Tax Guidelines for IRAs: Implications After Renouncing U.S. Citizenship or Losing Green Card
For non-resident aliens (NRAs) who have relinquished their U.S. citizenship or green card and live abroad, managing U.S. retirement accounts can be a complex task. Here's a breakdown of the key points to consider.
Traditional IRAs and SEP IRAs
After renouncing U.S. citizenship or abandoning green card status, the individual is treated as an NRA for tax purposes. Income distributions from these IRAs are generally subject to a flat 30% U.S. withholding tax on the taxable portion of distributions sourced from the U.S., except for capital gains, which are typically not taxed for NRAs[5]. Tax filing is done using Form 1040NR, reflecting U.S.-source income only[3][5].
Roth IRAs
Contributions require earned income that is subject to U.S. taxation. NRAs living abroad generally do not have U.S.-taxable earned income (especially if foreign earned income is excluded under the Foreign Earned Income Exclusion), so they typically cannot make new contributions to Roth IRAs[2]. Distributions from Roth IRAs, if qualified, are generally tax-free; however, as an NRA, you may lose the benefit of tax treaties, so any earnings withdrawn could face withholding depending on treaty status[5].
The Foreign Earned Income Exclusion (FEIE) complicates Roth IRA eligibility because excluded foreign income does not count as earned income for Roth IRA contributions, effectively disqualifying many NRAs living abroad from contributing[2].
Upon renunciation, the cost basis of assets in your IRAs or investments resets to the market value on the day before renunciation[5]. Banks and brokers must be notified of your NRA status via Form W-8CE[5].
Estate Tax Considerations
NRAs are subject to U.S. estate tax on IRAs, Roth IRAs, and SEP IRAs at death, with a paltry $60,000 exemption amount[1]. Some estate tax treaties can provide relief by modifying situs rules or expanded exemptions, but many treaties don't address IRAs.
Early Withdrawals and Penalties
If a nonresident alien withdraws funds from the traditional IRA, SEP IRA, or Roth IRA earnings before reaching age 59½, the amounts are subject to a 10% early withdrawal penalty. Certain exceptions can apply to waive the 10% penalty[4].
Covered Expatriates
Relinquishing U.S. citizenship or a green card held for at least 8 tax years may classify the individual as a "covered expatriate" under the U.S. expatriation tax regime[6]. In cases of expatriation, it is recommended that the individual consult a U.S. international tax advisor for advance planning as it may be possible to prevent covered expatriate status or mitigate the tax effects[1].
Key Takeaways
- Distributions from traditional IRAs, SEP IRAs, or non-qualified Roth IRA earnings are treated as U.S. source income and are subject to a 30% withholding tax.
- Roth IRAs, funded with after-tax dollars, avoid this deemed distribution treatment but may face withholding on future earnings withdrawals.
- Traditional IRAs and SEP IRAs hold pre-tax contributions, so withdrawals are taxed as ordinary income in the U.S. for nonresident aliens, with a 30% flat withholding tax typically applying unless reduced by a tax treaty.
- Roth IRA contributions can be withdrawn tax-free at any time, but earnings are tax-free only for "qualified distributions" (after age 59½ and a five-year holding period).
- The U.S. doesn't allow direct transfers of IRA funds to foreign retirement accounts without treating them as taxable distributions, complicating access for nonresident aliens living abroad.
Understanding the tax treatment of retirement accounts can help avoid unintended tax consequences. It's crucial for U.S. citizens and green card holders who are contemplating giving up U.S. status to be proactive in their tax planning to preserve hard-earned wealth.
Read also:
- Coastal men's disruptions of dolphin gatherings might lead to jail sentences
- California customers overcharged by Walmart face a penalty of $5.6 million due to pricing discrepancies.
- Stripped-down versions of the Model 3 and Model Y electric vehicles will be introduced by Tesla.
- Affordable Electric Vehicles from Ford Set for Sales Debut
