You can run from the IRS, but you can't hide
Sat, 01/09/2010 - 07:07 — chrisQ: Do I have to pay taxes on money I take out of my 401(k) if I retire to another country and expatriate?
A: Some retirees head to Florida or Arizona for shelter from the snow and cold. But it sounds like you may be headed outside the U.S. for shelter from taxes.
As you know, 401(k) retirement savings plans allow investors to sock pre-tax money away during their working years so there will be cash available to them in their old age. The money put into the 401(k) is exempt from taxation at the time of contribution. However, when you retire, the money you take out is taxed as ordinary income. You're also required to start taking distributions from a 401(k) after turning 70 1/2 years old.
From the sound of your question, you're wondering if you might be able to escape this tax bill by leaving the country. I'm also assuming you're a U.S. citizen. Be careful. These sorts of tax avoidance ideas have been a top priority for the government. And hunting down those who aren't paying their taxes will likely become even more important as the government tries to pay down its large budget deficits.
With that warning in mind, the government provides little guidance in this area. In the Internal Revenue Service's Publication 590, which describes tax rules pertaining to 401(k) plans, guidance is sketchy. You can read the document here.
But there are a few things the publication states for certain. If you're a U.S. citizen or resident alien with a home address outside the U.S., your 401(k) custodian is required to withhold taxes from distributions. You cannot legally stop the tax withholding.
To get more details, I consulted Mark Nash, a tax expert with PriceWaterHouseCoopers and co-author of the company's 2010 year-end guide to tax and wealth management, available here. Nash offers this guidance:
- U.S. citizens are taxed on income they earn worldwide. Even if you move outside the U.S., but maintain U.S. citizenship, your income including 401(k) distributions are taxed by the U.S.
- Depending on where you move, some nations might also tax your income. And some nations have a treaty with the U.S. to prevent double taxation.
- Distributions from a 401(k) plan are considered to be generated from the U.S. if the contributions were made with income earned in the U.S. Things get much more complicated if you earned some of the income while outside the U.S.
- There are new rules that apply to residents that expatriate after June 17, 2008. that is, those who renounce their U.S. citizenship or resident status. These rules are different for higher income and higher net worth taxpayers. See what the IRS says here.
As you can gather, this is a serious and complicated matter. You should consult a tax professional familiar with international issues and your particular situation for more details.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at [email protected]. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz
Originally posted on USAToday.com
