- 1 Moving Your US Retirement Account Overseas
- 2 Non-Qualified Rollover is Taxable
- 3 Taxable Event when you Withdraw
- 4 Higher Tax Rate when you Withdraw in one Lump Sum
- 5 Reporting Foreign Accounts (FBAR & FATCA)
- 6 Treaty Elections May be Limited
- 7 Current Year vs Prior Year Non-Compliance
- 8 Golding & Golding: About Our International Tax Law Firm
Moving Your US Retirement Account Overseas
With the globalization of the US economy, it is not uncommon for US Taxpayers who are considered US persons to have retirement accounts within the United States — but reside overseas. When a taxpayer is considered a US person, they are typically subject to US tax and reporting rules whether they reside in the United States where they reside overseas. When it comes time for retirement — especially if the taxpayer resides overseas –– they may want to move some or all of their US retirement accounts overseas. There are various tax and reporting considerations to make before moving your retirement accounts overseas. Let’s go through five key tax and reporting applications when you move your US retirement account overseas.
Non-Qualified Rollover is Taxable
In the United States, it is not uncommon for taxpayers who may have had a 401(k) to roll it over to an IRA after they retire — so that they may be able to have more control over the investments. Most of the time, foreign pension plans are going to be considered non-qualified, and therefore, rolling over your US retirement account to your foreign retirement account may not be a tax-free option. Therefore, it is important to reach out to a foreign investment advisory before transferring your retirement assets abroad.
Taxable Event when you Withdraw
In situations in which a taxpayer wants to move their money overseas from their US retirement account to their foreign retirement account — but it does not qualify as a tax-free rollover — will instead have to pay tax on the withdrawal. That is because, if the transfer is not considered a tax-free rollover, then from a US tax perspective it is simply a withdrawal from your US retirement account (taxable) and a deposit into your foreign retirement account.
Higher Tax Rate when you Withdraw in one Lump Sum
The concept behind the US retirement system in part is that taxpayers contribute tax-free to their retirement plan such as a 401(k) during the years in which they are earning more money and at a higher tax rate, and then withdraw the money later in life when they’re at a lower tax rate. If instead, you would draw all of your US retirement in one lump sum, not only may you be subject to penalties — depending on your age — but you may be taxed at a higher tax rate since you are withdrawing all of the money in one fell swoop.
Reporting Foreign Accounts (FBAR & FATCA)
Another important concept in moving US retirement accounts overseas is that now the taxpayer will have foreign accounts. As a result, the taxpayer may have to meet various IRS international information reporting requirements, such as FATCA and FBAR. Depending on how many foreign accounts a taxpayer has and the category of the assets may impact whether or not the reporting requirements can become more complex, such as PFIC reporting of foreign accounts that contain PFIC within the pension plan – but where there is no tax treaty with that foreign country.
Treaty Elections May be Limited
Oftentimes, taxpayers will just presume that they will not have much of an issue because they can rely on a tax treaty. It is important to note, that not all tax treaties are the same — especially when it comes to retirement plans and pension income taxation and reporting. In addition, US Citizens have a much harder time relying on tax treaties due to the saving clause – since they will often eliminate the benefits for US persons claiming tax exemptions for private pension plans.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the pension tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.