How to contribute to Roth IRA from Germany

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Anyone know what the affect of doing a backdoor Roth IRA contribution would be for German taxes?  If you contributed $5,500 to a Traditional IRA at the beginning of the year in a money market fund or something that didn't earn interest and immediately converted it, there should be no taxable income to report to Germany, oder?

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On 6/23/2015, 4:25:17, Gold and a Pager said:

Anyone know what the affect of doing a backdoor Roth IRA contribution would be for German taxes?  If you contributed $5,500 to a Traditional IRA at the beginning of the year in a money market fund or something that didn't earn interest and immediately converted it, there should be no taxable income to report to Germany, oder?

 

I would be interested in feedback on this question, as this is what I have been doing ever since the introduction of the Roth IRA conversion. I contribute after tax dollars to a traditional IRA (claiming no exclusion) and immediately convert.

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@ijump206 and @Gold and a Pager - I learned about this backdoor Roth IRA last year from a blogger, and I'd like to try to do it this year. Would one of you please walk through how you do it? 

 

My assumption is:

- Contribute $5500 to a deductible Traditional IRA with a money market fund in 2018

- Convert immediately from Traditional IRA to Roth

- File 2018 taxes using the Foreign Tax Credit instead of FEIE 

 

Is this correct? What paperwork must I watch out for? 

 

Usually I just file my US taxes with the FEIE, and I'm proud that I rolled over $4k from a Rollover IRA into a Roth in 2017 tax-free, as it is under my personal exemption and standard deduction. 

 

I still have more money in my Rollover IRA I could roll over next year, and I am wondering if I could do both for 2018:

1. roll over $4k from Traditional IRA to Roth tax-free using my personal exemption and standard deduction AND 

2. contribute $5500 to a Traditional IRA and immediately convert to Roth 

 

Also, I read online that filing as married filing singly (my partner is German), I could get the personal exemption of my partner who is a German working in Germany. Then I'd be able to convert more of my traditional IRA to Roth. Has anyone done this? 

 

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Hi there,

I am a US citizen with a German employer. 

I am looking into ways that I can save money in a traditional or Roth IRA, and I've read that the salary earned during days spent working in the US would count as US-source income. 

On the internet I read: "U.S. source income is the amount that results from multiplying your total pay (includes allowances, reimbursements other than foreign moves, and noncash fringe benefits) by a fraction. The numerator (top number) is the number of days you worked in the U.S., and the denominator (bottom number) is the total number of days for which you were paid."

I work for a tech company and believe that if I asked to work from their US office for X number of days, they'd be open to it. So I am trying to calculate how many days I should work in order to be able to contribute $5500 to my Roth IRA.

Has anyone experience in doing this? How would I report this in my US taxes? If I "paid" US taxes on this amount, would I not have to pay German taxes on it? Would I count actual number of days, ie, Monday - Sunday, or just workdays, ie, Monday-Friday? 

 

 

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AFAIK, the IRS says you just need to have compensation, not that it should be US-sourced.

 

https://www.irs.gov/publications/p590a#en_US_2017_publink1000230355

 

One of the kinds of "Compensation for Purposes of an IRA" is listed purely as "wages" with the caveat of "any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs." So if you're not excluding your income with the FEIE, your German income should qualify you to contribute to a Roth IRA.

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I can't remember if I made deductible or non-deductible contributions to a Traditional IRA last year, but I just contributed to a Traditional IRA and then clicked the "convert to Roth" button that Vanguard has and that was it. It means you'll have to file form 8606 with your taxes next year (and of course take FTCs instead of the FEIE).

 

Ideally, you don't want any money in any other Traditional IRAs (is that what you mean by "rollover IRA?") when you do it as it makes things more complicated. I never looked into it too much as it sounded more complicated and it didn't apply to my situation.

 

As for using the personal exemption of your partner, I'm not really sure how that works but I assume it would involve getting them an ITIN which you/your partner may or may not want. In general, I have tried to avoid involving my German spouse in my US Taxes.

 

I can confirm that having a child/other non-spouse dependent makes things easier since you can then start filing with the Head of Household status and not MFS.

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But would the later payout of the Roth IRA be taxable by Germany if the OP retires here?

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On 4/7/2018, 11:44:34, Gold and a Pager said:

AFAIK, the IRS says you just need to have compensation, not that it should be US-sourced.

 

https://www.irs.gov/publications/p590a#en_US_2017_publink1000230355

 

One of the kinds of "Compensation for Purposes of an IRA" is listed purely as "wages" with the caveat of "any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs." So if you're not excluding your income with the FEIE, your German income should qualify you to contribute to a Roth IRA.

 

Thanks @Gold and a Pager for answering! 

 

I'm a bit confused -- did you contribute immediately to a Roth IRA because you're contributing after-tax income or did you contribute pre-tax income to a traditional IRA and then immediately transfer that to Roth IRA? 

 

Unfortunately, I DO have money in a traditional rollver IRA back when I rolled over my 401k into Vanguard, so that is why I went for the FEIE + rolling over as much money as possible under the standard exemption from the traditional rollover IRA into a Roth for tax year 2017. 

 

Thanks! 

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On 2/24/2014, 11:04:07, Straightpoop said:

@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.

If I understand this correctly,  contributions to ROTH IRAs are deductible on German Tax returns. Is that correct?

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@Straightpoop I know this is a very old discussion but maybe you or others here could offer some insight as I couldn't find anything relevant to my situation.

 

I am an Indian citizen and I used to live and work in the US. I contributed to an employer sponsored retirement plan a 403b while living there. Most (95% of it is after-tax money with the rest in after tax and Roth) 

 

I left the US in 2015 and do not contribute to this account anymore. It is still int he US and grows annually.

I have been living and working in Germany since 2016 and only pay taxes in Germany (NOT in the US as I am NOT a US citizen or resident).

I filed taxed since 2016 and I was told by a tax advisor that the 403b account is treated in Germany like a brokerage account and that I should declare and pay capital gain taxes each year on the growth of this and declare the losses which I have been doing even though I checked multiple times if this is applicable for a retirement account that I won't touch until I turn 60.

 

Recently, while discussing retirement plans in Germany, I was told that this is NOT the case and that I don't have to pay capital gains taxes on any money invested in a pension/retirement structure. I cannot find any information on this as most of the info I find when I search involves individuals who are already retired and asking about paying taxes on the monthly payments they receive from their retirement accounts or people who are US citizens which doesn't apply to me.

 

Can anyone help me on how I should be declaring these? Is the second person right that I don't have to pay annual capital gains taxes since this is a retirement account and I am not getting anything from this? Also, again, just to make it clear, I am an Indian citizen with a US 403b retirement account that I do not contribute to anymore living and paying taxes ONLY in Germany.

 

Thank you for your help.

Regards

 

 

 

 

 

 

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3 hours ago, escalera said:

Recently, while discussing retirement plans in Germany, I was told that this is NOT the case and that I don't have to pay capital gains taxes on any money invested in a pension/retirement structure.

 

Can anyone help me on how I should be declaring these? Is the second person right that I don't have to pay annual capital gains taxes since this is a retirement account and I am not getting anything from this? Also, again, just to make it clear, I am an Indian citizen with a US 403b retirement account that I do not contribute to anymore living and paying taxes ONLY in Germany.

 

@escalera

 

The second person's advice is correct.  Income and gains that remain undistributed within a 403b or Roth established in the US before you began/resumed your German residence are neither reportable nor taxable in Germany.  This "internal" activity should remain unreported and untaxed unless and until such time as you take the money out via a distribution (rollovers from one plan trustee to another do not count as distributions).

 

The authority for this statement is Article 18A of the Double Taxation Treaty between Germany and the USA.  Specifically: paragraph 18A (1).

 

Although you are neither a US citizen/resident nor a German citizen, you are a tax resident of Germany and are therefore entitled to claim the benefits of this treaty.

 

 

 

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19 hours ago, Straightpoop said:

@Straightpoop Thank you for confirming. I guess I have to redo all my taxes from the last few years then :wacko: and ask for money back. 

Guess I will goto the Finanzamt and ask what is the best way to do this.

 

19 hours ago, Straightpoop said:

@escalera

 

The second person's advice is correct.  Income and gains that remain undistributed within a 403b or Roth established in the US before you began/resumed your German residence are neither reportable nor taxable in Germany.  This "internal" activity should remain unreported and untaxed unless and until such time as you take the money out via a distribution (rollovers from one plan trustee to another do not count as distributions).

 

The authority for this statement is Article 18A of the Double Taxation Treaty between Germany and the USA.  Specifically: paragraph 18A (1).

 

Although you are neither a US citizen/resident nor a German citizen, you are a tax resident of Germany and are therefore entitled to claim the benefits of this treaty.

 

 

 

 

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On 5/27/2020, 2:30:48, Straightpoop said:

The second person's advice is correct.  Income and gains that remain undistributed within a 403b or Roth established in the US before you began/resumed your German residence are neither reportable nor taxable in Germany.  This "internal" activity should remain unreported and untaxed unless and until such time as you take the money out via a distribution (rollovers from one plan trustee to another do not count as distributions).

 

The authority for this statement is Article 18A of the Double Taxation Treaty between Germany and the USA.  Specifically: paragraph 18A (1).

 

@Straightpoop

I'm curious about the statement that undistributed income and gains in qualifying US retirement accounts are not reportable.

 

My husband and I are filing taxes for the first time in Germany and are working with a Steuerberater. We both have IRAs in the US that we have rolled multiple 401k and 403b plans into from previous jobs. We understand that these accounts are not taxable here in Germany due to the Double Taxation Treaty until such time as we take distributions.

 

However, our Steuerberater is insisting that we must be fully transparent with the reporting of these foreign retirement accounts, even though they will make the case to the tax authorities that we do not need to pay taxes on the capital gains due to the Tax Treaty. They are insisting that we still must show the value of capital gains, either by using detailed account information going back to original dates of acquisition or they can try to make some high end assumptions which will cause a tremendous amount of work (and cost on our end). They are saying we have an obligation to report this information, and the German tax authorities have a right to accept or reject the claim.

 

Furthermore, they indicate that because a 401k plan is not explicitly listed in Section 18A of the Double Taxation Treaty (whereas 403b, 457, etc. plans are), they cannot assume that the plans are part of the qualified group. However, they indicate that they will make the case that they should be exempted from taxes. 

 

We of course want to follow appropriate tax regulations, but we don't want to go through the hassle and expense of having our Steuerberater complete the calculation of capital gains if it truly isn't needed. Are we simply working with a very thorough Steuerberater who is making sure every i is dotted and t crossed? (Because they have been really very good for a number of highly complex issues we've run into with our taxes) 

 

Anyone else run into this before?

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1 hour ago, jill_ said:

However, our Steuerberater is insisting that we must be fully transparent with the reporting of these foreign retirement accounts, even though they will make the case to the tax authorities that we do not need to pay taxes on the capital gains due to the Tax Treaty. They are insisting that we still must show the value of capital gains, either by using detailed account information going back to original dates of acquisition or they can try to make some high end assumptions which will cause a tremendous amount of work (and cost on our end). They are saying we have an obligation to report this information, and the German tax authorities have a right to accept or reject the claim.

 

Furthermore, they indicate that because a 401k plan is not explicitly listed in Section 18A of the Double Taxation Treaty (whereas 403b, 457, etc. plans are), they cannot assume that the plans are part of the qualified group. However, they indicate that they will make the case that they should be exempted from taxes. 

 

Just give your Steuerberater the letter of the OFD Karlsruhe of 16.10.2012 "Steuerliche Behandlung von Beiträgen an und Leistungen aus einem amerikanischen 401(k)-Plan" (= Tax treatment of contributions to and benefits from a US 401(k) plan) mentioned in the following post, that letter explicitly mentions 401(k) plans as being among the "eligible" US pension plans.

And please read that entire thread to the very end (since reading just that post has lead to misunderstandings, so I wrote a clarification in the last post).

The Oberfinanzdirektion (OFD) is the superior authority to the Finanzämter (source):

606de1d7e8aa8_2021-04-0718_45_49-DieSteu

 

In Bavaria, they call the OFD the "Bayerisches Landesamt für Steuern":

606de2b8dc64d_2021-04-0718_49_34-DieSteu

 

If your Steuerberater is still in doubt after reading the OFD Karlsruhe letter, he can ask the "Bayerisches Landesamt für Steuern" by e-mail about this: poststelle@lfst.bayern.de

They are nice to Steuerberater who ask questions and usually answer by calling back with the answer within one day.

This way, your Steuerberater will have certainty without putting you through this gruelling process of having to prove all capital gains inside the US pension plan now.

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52 minutes ago, jill_ said:

Are we simply working with a very thorough Steuerberater who is making sure every i is dotted and t crossed?


I have never encountered a German steuerberater who has advised his client as you describe.

 

There is a difference between being cautious and being obtuse.  The difference can frequently be explained by monetary incentives.

 

Do you have a contract with your Steuerberater that allows him to charge you by the hour?

 

 

 

55 minutes ago, jill_ said:

Furthermore, they indicate that because a 401k plan is not explicitly listed in Section 18A of the Double Taxation Treaty (whereas 403b, 457, etc. plans are), they cannot assume that the plans are part of the qualified group.

 

Now that's odd. Protocol 16 to the treaty specifically mentions "Individual Retirement Accounts" which is what you now have.

 

True, neither the treaty nor the protocol specifically mentions "401(k)" but the Protocol specifically mentions 401(a) which is the US tax law that generally describes the qualities any pension must possess to be a "qualified plan".  26 USC §401(k) merely clarifies that deferred compensation arrangements will not be disqualified from inclusion in the 401(a) description of "qualified plan".

 

"Qualified Plan" is specifically mentioned in Protocol 16 to the treaty.

 

Rollovers from one plan trustee to another including to an IRA are clearly not distributions.  I have never heard of anyone questioning that assertion.

 

Perhaps their diligence and thoroughness does not extend to doing basic research.  If they had done that they would likely have read the OFD Karlsruhe's own analysis to which @PandaMunich has provided a link.

 

All of which prompts me to question whether the "highly complex" issues you say he helped with in the past were really that complex - or just time consuming.

 

 

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