Chapter 12: Issues surrounding 401k, IRAs, Roths and Americans Abroad

Are you living outside the United States?

Are you thinking about relinquishing U.S. citizenship?

Do you have an IRA or other retirement planning account in the United States?

Are you wondering about the effect of relinquishing U.S. citizenship has on your IRA?

The answers to some of these questions will depend on what country you reside AND the tax treaty that your country has with the United States.

This post is for  you!


Introduction – In General

To quote from David Kuenzi of Thun Financial:

Introduction Expat IRAs and Roth IRAs

Even under the most conventional of circumstances, American taxpayers struggle to fully understand the myriad of tax advantaged retirement investment options they have. IRAs, 401(k)s, Roths, Individual 401(k)s, 403(b)s, deferred compensation plans, and defined benefit employer pension plans are some of the many possible investment choices from which American taxpayers might choose. Each has slightly different tax implications and a separate set of complex compliance rules, contribution limits, mandatory withdrawal requirements and other features. For Americans abroad, matters are further complicated by a broad range of special tax considerations, both U.S. and country-of-residence, that factor into the equation. The good news is that Americans abroad generally have the same opportunities as do Americans at home to accrue tax benefits from tax advantaged retirement accounts. In fact, under certain circumstances and with proper planning, U.S. expats may be able to manage their foreign residency to gain special advantage.

In this note, we guide U.S. expats to compliant and efficient use of IRAs and Roth IRAs. It also addresses the potential advantage of Roth conversion and broader oversea U.S. citizen tax strategies to use.

For the sake of simplification, this discussion assumes all traditional IRA contributions are pre-tax contributions only. The effect of U.S. state and local tax rate are not factored, except where explicitly discussed.
There are a number of issues that arise in relation to to Americans abroad and their IRAs and Roths.

Source: IRAs, Roth IRAs and the Conversion Decision for Americans Living Abroad (2018) – Thun Financial

This post introduces a range of issues which include:

1. In General: Americans abroad can invest in traditional of Roth IRAs but they can’t file their tax returns excluding their income using the FEIE

2. In General: American expatriates: The proper care and feeding of the IRA

The post is referenced in he above tweet was written by Chad and Peggy Creveling and appeared in the Wall Street Journal on August 23, 2016. It is well written and interesting. You will find some of their blog posts here. The post will NOT be of interest to “accidental Americans’ and other “long term” Americans abroad. The reason is simple. The rules are so complicated that only short term – “Homelanders Abroad” would undertake the compliance burden.

Nevertheless, I recommend the article to you. It will reinforce the difficulty of navigating U.S. tax rules if you live outside the United States.

A second post from the same authors:

3. Canada: The U.S. Canada Tax Treaty provides many benefits for Americans who move to Canada with a pre-exising Roth – it can grow forever tax free

4. Canada: How Americans moving to Canada can maximize the use of their existing Roth IRA

5. The UK: Similar benefits are available to Americans living in the UK

6. Canada: An IRA can be rolled into a Canadian RRSP – but be very very careful how this is done or you will erode the value of the IRA. This requires the proper integration of both U.S. and Canadian tax rules

7. In General: Relinquishment and “covered expatriates”: “Deferred compensation plans” and “Specified tax deferred accounts” are subject to particularly punitive tax treatment (full income inclusion) upon relinquishment of citizenship if the individual is a “covered expatriate” (unless a timely election is made with respect to an “eligible” deferred compensation plan)

8. In General: Relinquishment and “non-covered expatriates”: Traditional 401Ks and Roths are U.S. situs assets for the purposes of the U.S. Estate and Gift Tax

9. In Conclusion: It is essential that you get country specific advice – probably from advisors in your country of residence

John Richardson





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