What Happens to an IRA When You Terminate Your Green Card?

Is Your IRA Taxed When You Terminate Your Green Card?

Is Your IRA Taxed When You Terminate Your Green Card?

When a U.S. taxpayer is ready to relinquish their U.S. citizenship or terminate their green card, they may become subject to exit taxes — depending on whether they are considered a covered expatriate or not. One common type of investment that many taxpayers hold is an IRA —either a Traditional IRA or a Roth IRA. A concern for many taxpayers when they are ready to give up their citizenship or terminate their green card is what happens to their IRA. Will they be taxed at exit, or are they able to maintain their IRA — or both? Let’s take a brief introductory look at what happens to an IRA after a person gives up their citizenship or terminates their green card.

Are You a Covered Expatriate? (No)

Taxpayers who are not covered expatriates are not generally subject to the exit tax when they give up their US status, such as US citizenship or a green card. Thus, there is no immediate tax implication for the IRA. Typically, what happens is that the taxpayer will update the IRA administrator that they are no longer a US person for tax purposes and will submit a W-8BEN instead of a W-9. Then, in the future, when they begin receiving distributions, the default position will be that the planned administrator will withhold 30% income for the non-resident alien (FDAP rules). The taxpayer may be able to claim treaty benefits to reduce or eliminate any withholding, depending on which country they are in, whether there is a tax treaty or not, and the type of IRA that they hold.

Are you a Covered Expatriate? (Yes)

If a taxpayer is a covered expatriate, then the rules are more complicated and there may be a tax implication. If the taxpayer who is giving up their citizenship or terminating their green card is a covered expatriate, the key issue will be the type of IRA the taxpayer has:

Traditional IRA

In general, if the taxpayers are covered expatriates, then the amount of money in a Traditional IRA is deemed distributed when they exit the United States. For example, if there is $2,000,000 in the IRA, then the taxpayer loses the tax benefit of the IRA, and they will have to include the $2,000,000 (unless any portion of it already has a tax basis) as part of their income on their final dual status tax return. Just because the taxpayer must include the amount of money in their tax return does not necessarily mean that they must close the IRA. The taxpayer will have to communicate with the plan administrator to determine whether the administrator will allow the taxpayer to maintain the traditional IRA even after they are no longer a US person for tax purposes. Typically, the plan administrators will allow the taxpayer to maintain the IRA, but may no longer allow for any contributions.

Roth IRA

Presuming that the taxpayer meets the age requirement and timing requirements — even if they are considered a covered expatriate — they are not taxed on the distributions. In other words, just being a covered expatriate does not make a Roth IRA taxable even at exit. As with the Traditional IRA, some plan administrators may allow the taxpayer to continue to own the IRA even if they are no longer a US person, but this may vary from plan to plan. Likewise, most plans will no longer allow the non-resident to make any further contributions.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

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. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.