Just moved to Germany... I'm a US citizen, and my wife is a German citizen with a green card. I've read various older articles here regarding the various US retirements accounts and how they are treated under German tax law, but I wanted to just summarize my understanding, and get some confirmation that it's correct... and hopefully provide a more summarized resource for others. I am not a tax accountant... I'm just a regular person who does their own US taxes, and will attempt to do his own German taxes as well. I'm hoping to get some more knowledgeable people to bless/correct my statements here.
My understanding is that Germany doesn't recognize any of the US retirement accounts... Traditional IRA's, Roth's, 401K's, 403b's, 457's, etc. They are treated just like a regular brokerage account. Some articles on Toytown have suggested not telling the German tax office about these accounts. Ignoring the legality of doing that for a moment, it seems to me that if you might end up staying in Germany for a long period of time, that could get tricky when you want to start using money from those accounts in retirement. So I'm going to assume that people reading this article will be declaring these accounts.
401K/403b/457/Traditiona IRA (pretax) Accounts
In these accounts, my understanding is that any money I would contribute while in Germany is not tax free. So putting money in these accounts while being a resident of Germany doesn't make much sense. The US won't tax the money deposited (coming from your paycheck most likely), but Germany will tax it. And in the future, when the money is taken from the account, the US will then tax it again. No idea how one would handle the idea of avoiding double taxation in this case. In addition, capital gains made in these accounts are taxable in the year they are realized in Germany. So if you sell a mutual fund or stock in one of these accounts (or "rebalance"), and have a gain (or loss), this needs to be declared on your taxes. The dividends/interest received is also taxable in Germany. So even if you don't contribute to one of these accounts while you are in Germany, you will be taxed when you sell for a gain or earn dividends/interest, and then taxed by the US when you take money from the account in the future, since the US assumes all money in these accounts, whether contributions or gains, are pretax. Someone please correct me if I'm wrong. This then begs the question of what to do about these accounts when moving to Germany. One could invest your money inside these accounts before coming to Germany for the long term, and then just let it sit until you return to the US. You'd have to pay taxes on dividends/interest while in Germany, but if your investments are mutual funds that just increase in value in your account, then there should not be any taxes due in Germany. You could of course take the money out of these accounts altogether, but that would result in a ridiculous tax hit + 10% penalty. Any other suggestions?
1) Anyone aware of any discussion between the US and Germany to make the tax laws in Germany match the US tax laws for these accounts?
2) My wife is German. If we decide to stay in Germany, and she gives up her green card, I assume she is no longer subject to US taxes. So if she has a 401K plan in the US, and it's time for her to retire, will the US tax this account, or will she somehow get that money tax free? (too good to be true) Germany should not want to tax the account, since it is treating all these retirement accounts as regular brokerage accounts.
Roth IRA's contain post-tax money, and are exempt from US taxes when the contributions and gains are withdrawn, if you follow the IRS' rules for doing so. Germany will not recognize this tax exempt status. So although Germany will also not tax you for withdrawing money from these accounts (just like any other brokerage account) they will tax you on gains and dividends/interest in the year they are made... which turns your Roth into a regular brokerage account, negating the value of having it.
529 accounts are not retirement accounts, but rather college savings accounts. In the US, you deposit post-tax money (which might be tax free for state income taxes), and the capital gains and dividends/interest accrue tax free. The account can then be used tax free for a qualifying college. My understanding is that very few colleges in Germany qualify. So if you saved money for college for your kids like I did, and then move to Germany where tuition is essentially free, it's unclear to me if taking money from those accounts will result in a 10% penalty. I would think the IRS would say that it would, even if you are using the money for living expenses, books, etc. for a top university in Germany, just because it's not on the official list of colleges that the US maintains. Talking to my 529 plan provider, it really seems like a gray area. And, as usual, capital gains and dividends/interest from these accounts will be considered taxable by Germany anyway. So essentially these accounts become worthless, and likely an overall negative because of the likely/possible 10% penalty, if you plan for your kids to attend college in Germany.
Obviously if you intend to be in Germany for only a few years, it will likely make sense to just pay the taxes due during that time, and when you go back to the US, continue to receive the benefits of these accounts. It will make sense to sell
My understanding is that Germany does not have a wash rule. Meaning, if you sell a stock/fund for a loss, you can turn around immediately and buy the same stock/fund, and still declare the loss for that tax year. In the US you need to wait 30 days (it's a bit more complicated than that in reality). So if you have a capital gain currently in one of the accounts above, you can sell anything that's currently showing a loss to offset that gain, just like you'd normally do in a brokerage account. In the US, it won't matter, since gains/losses don't matter in the above accounts. But in Germany, it could negate a gain that would otherwise be taxable.
I'd really appreciate it if anyone reading this could please confirm or correct what I've written, answer my questions, and just generally comment. Thanks.