How to contribute to Roth IRA from Germany

79 posts in this topic

 

I'm curious too what other American expats do for retirement. I'm a single, early 30's woman and I've lived overseas for 8 years (only one year thus far in Germany). I have nearly 50K in the bank, but no real "retirement" as I'm not contributing to social security and prior to Germany have not had to contribute as a foreigner to any retirement schemes of the countries I have lived in. I know I really should be investing more in retirement, but am at a loss for what to do.

 

It's a bit hard for someone to answer who isn't familiar with your finances and income, but public pensions shouldn't be your focus anyway. You probably should get some professional advice from a US CPA on the tax implications of anything you do, but if I were you I'd look at dividend reinvestment plans you can invest in on a monthly basis, and you might want to consider buying some real estate as well. Tax implications may make US mutual funds a less than optimal choice unless you are eligible to invest in a Roth IRA, and, BTW, IIRC, you don't have to take distributions from an IRA until you are 70. IRAs are usually the best place for investments that would otherwise be taxed every year, as is the case with mutual fund distributions. Also check into Riester Rente.

 

You may also want to look into whether you can make voluntary contributions to US Social Security so that you can at least get to the 40 quarters you need to qualify for it.

 

Nothing in this post should be construed as professional advice, and I would advise consulting an investment professional for this, or two if you need advice that takes both US and German taxation into account.

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Aren't US citizens locked out of most fund-based investing outside of the US because of SEC rules?

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A little birdie Í know swears that isn't necessarily the case, at least not in some European countries other than Germany. Note that the Report of Foreign Bank Account forms that we have to file every year by June 30th are also for securities accounts.

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As I understood it, it wasn't that we couldn't in theory, just that every stock in a fund has to meet certain SEC requirements in order for Americans to be permitted to invest and most international fund managers don't want to be %&§ making sure they do, for obvious reasons. It's just easier to exclude US investors. Individual stocks meeting the requirements would be permitted, but I am not smart enough for that kind of thing.

 

Feel free to PM me with a recommendation if your birdy is a professional advisor.

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Foreign Account Tax Compliance Act should be of interest to readers of this thread- go to page 2 under "Revenue Raisers". Be sure to bring this up to your US tax accountant if you don't do your own taxes and this change in the law applies to you. Note also that this reporting requirement is in addition to the annual Report of Foreign Bank Account, which is due by June 30th and is filed with the Treasury Department, not the IRS.

 

Ann, the birdie isn't a financial advisor, but he did know what he was talking about and he had relevant forms that would have to be filed with the US for a US citizen who would invest in their mutual funds. I am generally not a fund investor, I invest in individual stocks so I wasn't interested for that reason not because of the reporting requirements. An ETF can often be substituted for a mutual fund.

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Gosh this is annoying, I've never felt the need to hire a professional (unless you count TurboTax) to figure taxes and retirement planning out. It's always been straightforward even when self-employed. But now it sounds sort of inevitable that I'll have to.

 

Would be nice to seek help on these things without being completely clueless, but honestly this thread is just making me feel less and less informed. :)

 

tl;dr: I'm not making that much money, I shouldn't have to put with this %#$!.

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I agree with you, but the underlying causes are, above all, tax evasion by US citizens, and also our government making us file tax returns when we live overseas when we otherwise would not have to. The reporting requirements for us keep getting more and more onerous.

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Yea and some of those laws still don't apply to me since I don't have enough money. Though obviously if German institutions are just like "bugger it" and not serving US citizens that effects me. And I was really dispirited by the description of employer-run pensions on the wiki, they sound like a big scam to steal money from employees who don't stay in the same company for decades. Even worst then 401ks which are blatant rent-seeking for financial company fees. The only bright side seems to be that I'll get my pension fees back eventually.

 

and I still don't have even a vague idea of what this year of dual-residency means for my taxes.

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Interesting article. I will definitely send this to my CPA.

 

So Conquistador, does your birdie use a German investment and trading company or something like Etrade in the US and transfers the funds to a US bank account first and then to Etrade? I've considered this as well but it then opens up a grey area in the tax treaty. One could wind up in a situation where the US taxes the gains and then Germany goes ahead and taxes the gains too. Or at least it will raise your taxable income in Germany so you wind up paying a higher effective tax rate.

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Hello. Does anyone have an answer to Shelly5's question from 10-Dec-2010: "Does anyone, who has done a rollover to a Roth IRA while in Germany, or even looked into it, know how that money being rolled over would count into tax filings for Germany, if at all?"

 

When I moved to Germany, Deloitte told me that the Finanzamt is not keen on Roth IRAs. Has anyone already done a conversion from a traditional IRA to a Roth IRA and reported this to their local Finanzamt? What was the process? What were the results?

 

I have both US-sourced and non-US-sourced, as well as pre-tax and after-tax funds in Traditional IRAs. I understand that for US tax I can use earned income tax credits against the base non-US-sourced income deposited in my IRA pretax, originally via a 401K when I was on ex pat assignments.

 

Most of the holdings predate 2009 as well. Which is good for Germany, at least when the holdings are stocks in a normal trading account.

 

With December 2012 coming, and uncertain US tax rates in 2013, it would make sense for me to do a 2012 conversion from traditional IRA to Roth IRA -- if I were living in the US. Here I do not know.

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I know this thread is a little old, but I figured it would be better to use it than create a new one.

 

What are the implications of having an existing IRA/401k when you move to Germany? Most IRAs/401ks are invested in mutual funds that I assume are "intransparent" according to the Investmentsteuergesetz. Does that mean you would need to liquidate any IRA/401k that was invested in a mutual fund so as to not run afoul of the § 6 Besteuerung bei fehlender Bekanntmachung provision?

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@Gold

 

Income accumulating within a 401k/IRA that was established prior to becoming tax resident in Germany will accrue tax-free. The 401k/IRA is essentially tax opaque in Germany for so long as activities stay within it. Thus, the character, amount, nature, etc. of income items are essentially ignored for German income tax purposes until amounts start to get paid out.

 

Your question was a serious issue until 2006 when Article IX of the protocol of changes to the Germany-USA treaty added Article 18A to the treaty to deal specifically with this issue.

 

What was the tax treatment BEFORE the 2006 amendment? Don't ask.

 

How does Germany tax its residents on distributions from a 401K/IRA/Roth?

 

- On all withdrawals?

 

- On only the "income" portion of withdrawals?, i.e. everything except principle amounts earned and paid in (either tax-deferred, e.g. 401K/trad. IRA or post-tax, e.g. Roth IRA)the USA during periods of German non-residence?

 

- On only the "income" portion of withdrawals that accrued on the account following (re)establishment of German residence?

 

The new Article 18A appears to require Germany to grant tax deferral benefits to contributions made to pre-existing 401K/IRA - even after acquiring German residence and presumably from wage income earned in Germany.

 

Quite frankly, I do not know if that is a correct appreciation of the treaty language.

 

If it is, then one must also add to the list of questions above whether and to what an extent a post-residence contribution to an IRA that enjoyed tax-deferral in Germany under Article 18A will be taxed when withdrawn.

 

Quite frankly, I do not know and I have yet to read an authoritative answer on the German tax treatment of IRA contributions to preexisting IRAs or, more importantly, on the tax treatment of withdrawals from a 401k/IRA/ROTH.

 

I would be delighted to read what others have experienced at their local Finanzamt or have concluded based on their analysis of German tax law.

 

In the meantime for you or anyone else who might be interested, here is the 2006 protocol of amendment and the text of the new treaty Article 18A together with the contemporaneous explanatory protocol:

 

ARTICLE IX

The following new Article 18A (Pension Plans) shall be added to the Convention:

Article 18A

Pension Plans

 

1. Where an individual who is a resident of a Contracting State is a member or beneficiary of, or participant in, a pension plan established in the other Contracting State, income earned by the pension plan may be taxed as income of that individual only when, and, to the extent that, it is paid to, or for the benefit of, that individual from the pension plan (and not transferred to another pension plan in that other Contracting State).

 

2. Where an individual who is a beneficiary of, or participant in, a pension plan established in a Contracting State exercises an employment or self-employment in the other Contracting State:

 

a) contributions paid by or on behalf of that individual to the pension plan during the period or attributable to the period that he exercises an employment or self-employment in the other State shall be deductible (or excludable) in computing his taxable income in that other State; and

 

B) any benefits accrued under the pension plan, or contributions made to the pension plan by or on behalf of the individual’s employer, during that period shall not be treated as part of the employee’s taxable income; any such contributions shall be allowed as a deduction in computing the business profits of his employer in that other State.

The relief available under this paragraph shall not exceed the relief that would be allowed by the other State to residents of that State for contributions to, or benefits accrued under, a pension plan or plans established in that State. The competent authorities of the Contracting States shall determine the relief available under this paragraph pursuant to the preceding sentence.

 

3. The provisions of paragraph 2 shall not apply unless:

 

a) contributions by or on behalf of the individual, or by or on behalf of the individual’s employer were made before the individual began to exercise an employment or self-employment in the other State; and

 

B) the pension plan is accepted by the competent authority of that State as generally corresponding to a pension plan recognized as such for tax purposes by that State.

 

4. The term “pension plan” means an arrangement established in a Contracting State which is operated principally to administer or provide pension or retirement benefits or to earn income for the benefit of one or more such arrangements.

 

5.

a) Where a citizen of the United States who is a resident of the Federal Republic of Germany exercises an employment in the Federal Republic of Germany the income from which is taxable in the Federal Republic of Germany and is borne by an employer who is a resident of the Federal Republic of Germany or by a permanent establishment situated in the Federal Republic of Germany, and the individual is a beneficiary of, or participant in, a pension plan established in the Federal Republic of Germany, aa) contributions paid by or on behalf of that individual to the pension plan during the period or attributable to the period that he exercises the employment in the Federal Republic of Germany, and that are attributable to the employment, shall be deductible (or excludable) in computing his taxable income in the United States; and bb) any benefits accrued under the pension plan, or contributions made to the pension plan by or on behalf of the individual’s employer, during that period or attributable to that period, and that are attributable to the employment, shall not be treated as part of the employee’s taxable income in computing his taxable income in the United States. This paragraph shall apply only to the extent that the contributions or benefits qualify for tax relief in the Federal Republic of Germany.

 

B) The relief available under this paragraph shall not exceed the relief that would be allowed by the United States to its residents for contributions to, or benefits accrued under, a generally corresponding pension plan established in the United States.

 

c) For purposes of determining an individual’s eligibility to participate in and receive tax benefits with respect to a pension plan established in the United States, contributions made to, or benefits accrued under, a pension plan established in the Federal Republic of Germany shall be treated as contributions or benefits under a generally corresponding pension plan established in the United States to the extent relief is available to the individual under this paragraph.

 

d) This paragraph shall not apply unless the competent authority of the United States has agreed that the pension plan generally corresponds to a pension plan established in the United States.”

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@Gold

 

My earlier post exceeded the "emoticon limit" so here is protocol 16 to the protocol of 2006 as it relates to the new Article 18A of the treaty:

 

16. WITH REFERENCE TO PARAGRAPH 4 OF ARTICLE 18A (PENSION PLANS)

 

a. For purposes of paragraph 4 of Article 18A, the term "pension plan" shall include the following and any identical or substantially similar plans established pursuant to legislation enacted after the date of signature of this Protocol:

 

aa. In the case of the United States, qualified plans under section 401(a) of the Internal Revenue Code, individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, and section 408(p) accounts, and Roth IRAs under Section 408A), section 403(a) qualified annuity plans, section 403( B) plans, and section 457( B) governmental plans.

 

bb. In the case of the Federal Republic of Germany, arrangements under section 1 of the German law on employment-related pensions (Betriebsrentengesetz).

 

B. For purposes of subparagraph B) of paragraph 3 and subparagraph d) of paragraph 5 of Article 18A, it is understood that:aa) The Federal Republic of Germany recognizes qualified plans specifically listed in clause aa) of subparagraph a), other than Roth IRAs, as arrangements that correspond to pension plans referred to under section 1 of the German law on employment-related pensions (Betriebsrentengesetz). The Federal Republic of Germany shall provide the corresponding relief under section 3 No. 63 of the Income Tax Act; and bb) The United States recognizes arrangements under section 1 of the German law on employment-related pensions (Betriebsrentengesetz) as arrangements that correspond to pension plans referred to in clause aa) of subparagraph a) above.

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straightpoop - since I fall for this ever so often myself: a small b with a bracket turns into an emoticon as can be seen in your text. where possible I either use a small b with space and then the bracket or I rather enumerate with i, ii, iii and so forth.

But all too often I forget... :(

 

Cheerio

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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The new Article 18A appears to require Germany to grant tax deferral benefits to contributions made to pre-existing 401K/IRA - even after acquiring German residence and presumably from wage income earned in Germany.Quite frankly, I do not know if that is a correct appreciation of the treaty language.If it is, then one must also add to the list of questions above whether and to what an extent a post-residence contribution to an IRA that enjoyed tax-deferral in Germany under Article 18A will be taxed when withdrawn.Quite frankly, I do not know and I have yet to read an authoritative answer on the German tax treatment of IRA contributions to preexisting IRAs or, more importantly, on the tax treatment of withdrawals from a 401k/IRA/ROTH.I would be delighted to read what others have experienced at their local Finanzamt or have concluded based on their analysis of German tax law.In the meantime for you or anyone else who might be interested, here is the 2006 protocol of amendment and the text of the new treaty Article 18A together with the contemporaneous explanatory protocol:

<snipped>

 

Just to follow-up on this, the tax year is coming to an end, and I was curious if anyone has investigated Straightpoop's point about the US/Germany double taxation treaty allowing contributions to a US-based retirement account (specifically an IRA) with German sourced income, and declaring the contributions in their Steuererklarung.

 

Like many of the posters in the this thread, I find my investment and retirement options limited not only due to US regulations (FATCA and SEC rules), but practically no self-directed options like a 401k/IRA on the German market. My company offers a salary sacrifice (Pensionskasse) plan through Allianz, but the rates are roughly 3% return/year, and don't allow for any risk. As such, if possible, I would prefer to keep investing in a US-based retirement account.

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One thing to watch out for is the income limits for Roth IRA contributions. You can contribute up to 5500 USD if you make 114K USD or less per year. Between 114K and 129K you can contribute but at a lower rate. Once you exceed 129K USD you cannot contribute and will be penalised at 6% of the contribution per year until you pull the money out. Remember we are talking about USD, which does not seem as much when you convert it to Euros. I got burned once on this...

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All this information is great, thanks everyone and glad people tagged onto the older post. However, I am still not sure I grasp it all. I need to now roll over my US 401K that was created years before I moved to Germany with the same employer.

 

1) I can or cannot contribute to US Roth IRA with funds earned solely in Germany?

If I can, then up to normal US limits based on my German income, correct?

If I cannot, then I can put it in a Roth but not contribute or?

2) I will pay taxes in Germany only at time of distribution but only if I am not residing in the US?

If so, it is only on income earned and not earlier contributions if the fund was created prior to my arrival in Germany? Does this refer to the 401K account or the Roth I want to set up?

 

I had split pay between US and Germany up to this last pay month that we are in. I was receiving checks in both places, but only paying taxes in Germany. I now will only be paid in Germany.

 

I hope someone can help me better understand.

 

Thank you!

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No idea how a 401k rollover would be handled, but be sure to double check everything if you decide to do that. It could be considered a taxable event in the US and might cause you to owe additional taxes in Germany.

 

1) Assuming you have earned income and do not take the FEIE, you can contribute up to $5,500 this year to a Roth IRA with money earned in Germany.

 

2) Who knows what will happen in 30 years and according to Straightpoop, it is not 100% clear-cut on how distributions will be taxed. It's probably safer to assume that if you were to start taking distributions today from your Roth IRA while a tax resident in Germany, you would need to pay tax to Germany on that income. It does not matter when the money was contributed. As for taking distributions from a 401k plan while living in Germany, you would probably also need to pay taxes on those as well.

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