Moving IRA to foreign country for tax purposes

[Zero]

Looking thru the discussion threads on IRA issues, I have not seen this discussed.

The wife and I are moving to Australia for at least a year and will decide on pursuing permanent residency.

If I transfer all my financial accounts into Australian financial institutions, will my IRA still be treated to US tax laws? Or can I pay the taxes in Australia after I get residency?

 

[Alan]

Did you browse this thread?
http://www.early-retirement.org/forums/f29/giving-up-us-citizenship-50055.html

If you are a US Citizen, you will have to pay US taxes no matter where you live. I expect that transferring your IRA into Australian financial insitutions will trigger US taxes.

You'll need to consult a tax pro, no matter what advice is given here.

 

[Texas Proud]

I think Alan is right...

They do not have US "IRAs" in Australia.... so it would be a distribution when you moved it and it all would be taxable in the US...


Even if you got residency in Australia... any distribution would be taxable in the US...

You can not avoid US taxes just by moving overseas.... you can if you cheat... but then again, you don't have to move overseas to cheat...

 

[DangerMouse]

Permanent residency does not necessarily mean citizenship. However even if Zero takes up Australian citizenship shouldn't they still be able to retain US citizenship? We are Australian citizens and when we get US citizenship we can maintain the two.

I can confirm there is not such thing as an IRA in Australia. In Australia the 401k equivalent is Superannuation. We have never explored the option of moving IRAs etc. to Oz, however I do know that if you take out Australian citizenship and become entitled to a pension (which is means tested and would expect you would miss out), they offset any US social security against the Australian pension.

 

[Alan]

Permanent residency does not necessarily mean citizenship. However even if Zero takes up Australian citizenship shouldn't they still be able to retain US citizenship? We are Australian citizens and when we get US citizenship we can maintain the two.

Correct. The US allows dual citizenship and I believe Australia does as well. (The only way you can give up UK citizenship is to do so at a British Consulate and I'm certain my brother and his family did not do that when they became Australian citizens).

You may even find a paragraph in your Australian passport explaining that if you are a citizen of another country that you can be conscripted into the miltary of whichever country you happen to have residency in. (our US & UK passports both have a section on Dual Nationality / Citizenship)

 

[79protons]

Even if you move to another country and give up USA citizenship, they still hold you for taxes for a period of 10 years I believe. I assume this would refer to taxes earned from usa sources (pensions, ira, stocks, etc.)

 

[M Paquette]

Even if you move to another country and give up USA citizenship, they still hold you for taxes for a period of 10 years I believe. I assume this would refer to taxes earned from usa sources (pensions, ira, stocks, etc.)

Take a look at the Heroes Earnings Assistance and Relief Tax Act of 2008 (the HEART Act). The US now has an exit tax sufficient to whack a chunk out of many early retirees.

Internal Revenue Bulletin - November 9, 2009 - Notice 2009-85

Section 6 of the above link covers IRAs. They're treated as a full distribution occurring on the day before the expatriation date, but with no early distribution tax (penalty).

 

[Zero]

Well, thanks everyone for the information and comments. I suspected it might be nearly impossible to change the IRA to another countries system. I'm mainly looking at the IRA as a major tax burden.

The concept of tax-deferred savings seemed grand in the accumulation phase but now as I ponder the impacts of forced RMD amounts at age 70, the tax man certainly regained his pound of flesh in spades.

If I were recommending to a young person (given my hindsight), I'd caution them to look at the future tax implications closely and don't be fooled by the mantra of: "Let the money grow tax free and then collect when you are in a lower bracket." That's not exactly how it is working out for me.

 

[Alan]

It's thanks to people like yourself, zero, sharing their experiences that have me embarking on a plan of Roth conversions and tIRA draw down long before I get to age 70.

Sorry to hear about your predicament, but thank you for sharing.

 

[Zero]

Alan, I think that is exactly what I should have started as soon as I retired but the guru's all seemed to say, "keep the tax deferred money working as long as possible."

That looks like "bad" advice for folks who might have accumulated a nice nest egg in an IRA.

Couple that with advice to wait till 70 for SS and whamo, the tax implications are scary.

Say a person was fortunate and retired with $1.25mil in a t-IRA at age 60, well by age 70 with luck, it might be $2.5mil and the RMD would be $100,000.

Couple that with a couples SS of maybe $50k and that is one ugly tax situation.

So I wished I had seen the light a bit earlier. Would have done exactly what you are doing.

 

[Alan]

Alan, I think that is exactly what I should have started as soon as I retired but the guru's all seemed to say, "keep the tax deferred money working as long as possible."

That looks like "bad" advice for folks who might have accumulated a nice nest egg in an IRA.

Couple that with advice to wait till 70 for SS and whamo, the tax implications are scary.

Say a person was fortunate and retired with $1.25mil in a t-IRA at age 60, well by age 70 with luck, it might be $2.5mil and the RMD would be $100,000.

Couple that with a couples SS of maybe $50k and that is one ugly tax situation.

So I wished I had seen the light a bit earlier. Would have done exactly what you are doing.

As I say, I would have followed that advice myself a few years ago, it is just unfortunate that this has happened for you. Hopefully, it is just more taxes and the rest of your life is good.

 

[79protons]

I wish I had converted my IRA earlier this year. I made some semi gambles with it and have now tripled the value (was $17,000, now $60,000). I really really don't want to pay $20,000 in federal tax.

 

[Alan]

I wish I had converted my IRA earlier this year. I made some semi gambles with it and have now tripled the value (was $17,000, now $60,000). I really really don't want to pay $20,000 in federal tax.

Pay now or pay later (assuming it stays high or goes up more). Life is full of regrets. However, it's a nice problem to have.

 

[nun]

Transferring US IRAs, 401k balances to another country in a seamless/tax deferred way is a non starter as there's no way to do a roll-over as foreign retirement schemes don't fall under rollover provisions. However, he US has tax treaties with many nations so it's possible that you'll get the same tax advantages if you move overseas. For example under the US/UK treaty a ROTH is free of tax in the US and the UK.

The problems all arise because the US taxes on the basis of citizenship rather than residency like other countries. I'm a UK/US dual citizen and I've never paid UK tax as I've live in the US my entire working life.

Other issues with US citizens taking foreign citizenship are how it might affect your rights to SS and if it's done for tax purposes there are stiff penalties. Other bizzare things are that every year you have to declare any foreign accounts with balances over $10k and the rule for investing in foreign mutual funds are draconian leading to you having to "mark to market" every year. This is again because there's no communication between IRS and foreign financial institutions.