What Happens to a Roth IRA if a U.S. Taxpayer Moves Abroad?

What Happens to Your Roth IRA When You Move Abroad?

What to Do with Your Roth IRA When You Move Overseas

A common type of retirement investment for many Taxpayers is the Roth IRA. Unlike the traditional IRA, with a Roth IRA a person invests with after-tax money – and then the proceeds of the investment are largely tax-free. For many retirees, it is a very important aspect of a U.S. Taxpayer’s investment and retirement portfolio. Additionally, with the cost of living in the United States continuing to rise, now more than ever, individuals who are either retired or in the final phases of working may decide to move overseas in order to live out their retirement outside of the United States. The question then becomes — what happens to U.S. taxpayers with Roth IRAs when they live overseas, do they become taxable?

Contributions to Roth IRA (Non-Resident vs Resident)

If a U.S. Taxpayer is still employed and making contributions to the Roth IRA, that is typically not an issue if they are still U.S. persons earning income which has not been excluded (FEIE) — or even if they are a foreign person with income taxable in the U.S. (some additional categories of income aside from employment income may be used to contribute to a Roth IRA). In other words, even when a U.S. taxpayer moves overseas, they still have the opportunity to invest into a Roth IRA. If on the other hand, the Taxpayer formally expatriates, then they may lose the opportunity to invest in the Roth IRA because they are no longer a U.S. person or have U.S. sourced income (unless they do have U.S.-sourced earned income).

Distributions from Roth IRA

When a U.S. Taxpayer resides overseas, they are still entitled to receive their distributions tax-free, as long as the other requirements are met. In other words, simply relocating abroad does not mean that the Roth IRA suddenly becomes taxable from the US government. Unfortunately, it may be a problem in the foreign country because most foreign countries tax their residents who qualify as permanent residents in that country on their worldwide income. But, if the United States in that foreign country had ever entered into a tax treaty, then usually the tax treaty will assist the taxpayer to avoid being taxed on U.S. income such as Roth IRA income in the foreign country. Likewise, the U.S. typically reciprocates so that the IRS does not tax the foreign nationals residing in the United States on their tax-free distributions for retirement similar to an IRA as well.

Moving Earnings into Foreign Accounts and Investments

Taxpayers who have foreign investments, accounts, or retirement plans are still required to file international information reporting forms such as FBAR and FATCA, even if they reside overseas.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer missed the 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 who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.