timetogohome

In fact I have just been advised that the 'Exit' tax imposed by the IRS ion IRAs is enforced irrespective of electing for either option # 1 or # 2. i.e. That 'Exit tax' is applied in both cases - as soon as it becomes apparent that you've relinquished your US residency status.

nun

Who told you that? The expatriation tax comes into play if you are a high earner ( approx $150k for the last 5 years) or have over $2M in assets. Then you have to mark-to-market. there is no automatic exit tax on an IRA, but if you do have to pay the exit tax I think you might have to give up some treaty rights on form 8854.

If you do scenario #1, you will have a big tax bill as your income will be very high for a single year and you loose all the tax deferred growth.

If you do #2 and leave the IRA where it is the UK/US tax treaty allows it to grow tax free and as a UK citizen resident in the UK you will only be taxed on any income by the UK. You file a W8-BEN with the IRS to claim exemption form US withholding and tax on any income under Article 17(1)(a).

If we are taking about asset values over $2m or high average annual incomes it's probably best to seek professional advice, or become a US citizen

timetogohome

Thanks - I was just told that the IRS 'Exit' tax comes into play by an 'Independent Financial Adviser' at one of the banks I deal with. The IFA said that it didn't matter whether I went for option #1 or # 2 - but that the IRS would levy the 'Exit' tax (at my marginal rate of 32%) in both cases as soon as I effectively relinquished my US Permanent Residency status. Hence, I'm very keen to hear from other forum members who've been through this situation.

nun

Do you meet the income and asset thresholds for the expatriation tax?

http://en.wikipedia.org/wiki/Expatriation_tax

timetogohome

Possibly on the income side if you mean average joint income (self & spouse) over the last 5 years - but maybe not on the assets side unless you include proceeds from the eventual sale of the house. Either way the IFA said it made no difference - as I said he stated that it took effect as soon as I effectively relinquished my US Permanent Residency status - nothing to do with my income or assets. I think I need a good International Tax Adviser - familiar with USA/UK tax issues as they relate to IRAs - but have heard that these guys are really expensive. Would still be interested to hear from others on this forum who've been through this situation and their specific experiences.

nun

The income and asset levels are crucial. If you don't meet those and can certify that you have paid your taxes properly for the last 5 years then there's no exit tax. What is the citizenship of your wife? If you are both expatriating I imagine you'd split the income and assets for the purposes of the taxation threshold as you each have to file 8854s, or if she's a US citizen you can transfer assets to her to get you under the thresholds.

http://hodgen.com/question-about-exp...n-from-reader/

I'd double check on that though.

Anyway I'll assume that you don't have to pay the expatriation tax.

So if you cash in the IRA while in the US your IFA is correct and you will be taxed on the income just like any other income.

However, assuming you are a UK citizen and give up the Green Card to live in the UK the best thing to do (IMHO) is to leave the IRA where it is and take income as usual. Under US law the gains are tax deferred and under the US/UK tax treaty they are also tax deferred in the UK under Article 18(1). when you take income out the income is US tax free, but fully taxable in the UK under Article 17(1)(a). You file the W8-BEN to claim your US tax exemption under the treaty and file SA100 and SA109 self assessment form in the UK. If there were no tax treaty in place as a NRA a 30% withholding tax would be applied. that maybe what your IFA is thinking, but in this situation the US/UK tax treaty exempts you from US tax and withholding.

If the expatriation tax does apply you will need to get professional advice. However, if you become a US citizen there will be no exit tax whatever your income or assets and although you will have to file US and UK taxes the tax treaty prevents you paying more tax than the higher of either the US or UK bills.

Happychappy

You will be able to receive your benefits. http://www.ssa.gov/pubs/10137.html
We are in the same boat. We are also trying to figure out what to do with our 401K. Our tax manager said to roll it over to a Roth or something similar and keep it there till we need it. The only problem we have encounter is that the bank we us in the US will not open up any such account unless we have a US address. We are still researching this and the first thought is to open up a mailbox at The UPS Store which will take in all mail we get and then ship it to us in the UK. This way the bank thinks we have a US address and we continue to get our statements and keep track of the money. Not all the research has been done yet so I am assuming somewhere along the line there will be an issue that needs addressing. Just my two cents for now.

nun

Rolling a 401k over to and IRA or ROTH IRA is usually a good idea because you can choose your provider and probably get charged lower fees. But if you have a reasonable 401k that you are happy with there's no desperate need to move the money. The ROTH might have additional tax advantages, but that's going to depend on your income tax rate.

If you set up an account with someone like Vanguard or Fidelity while you have a US address there will be no issues with you doing transactions when you move abroad.

Happychappy

When it comes time to collect on retirement, will they send you a check each month, do a money transfer into your UK bank, or what? And if you keep contributing to it from the UK, do you send them a check/money transfer or something else? If you set it up with a US address and then move, what happens if they send something to that address and you are no longer there? I have a stock portfolio with Vanguard already so they know our address and we get things from them from time to time.

That is the part that is stumping us. Does citizenship come into play at some point in the future? After awhile my husband loses his green card and will revert back to his German citizenship if he doesn't spend a month in the US from time to time. Can that affect the Roth in anyway? And must we keep filing US income tax for the rest of our lives? I do hope there is a good tax accountant in the UK that knows US tax issues and we can find one.

nun

You can instruct them to do whatever you like; it's your money.

You can only contribute to a ROTH or IRA if you have earned income on a US 1040. If you work outside the US that can only happen if you are a US citizen and you use the foreign tax credit rather than foreign earned income exclusion.

I wouldn't let that happen. Either go to email for all statements or change your address, they are ok with sending documents to foreign addresses.

Yes, your citizenship will determine how you are taxed on any distributions.

You should be proactive about the green-card so you know your residency status. If you are leaving the US to become resident elsewhere I would file n I-407 with INS and an 8854 with the IRS to notify them you are giving up the green card. Obviously this has to be carefully considered, but until the IRS receives the 8854 they will still consider you to be a US resident for tax purposes.

The gains and income from the ROTH is always US tax free, but you will have to investigate whether they are also tax free where you reside. They are tax free for UK residents.

If you are US citizens or green card holders you have to file a US tax return each year if you habe more than $9.5k income. If you take distributions from IRAs, 401ks etc your administrator will send you a 1099-R to document these and if they are send to you outside the USA they also have to withhold either 10% or 20%. The you must pay tax on those distributions wherever you live. In the UK that will require a UK self assessment form (SA100) and filing of the foreign pages. Finally file a US 1040 to take credit for those foreign taxes and the US withholding tax.

If you are NRAs it's a lot simpler as you only have to file US taxes on US source income, and that does not usually include IRA, 401k distributions. You file a W-8BEN with your administrator to certify that you are a NRA and claim the relevant tax treaty exemption from US taxation. Then you just have to pay tax where you live.