More on QROPS and the IRS
Dec 10th 2010, 7:53 pm
#1
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Joined: Dec 2010
Posts: 1
More on QROPS and the IRS
I'm trying to move some funds to a QROP and then the tax-free lump sum into the United States. I've read about all the confusion regarding what the IRS might demand.
Does this clear it up? It seems for people who accumulated their funds BEFORE they became US residents, they are mostly exempt from paying income tax on the sum.
Its from IRS 575 from 2009 (the latest)_
Foreign employment contributions while a nonresident alien. In determining your cost, special rules apply if you are a U.S. citizen or resident alien who received distributions in 2009 from a plan to which contributions were made while you were a nonresident alien. Your contributions and your employer's contributions are not included in your cost if the contribution:
*
Was made based on compensation which was for services performed outside the United States while you were a nonresident alien, and
*
Was not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if paid as cash compensation when the services were performed.
Opinions welcome.
Does this clear it up? It seems for people who accumulated their funds BEFORE they became US residents, they are mostly exempt from paying income tax on the sum.
Its from IRS 575 from 2009 (the latest)_
Foreign employment contributions while a nonresident alien. In determining your cost, special rules apply if you are a U.S. citizen or resident alien who received distributions in 2009 from a plan to which contributions were made while you were a nonresident alien. Your contributions and your employer's contributions are not included in your cost if the contribution:
*
Was made based on compensation which was for services performed outside the United States while you were a nonresident alien, and
*
Was not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if paid as cash compensation when the services were performed.
Opinions welcome.
Dec 11th 2010, 6:31 am
#2
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Joined: Aug 2004
Posts: 4,754
Re: More on QROPS and the IRS
Look at the Uk/US tax treaty, it will apply in your situation and has specific sections on pensions and retirement accounts.
QROPS are not recognized by the IRS, but UK pension funds are (under the treaty) so if you are moving money from a UK fund to a QROP you might run into trouble with the IRS not recognizing it's tax free status. The tax treaty paragraph 1(b) of article 17 covers the taxation of retirement fund distributions.
Of course check with a professional as this is a very complex area.
QROPS are not recognized by the IRS, but UK pension funds are (under the treaty) so if you are moving money from a UK fund to a QROP you might run into trouble with the IRS not recognizing it's tax free status. The tax treaty paragraph 1(b) of article 17 covers the taxation of retirement fund distributions.
Of course check with a professional as this is a very complex area.
Last edited by nun; Dec 11th 2010 at 6:42 am.
Dec 19th 2010, 12:09 am
#3
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Joined: Nov 2007
Location: South Staffs UK & Gulf Coast Florida
Posts: 137
Re: More on QROPS and the IRS
Foreign employment contributions while a nonresident alien. In determining your cost, special rules apply if you are a U.S. citizen or resident alien who received distributions in 2009 from a plan to which contributions were made while you were a nonresident alien. Your contributions and your employer's contributions are not included in your cost if the contribution:
* Was made based on compensation which was for services performed outside the United States while you were a nonresident alien, and
* Was not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if paid as cash compensation when the services were performed.
[/B]
This extract generally refers to employer or group based plans (like a 401K) where contributions have been made pre-tax by employer or employee (via salary). Not included in 'cost' suggests that this part will be taxable.
If you have personal plans then these will have contributed to with after-tax £'s and therefore would equate to your 'cost'. The IRS will generally not recognise UK tax relief added on as part of 'cost' as it makes the plan non-qualifying for US purposes. You may therefore only be taxed on the profit over and above your own 'net' cost.
If a lump sum distribution is to be taken then both types of above plan and costs have to be taken into account, and also do not assume that 25% of the lump sum will be tax-free, as in the UK. Proper tax counsel needs to be taken on this point and an individual's circumstances and plans. (Pete Newton on these boards is as good a start point as any for good advice as opposed to 'tire-kicking').
Neither is it a given that a transfer to a QROPS is tax-friendly from a US perspective. Again tax counsel is advised.
As a general aside, those with UK personal pensions (and ISAs) should be reporting these on the Foreign Bank Account (FBAR return) where the aggregate value of these and other 'accounts' exceed $10,000 in any year. Failure to report and or voluntary correct previous years FBAR's may have consequences.
No part of this answer is advice and should not be construed as such. As ever, individuals should seek independent advice from an appropriate professional.
* Was made based on compensation which was for services performed outside the United States while you were a nonresident alien, and
* Was not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if paid as cash compensation when the services were performed.
[/B]
This extract generally refers to employer or group based plans (like a 401K) where contributions have been made pre-tax by employer or employee (via salary). Not included in 'cost' suggests that this part will be taxable.
If you have personal plans then these will have contributed to with after-tax £'s and therefore would equate to your 'cost'. The IRS will generally not recognise UK tax relief added on as part of 'cost' as it makes the plan non-qualifying for US purposes. You may therefore only be taxed on the profit over and above your own 'net' cost.
If a lump sum distribution is to be taken then both types of above plan and costs have to be taken into account, and also do not assume that 25% of the lump sum will be tax-free, as in the UK. Proper tax counsel needs to be taken on this point and an individual's circumstances and plans. (Pete Newton on these boards is as good a start point as any for good advice as opposed to 'tire-kicking').
Neither is it a given that a transfer to a QROPS is tax-friendly from a US perspective. Again tax counsel is advised.
As a general aside, those with UK personal pensions (and ISAs) should be reporting these on the Foreign Bank Account (FBAR return) where the aggregate value of these and other 'accounts' exceed $10,000 in any year. Failure to report and or voluntary correct previous years FBAR's may have consequences.
No part of this answer is advice and should not be construed as such. As ever, individuals should seek independent advice from an appropriate professional.
Dec 19th 2010, 9:28 pm
#4
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Joined: Aug 2004
Posts: 4,754
Re: More on QROPS and the IRS
As well as FBAR in the next year or so FATCA will be implemented. In it's current form you'll have to report foreign accounts over $50k and the foreign financial institution where you have that account will too. If they don't the IRS will require them to close your account or they'll levy penalty taxes of any US assets they have. Most UK banks etc don't have enough US clients to make this reporting worthwhile and if they did it they'd probably be breaking various EU privacy laws so they might just close you accounts for an easy life.
