If I move my retirement (IRA, ROTH IRA, etc) to/from the US - what tax impact will it have?
The following article aims to answer the following questions:
1. Is there a penalty for moving retirement funds from the U.S. to abroad?
2. If so, how can these penalties be avoided?
3. Are there any cases where the penalty is waived?
4. How can TFX help me find out my cost of doing this?
Can I move funds between my U.S and non-U.S. financial accounts?
Technically, moving funds across border can be done in either direction - to and from the U.S. In general, there are no U.S. tax consequences or penalties associated with the actual cross-border funds transfer.
Cross-border transfer of retirement accounts is far more complicated
Withdrawal of funds from a U.S. employer retirement plan (i.e. 401K, 403b) or U.S. Traditional IRA is ALWAYS treated as ordinary income because Traditional IRA was funded with pretax money. If you are younger than 59 ½ then you will pay 10% early withdrawal penalty in addition to your regular tax rate.
Only a rollover (i.e. transfer of funds to another U.S. Traditional IRA account) is a tax-free and penalty-free event, regardless of the amount of funds transferred and regardless of your age. The best way to ensure the tax-free character of funds transition is to initiate a direct rollover.
If you accidentally made a withdrawal not knowing about the direct rollover option, you can deposit these funds to a new account or return it to the original account. However, take note that this must be done within 60 days avoid tax and penalties. The designated account must be a U.S Traditional IRA. Retirement plan established in any country outside of the United States does not qualify for a tax-free rollover to or from the U.S.
Can I transfer a non-US IRS-qualified IRA (i.e., UK SIPP, Canadian RRSP, or German Riester and Rürup) to a U.S IRA?
It is important to note that even individual retirement plans treated as IRS-qualified ones (such as the aforementioned options) are treated as non qualified when it comes to transfer of funds from or to the U.S.
This transfer will generate a taxable event.
There are, however, a number of qualifying events that relieve you from the 10% early withdrawal penalty. They include:
- Funds used to pay health insurance premiums for an unemployed taxpayer
- Qualified higher education expenses for taxpayer or her family
- A first-time home purchase.
Early IRA distributions will not bear additional 10% penalty if the funds are used to pay health insurance premiums for an unemployed taxpayer, qualified higher education expenses for his or her family, or a first-time home purchase.
The three qualifying events can only eliminate the 10% penalty but the base tax rate will not be reduced
Tax rate depends on the gross income and may be smaller in the years where overall income drops. Your tax advisor can do the calculation telling you how much you will pay on distribution from the IRA depending on the amount of withdrawal and your overall income for one year or a series of withdrawals spread over a number of years.
Transfer of the retirement funds from the foreign retirement account and moving it to the U.S. will also be treated as U.S. ordinary income. You can not deposit those funds to a U.S. retirement account, whether it is Traditional or ROTH IRA. U.S. tax consequences of such withdrawal depend on the Tax Treaty with the country where account was held, your U.S. tax residency status (citizen, green card holder or resident alien) and timing of the withdrawal.
The U.S. tax burden will be lesser than you may expect because your own contributions will be excluded from taxable amount. Contributions made by your employer will also be excluded to the extent that they were reported on your tax returns. Thus it will be mainly growth in the account that you'd have to pay U.S. tax upon withdrawal of lump sum from foreign retirement account. And, of course, tax paid abroad (if there was tax paid on the withdrawal) will be applied as foreign tax credit against the U.S. tax due on that part of your income.
Funds transfer between foreign retirement accounts will not be taxable in the U.S. if you transfer funds between the foreign retirement account of the same type, within the same country.