Another 401K Tax Question With a Twist

[ShokWaveRider]

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

 

[saluki9]

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

 

[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..

 

[ShokWaveRider]

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

 

[Texas Proud]

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.

 

[LOL!]

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

 

[ShokWaveRider]

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

 

[nun]

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.