Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Another 401K Tax Question With a Twist
Old 08-03-2006, 09:09 AM   #1
Thinks s/he gets paid by the post
 
Join Date: Jun 2003
Location: Historic Florida
Posts: 1,647
Another 401K Tax Question With a Twist

I am very curious abour how taxes are calculated and levied on US Expats with respect to retirement pension income, either from Federal pensions or IRA distributions. I think this is a good question to hash out, as I know a lot of folk are considering moving to cheaper places for a variety of reasons, healthcare probably being the big one.

Here is the scenario. At the moment it is hyperthetical. Because I am only 52, but it is a good time to start investigating.

Husband and Wife work for 20 years in the USA, both are citizens. During this time they amass a small fortune in their combined 401Ks which they convert to IRAs. Not Roth. They retire to another country and want to take distributions. Which country are the distributions taxed in? Does the USA levy taxes on the distributions if the persons are living abroard? The Country of residence will want their cut as they see it as income.

US Citizens are entitled to earn $80k each I think before taxes are levied? But I thought this is limited to income earned outside the USA.

I know there are people here that live abroad, and I am curious if they understand the rules on this. as I don't.

Thanks in advance,

SWR
__________________

__________________
"Arguing with an Engineer is like rolling in the mud with a pig. Just remember that the pig likes it."
ShokWaveRider is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Another 401K Tax Question With a Twist
Old 08-03-2006, 10:01 AM   #2
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Re: Another 401K Tax Question With a Twist

You are still a US citizen, so you still fall under the US tax code (in addition to the country that you would then be residing in)

Your distributions would still generate a 1099-R on which there would be US tax due. If you can show that you also had to pay tax on this in another country you get a tax credit for foriegn taxes paid
__________________

__________________
saluki9 is offline   Reply With Quote
Re: Another 401K Tax Question With a Twist
Old 08-03-2006, 01:28 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,275
Re: Another 401K Tax Question With a Twist

ALL.. repeat... ALL income, no matter where it is earned is considered income for US tax purposes...

They then have some ways of reducing the income with deductions, or reducing the taxes with tax credits... but they tax worldwide income...

The country you live might have different tax laws and you might have to pay tax on it twice... I would ask people who live in a country you might want to visit..
__________________
Texas Proud is offline   Reply With Quote
Re: Another 401K Tax Question With a Twist
Old 08-03-2006, 02:13 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Jun 2003
Location: Historic Florida
Posts: 1,647
Re: Another 401K Tax Question With a Twist

Quote:
Originally Posted by Texas Proud
ALL.. repeat... ALL income, no matter where it is earned is considered income for US tax purposes...

They then have some ways of reducing the income with deductions, or reducing the taxes with tax credits... but they tax worldwide income...

The country you live might have different tax laws and you might have to pay tax on it twice... I would ask people who live in a country you might want to visit..
That is very clear. However the confusion is:

If there are 2 people. There is an ~$160k (Again I think) tax exemption on money earned outside the US. OR does that include worldwide income. The income in this case would be passive in the US (Interest income, Capital Gains IRA withdrawals etc). Actually there would be minimal if no income from the host country at all. But the US citizens in question would live there as they are also citizens of that country.

Confusing I know.

SWR

SWR
__________________
"Arguing with an Engineer is like rolling in the mud with a pig. Just remember that the pig likes it."
ShokWaveRider is offline   Reply With Quote
Re: Another 401K Tax Question With a Twist
Old 08-03-2006, 04:48 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,275
Re: Another 401K Tax Question With a Twist

If I remember correctly... the exemption is for earned income (wages) not passive income... you would be taxed on 100% of your withdrawl in the US. Also, it is considered US sourced income anyhow.... I had a few friends from England who had to pay taxes with capital gains they got here. But they did not have to pay UK taxes as it was offshore income. I do not think they brought it into the country though.
__________________
Texas Proud is offline   Reply With Quote
Re: Another 401K Tax Question With a Twist
Old 08-03-2006, 08:40 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,619
Re: Another 401K Tax Question With a Twist

The exemption is for foreign earned income, not just any old income.* Your IRA money is not foreign earned income, so you can't exclude it.

http://www.irs.gov/instructions/i2555/index.html
__________________
LOL! is offline   Reply With Quote
Re: Another 401K Tax Question With a Twist
Old 08-04-2006, 07:36 AM   #7
Thinks s/he gets paid by the post
 
Join Date: Jun 2003
Location: Historic Florida
Posts: 1,647
Re: Another 401K Tax Question With a Twist

I think I figured that out. Just have to keep paying tax on it here until the dollar is eventually worth something then transfer it to the target country. But that may take 20 years at the rate we are going. I thought we were free here.. We have money but it is only worth anything in the USA. to live in Europe costs us triple. Free to throw our cash away I suppose. Go Figure... All was fine until the current administration ruined everything. Should have seen it coming and left while things were good. Oh Well Hindsight.....

SWR
__________________
"Arguing with an Engineer is like rolling in the mud with a pig. Just remember that the pig likes it."
ShokWaveRider is offline   Reply With Quote
Re: Another 401K Tax Question With a Twist
Old 08-08-2006, 10:19 AM   #8
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Re: Another 401K Tax Question With a Twist

As someone planning on retiring from the US to the UK your question struck a cord with
me. To answer your OP in any sensible way you need to know the country you'll be living in and your residency status there as the way you are taxed will be determined by the tax teaty (if there is one) in force between the US and wherever you're living.

You state that the US citizens are also citizens of the country they'll be retiring to. This may open them up to having their worldwide income taxed by the retirement country too. As an example here's what the situation is for UK/US dual citizens.

1) As a UK/US citizen worldwide income is taxed.
2) As a UK/US citizen ordinarily resident in the UK only UK income and income from foreign sources moved back to the UK is taxed.
3) If you are a UK/US citizen domiciled in the UK then worldwide income is taxed.

So how do you know how much to pay the IRS or HMRC. Well you have to go to the UK/US tax treaty and it gets complicated very quickly. A tax advisor is strongly recommended.
__________________

__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Reply

Tags
401k


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Tax question, about how much I should owe... AirJordan FIRE and Money 7 03-26-2007 04:26 PM
Bond Fund and Money Market Fund Tax Treatment Question terminator FIRE and Money 4 03-01-2007 07:56 AM
capital gains tax question just_hatched FIRE and Money 5 01-31-2006 11:07 PM
401K Question geeman Young Dreamers 17 06-28-2005 09:46 PM
Paying off Debt vs. 401(k) Contributions BigMoneyJim FIRE and Money 4 02-10-2003 11:06 AM

 

 
All times are GMT -6. The time now is 02:38 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.