Roth IRA retirement accounts from the U.S.

Hi all,
Well, I'll probably be moving back to Germany with my wife (who is German) in a few years. Currently, in the US, I have ROTH IRA retirement account. For those of you who are not American or are simply not familiar with it, the ROTH IRA, under US tax laws, allows one to invest post-tax money, but let me grow tax-free (so, if I invest $4000 today at 12%, in 40 years I would have $372,203.88 which would not be taxed at all, neither during growth, nor during withdrawal).

So I was wondering if anyone knows how Germany would view capital gains, interest and dividend payments connected to the account. The money is invested in a relatively simple mutual fund that basically tracks the S&P 500 (so, there is nothing special about the fund, just the account it is in). As far as the US tax code is concerned, I am for all eternity exempt from any taxes on the growth of this account. However, Germany may not view it that way. If I pay German tax rates on this account, then it makes absolutely no sense to put further money into a ROTH IRA (especially considering there is no deduction at the point of investment).

Does anyone know anything about this? Does anyone have a ROTH IRA themselves? For those who are saving for retirement in Germany, what sort of tax-advantaged accounts are available there? What are the tax advantages? (I have as much faith in the German government retirement programs as I do in American Social Security, and I have total faith that Social Security will be quite broke by the time I'd start drawing on it.)

Let me know what you do.

-Michael

I would hazzard a guess that if you reside in Germany when your US savings mature you will
be taxed here at the normal rate. I'd be pretty confident that the mere fact that such
income would have been tax-free that this will cut no ice here.

Double taxation agreement means that it were to be taxed in US "sum A" and the German
tax would be "sum B" then you would be liable here for "B - A" (certainly not "B + A" at least as
far as the Germans are concerned). However if "A" is zero then...

I have a 401K in the U.S. and I'm thinking (probably incorrectly), that if/when I retire in Germany, the money from that account will be paid into my American bank account and then used to travel in the States or transfer to Germany.

Besides, the 401K money is not tax free. It is tax free when you deposit it and normally you pay the taxes on it when it comes out. And normally, this would be at a much lower tax rate (you are older and no longer making money, hence a lower tax bracket).

Why does the German government even need to know?

Its possible that the US government informs them of the payouts as they know you are resident in Germany?

Maybe...but I doubt it. The only reason the gov't knows where I am is because I file my income tax return but there is no requirement to tell the U.S. government that I live elsewhere.

I believe that the US government & the German government have an agreement to inform each other.
And they know where you live.

Similarly my company awards share options (or rather used to) to selected employees. When these get
vested and are immediately cashed in (to take the winnings at no risk) the US authorities (not our company)
informs the Finanzamt. Story goes that some people (well before my time) had to sell houses
to pay off the backlog in tax (1 of many houses u understand). Crying all the way to the bank ...

To kitkat64: I don't have a 401(k), but rather a Roth IRA, whose main advantage is that all cash and all withdrawals are, according to *US* tax code, 100% tax free (assuming you make no withdrawals before 59 and 1/2. On the same note, however, the 401(k) usually makes you pay taxes when you withdraw the money, and not during growth. Are you paying German taxes as it grows now? If not, what evidence do you have, if any, that you have no legal obligation to pay taxes during the growth period?

What I am not worried about is tax at withdrawal time (I'll burn - er, cross - that bridge when I get there). I'm worried about paying tax during growth (which, as I said above, is the huge advantage of the Roth IRA, as opposed to standard IRA's or 401(k)'s).

And to HEM: you really think that the US Government knows where I live? I mean, the FBI might, kinda, know where I live, but honestly, I bet they have better things to do than that. There are tens of millions of non-documented people in the US and the government couldn't say where the are. It's not quite as easy to go undocumented in Germany.

So, basically, I still want to know if anyone knows what German tax implications would be in the following scenario. I own 1000 valued at $10 each at the beginning of the year (and I live in Germany). At the end of the year, I still own all 1000 shares, but the value went up to $12 per share, so I made $2000 in capital gains (I suppose it would be called). Since this is in a ROTH IRA account, I would owe no taxes on the $2000 (neither now, nor when I withdraw it after retirement). Would I own German taxes on the $2000, assuming I live in Germany? I guess most of you who live in Germany moved over before the ROTH IRA became popular/came into existance, so mostly everyone probably has little experience with that.

Thanks for all the replies!

-Michael

Germany will tax you on money you earn and not on money that you already have. A good tax consultant should be able to straighten you out.

So this leads to the major question, how does one find a good tax consultant and financial planner in Germany (particularly Munich) who can help out with these US - Germany issues? I just read in another Toytown threat that some banks won't let US citizens make investments. That follows that any financial planner here in Germany has to know about such international rules (or at least the limitations for US citizens). Fidelity tells me they can't give financial advice to US citizens living abroad (unless they work in an Embassy or on a US military base). Essentially, everyone's hands are tied. :-(

oh no, the TT threat!

anyhow, when i went to open my securities account from the Postbank, I, as a US citizen was first required to fill out a W-4 with my social security number. the guy at the Postbank had no clue what it was (and even sent it off without me signing it - idiot), but i know what a W-4 is. also, he told me that as a US citizen i had a restriction on how i could trade. i could buy stocks, but not funds (i think) and not "options" or was it "zertifikate". oh, I'm sorry, I did know last week, but I also did not care. i only heard what i could buy.

I am new & this is my first post to TT, so if there are other links wrt retirement planning/ international tax advisors, kindly send the links.
I am currently researching revocable living trust/ will for American-German couple. The benefit would be to avoid probate costs. But there are complications if the German spouse has never lived in the US & does not have a SSN. Also, once we begin our residence in Germany, it seems those laws would trump the US will/ trust? If anyone can recommend someone who knows both countries regulations, that would be great.

Is this difficult in principle?

If you reside in Germany, you will be subject to the German tax regime.

Those of us that automatically get tax deducted in another nation have to consider:

(1) whether we might be able to reclaim it from that nation and
(2) how any double tax agreement between Germany and the or other nation works - specifically if we can offset any tax paid in that other nation against our German tax liability
(3) any other solutions that may help us avoid - not evade - tax and minimise our liability.

That's why you need an adviser.

What we do not get is the automatic right to cherry pick the most favourable tax solution to minimise our obligation. That's not how it works.

This is so complicated that you need to tap a vein as I have and get qualified legal help.

The short answer is that assets can grow tax free in any domicile (US for 401ks and IRAs, Germany for Riesters, insurance policies, etc.) but your ultimate tax rate on payout is wherever you're living.

If you or a spouse are US citizens, then you're on the hook for US taxes on any income above the $88,000 per year foreign income exclusion in addition to German taxes, but this tops out due to the tax treaty before it hits 50%.

Trust me ... it sucks. But the silver lining is that the flat 25% Abgeltungsteuer that goes into effect next year should simplify things ... just in time for US Obamarama income rates to potentially even exceed those in Germany.

Living here as a US citizen is a luxury few people can afford without employer tax equalization ... or depressingly low incomes.

I'm not a tax advisor, but I play one on TV.

Start with the fact that Germany does not recognize trusts.

You have 10 years under the tax treaty for US laws to stick, after which you're thrown to the lions.

My only advice: Lawyer up. And forget that midlife crisis Porsche, because it's all going to go there in legal fees.

mikepn, please post back about this if you manage to get any reliable information -- particularly re: Would I owe German taxes on the $2000, assuming I live in Germany?

Thanks.

BTW, wouldn't the potential problem here exist even with a regular (non-Roth) IRA?

As a CPA, I can tell you that in the situation mikepn talked about, you would not owe anything on the $2000 because the capital gains were not realized. He stated that he would still own the shares at year-end so his gains are only on paper. Now if he had sold the shares during the year (even inside a ROTH or 401k) those capital gains would then have been considered to be realized. In that case, US tax law exempts those gains inside the ROTH from any tax and essentially defers those inside the 401k until distributions are taken in retirement. In Germany, however, those gains would be considered immediately taxable which essentially screws US citizens who declare them in Germany.

Honestly, I probably would not bother declaring capital gains or interest/dividend income from a US IRA or 401k in Germany and I suspect most Americans don't. My reasoning here would be simply that you're a small fish and there's essentially no realistic way that the Finanzamt is ever going to find out about what's going on in your US bank accounts. In fact, they probably wouldn't even try unless they suspect they're going to be able to recover a large sum of money and even then, I'm pretty sure that US banks would not just hand over your bank records to a foreign government. (If you're a multi-millionaire then all bets are probably off) I have a tax accountant in Germany who basically formed my opinion on that point (even though I never had IRA or 401k income while I was in Germany).

In the case of the 401k, you've also got to consider the fact that distributions from it will be taxable in the US when you draw it down in retirement so that would essentially mean that your capital gains and interest/dividend income were taxed twice (if you declared them in Germany) which would actually make you worse off than if you had invested in an ordinary taxable account.

People thought that about Liechtenstein too. Before the Finanzamt went and bought records from ... third-hand sources.

... with an offsetting tax credit, of course. Right now, the issue is that a US citizen who has a 0% LT cap gains rate in Germany has to pay 15% to the US. This changes next year, and goes to a flat 25% in Germany. I'm pretty sure there's no way the rate in the US won't go back up to c. 28%, so we may be in the unfamiliar situation of having a lower unified cap gains/interest/dividend rate in Germany than in the US (where investment income is taxed at one"s marginal income rate).

At a max of c. 5% of one's gross income, it's still a cheap call option on returning home ... expecially since you can claim back on a six-year trail.

Expaticus, can you explain what you meant in the above, particularly re: the "six-year trail"?

Thanks.

You can claim back German social security etc. paid in for six years.

Ah okay, thanks. Can you get all of it back or only a percentage?

Also, what determines entitlement? -- i.e., do you have to have been out of Germany for a specific period of time before you are eligible to claim the (German) social security payments?

And if you later return to Germany, do you then have to repay them or do you 'start over from scratch'?

I think you can get it all back, but am not sure.

If you were here before and paid in, left for a while and come back, I would assume you'd have to start from scratch.

I really don't know. Maybe someone else does.