax Services for Expatriate Americans

 

[Rich Carreiro]

Tax treaties are bizarre things. They often state one rule,
and then take it back in another section, and then give it
back again in another section.

That's not surprising. Look at tax statutes!

 

[Stephen Gallagher]

A US citizen is taxed by the US on their worldwide income,
regardless of where they live or the source of their income.

If you have income from Australia, the US will tax it,
subject to any tax treaty which allows you to offset the tax
by taxes paid to Australia.

If you renounce your US citizenship, officially, in
accordance with the US laws, and become a citizen of
Austrailia (for instance), your income will still be taxed
by the US for five years.

These rules came into law in the late 1990s to keep people
like Bill Gates from taking their fortunes overseas. It also
applies to everyone else, including retirees living on
social security. Bummer, huh ????

The policy of taxing US citizens who live abroad, on their
worldwide income has been around from before the late 1990s.
This policy does not, as you can imagine, follow the tax
policies of most countries, which normally impose tax based
on residency and/or source of income. Very few countries
will tax based on citizenship alone.

(snip)

If your wife become a US citizen, the US gov will have an
automatic claim on her earnings , too.....

And if she doesn't, but you move to Australia, you should
still check with a tax expert because the IRS takes a dim
view of what they call "long term permanent residents" who
move out of the US. They often will view the move as a way
to avoid US taxation.

Stephen Gallagher