Moving Retirement Overseas Out of the United States
When a US person resides overseas, it is not uncommon that they may want to take their US money with them to whichever foreign country they reside in. This can have serious US tax implications for several reasons. First, transferring money from the United States to a foreign pension plan is generally not considered a qualified rollover that can avoid tax. In other words, moving a big chunk of money from the US retirement into a foreign retirement may be a taxable event. In addition, the taxpayer may now have various reporting requirements such as FBAR and FATCA – as well as Form 3520. Finally, if the person is going to give up their US status then there are the potential expatriation/exit tax consequences. Let’s take a brief look at some of the issues.
Rollovers May be Considered Taxable Distributions
It is not uncommon for taxpayers in the United States to roll over their retirement from one plan to another. Whether it is because their employer-provided more opportunities to move to different retirement providers or the taxpayer switched jobs — or is now retired and wants to have more control over the investment — rollovers are very common and typically not taxable. The problem is within the United States, the rollover generally has to be between qualified plans. Most foreign retirement plans are not considered qualified; therefore the rules are different and the “rollover” transfer may result in a taxable event.
Treaty Election Withholding
When certain permanent residents reside overseas in a treaty country they may want to make a treaty election to be treated as a foreign person for tax purposes. Presuming they do not fall into the expatriation tax pitfall of making the election after having been a permanent resident for eight of the past 15 years, there is the other concern of withholding. The United States typically withholds 30% for non-residents – the person is in a tree country able to make a further relation to reduce or eliminate the withholding.
FBAR & FATCA and Form 3520
US retirement accounts are generally not reportable on forms such as FBAR or FATCA – even if those plans contain otherwise reportable assets. But once the plan itself is considered a foreign pension or retirement plan — and it meets the threshold requirements for filing — there are many potential international information reporting requirements that taxpayers may have to fulfill each year in order to comply. Generally, these forms are required whether or not the taxpayer resides in the United States or abroad, with the defining issue being whether or not they are still considered US persons, and not where they reside per se.
Expatriating Exit Tax (401K vs Ineligible Deferred)
If a person is considering formally relinquishing their US resident status or renouncing their US citizenship, this is referred to as expatriation. If a person formally expatriates from the United States there is the issue of exit tax if they are considered a covered expatriate. Moreover, foreign pension plans are typically considered ineligible deferred compensation — resulting in a grossed up, deemed distribution at the time of expatriation. Meanwhile, if the retirement plan is US-based, it will usually avoid exit tax at the time of expatriation (although the value of the US pension is still included to determine whether or not the taxpayer of meets one of the three covered expatriate tests).
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