descarrga

I Have recently begun contributing to both tax deferred and taxable investment accounts. I think we will be living in the US for at least the next 5-8 years. I believe that new laws were passed in December applying heavy penalties to retirement accounts of permenant residents leaving the US for good. I have posted two related links to other forums below which are slightly confusing on the issue.
- Can anybody explain the law as it stands? I want to know if it's worthwhile maxing out IRA and 401k accounts this year.
- Can a former permenant US resident hold taxable investment accounts whilst living outside of the US?

http://www.diehards.org/forum/viewto...ght=expatriate
http://www.financialwebring.org/foru...c.php?t=106388

Thanks for you answers in advance.

texas_ranger

good question - subscribing on this thread!


C

robin1234

This all sounds confusing. I wonder if the penalties apply to someone who leaves the United States after the age of 59.5? As for withholding, someone at TIAA-CREF (where my 403b is) told me that they have to withhold 30% when sending retirement distributions to folks who live abroad. That sounds reasonable to me, because it would encourage the person to file his/her tax return every year. Filing every year is not something I look forward to (I hope to retire to the UK) but I'm quite resigned to doing it.

paddingtongreen

Nothing firm, but it appears there will a threshhold. $600,000 is the tentative number:

http://taxprof.typepad.com/taxprof_b...%20Summary.pdf

"Revision of tax rules on expatriation. U.S. citizens and long-term U.S.
residents are subject to tax on their worldwide income. Taxpayers can avoid
taxes by renouncing their U.S. citizenship or terminating their residence. This
provision would tighten current law rules to ensure that certain high net-worth
taxpayers cannot renounce their U.S. citizenship or terminate their U.S.
residence in order to avoid U.S. taxes. Under this provision, high net-worth
individuals will be treated as if they sold all of their property for its fair market
value on the day before such individual expatriates or terminates their
residency. Gain will be recognized to the extent that the aggregate gain
recognized exceeds $600,000 (which will be adjusted for cost of living in the
future)."

robin1234

Thanks, paddingtongreen!
OK, this makes it clearer.. a citizen or resident who goes to live abroad and continues to pay US income tax is not affected. The new legislation affects two classes of people (a) Citizens who renounce in order to avoid paying US taxes (b) Permanent residents who expatriate in order to avoid paying US taxes.

nun

Yes that's right, if you abide by the regular US tax laws you are ok, the penalties are for people trying to leave the country to avoid taxes.

I have 401k etc in the US and I plan to retire back to the UK. I'll leave my retirement funds in the US to avoid early withdrawal penalties. When in the UK I'll file 1040s and UK taxes. I'll get credit for US taxes paid on my UK tax return and vis versa.

FYI US ROTH IRAs are tax free in both the US and the UK.

descarrga

Is it not the case that when you go back to the UK to retire you are expatriating and will be penalised upon leaving as well as when you withdraw. The links I posted originally comment on a 30% penalty upon leaving - which has a significant effect on compounding if you are 20 years from retirement. - I guess this may be different for a dual citizen –

Is it the case that under the new law from December there is a 600K exemption then everything beyond that is taxed at the max rate – the further taxed upon withdrawal?

If that’s the case do you guys recommend not paying into retirement accounts and investing in taxable accounts instead? Or is the 600k exemption for all assets – real estate, cash, taxable investments etc.

Any further insight would be a great help.

paddingtongreen

It appears that it will be taxable monies, capital gains and monies in tax protected, etc. in excess of $600,000. It is aimed at the rich.

nun

Expartiation in this context means US citizens trying to give up their US citizenship to avoid US taxes and permanent residents leaving. If you have US retirement accounts and move out of the country you still have to pay US tax on those accounts when you take money from them. So you will have to file US taxes, if you do that there's no issue.

I believe that 30% tax is taken out by investment firms when they send money abroad, you just have to claim it back when you do your taxes.

nun

Actually I just looked at the legislation that the congress just passed and it looks like if you are a PR and leave the US you get screwed on anything above $600k. You don't get the opportunity to defer tax and pay when you take the distributions. It looks like they want you to sell up, pay the tax and get out. If you are a US citizen that only applies if you renounce US citizenship.

paddingtongreen

If you are going to have more than $600,000, and plan to go back to UK, it looks as if you should only fund your 401K to get any employer match, and use taxed money for a Roth IRA.

SamuearlJackson

My reading on this is that the most tax efficient policy for someone who is/plans to be in the US for a lengthy period of time in which they will build up significant retirement accounts is to go the citizenship route (which is fine for us Brits as we can keep our UK passports), and obviously not renounce citizenship if intending to go back to the UK!

The US-UK tax treaty will then apply when taking distributions, rather than any forced expatriation laws.

As another point, could one still claim social security if the expatriation laws apply? I don't see why not if you've contributed for long enough (once again green card -> US citizenship makes this easier all round though).

paddingtongreen

If you don't have enough to be eligible for a pension, by treaty, UK adds the time to their calculations, and vice versa.

SamuearlJackson

I guess this doesn't apply if one has been making class II NI contributions during the time in the US though???

nun

If you have enough UK and US contributions to qualify for pensions in both places you'll get a UK and a US pension. However, when they calculate your benefit they take into account your 2 pensions and you may get a slightly reduced benefit.