Living in Germany with US Retirement Accounts, 401K, IRA, Roth

89 posts in this topic

1 hour ago, SnowedIn said:

Leaving the funds in the current IRA or the US domicile is not an option.

If you mean it is not an option because the investment firm that is overseeing your account, such as Fidelity, says that they won't allow you to stay with them while you are living overseas, then a workaround is to transfer the account to a different firm that will allow you to live in Germany and have the account be US domiciled.  There are plenty of investment firms happy to do so.  We are personally familiar with this world.

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9 hours ago, BethAnnBitt said:

If you mean it is not an option because the investment firm that is overseeing your account, such as Fidelity, says that they won't allow you to stay with them while you are living overseas, then a workaround is to transfer the account to a different firm that will allow you to live in Germany and have the account be US domiciled.  There are plenty of investment firms happy to do so.  We are personally familiar with this world.

I would need to eventually move the money here..I know there are some options but leaving it there is just not one of them at this time.

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9 hours ago, Straightpoop said:

 

You cannot roll over your IRA or Roth IRA to a German IRA because that it is simply impossible.  There is no such thing as a German IRA - Roth or otherwise.  I suppose it is theoretically possible that an individual or corporate IRA custodian could be domiciled in Germany but I cannot conceive of the possibility that there would be a German financial institution capable or willing to maintain an IRA account for such a custodian.

 

If you take a premature distribution from your IRA you are subject to a US excise tax of 10% - not 20%.  The distribution will be otherwise US (income) tax-free because the Germany-US tax treaty gives Germany the exclusive right to impose an income tax on it.  The 30% withholding tax can also be avoided by first submitting a Form W-8BEN to the IRA trustee.  If properly respected a Form W-8BEN will eliminate the need to file an nonresident alien return (1040-NR) to obtain a refund of any income tax withheld. (That will not apply to the 10% early withdrawal penalty.)

 

As noted, you will have to declare the distribution and be taxed on it in Germany.  How much of the distribution will be taxable in Germany will depend upon when and under what circumstances you contributed to the IRA.  Germany's system for taxing US IRA (or 401k) distributions is mathematically similar to the US method applied when a US taxpayer has made non-deductible contributions to the IRA.  So, if at the time you made your contributions you were ineligible to claim any reduction in your current German taxable income (most likely because you were a German tax non-resident when you made the contributions), then a portion of whatever is distributed to you will be deemed a non-taxable return to you of your cost basis in the IRA.

 

See this Merkblatt from the OFD Karlsruhe:

 

https://datenbank.nwb.de/Dokument/Anzeigen/449077/

 

That doc is quite helpful, thank you! The contributions were done after 2008 as such there should be reductions in the tax for Germany. The company which is in charge of managing the funds will withhold 20% of the taxable amount of the payout for federal income tax. I do not see an additional 10% because of early withdrawal indicated. 

 

 

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@SnowedIn

 

Just to dot the i and cross the t on the issue of whether an IRA can theoretically exist in Germany:

 

IRS Reg. §1.408-2(b) reads:

 

(a) In general. An individual retirement account must be a trust or a custodial account (see paragraph (d) of this section). It must satisfy the requirements of paragraph (b) of this section in order to qualify as an individual retirement account. It may be established and maintained by an individual, by an employer for the benefit of his employees (see paragraph (c) of this section), or by an employee association for the benefit of its members (see paragraph (c) of this section).

(b) Requirements. An individual retirement account must be a trust created or organized in the United States (as defined in section 7701(a)(9)) for the exclusive benefit of an individual or his beneficiaries. Such trust must be maintained at all times as a domestic trust in the United States.

 

Besides Germany not being in or part of the United States, trusts as such cannot be created under German law.

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I've been reading up on these threads because I received some interesting information from my investment firm, Charles Swab. They advised me against putting money into ETFs or my IRA if I didn't have a W2 for the income? Has anyone had any trouble with this? They said it was frowned upon by the IRS and could end in penalties/owing money. I'm not really sure how reliable that information is and after some digging around, it apparently depends if you claim Foreign Earned Income Exclusion (which I do).

Is anyone able to confirm or deny this?

 

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@DoubleO

 

In order to contribute to an IRA you must have qualifying income at least equal to the annual contribution limits.

 

Foreign earned income that is eligible for the FEI exclusion qualifies.

 

However, income that is actually excluded under IRC §911 is disqualified income.

 

If your income exceeds the FEI exclusion, the excess would qualify.

 

If you elect not to exclude under the FEI but use the foreign tax credit instead, the income will qualify but you would be well-advised in that event to consider designating your contributions to the IRA as "nondeductible" (file Form 8606).  Because of the FTC, an IRA deduction would likely be valueless to you for tax purposes in the year of contribution.  The nondeductible contribution adds earning power to your IRA but is regarded as non-taxable "basis"  when you eventually do take distributions.

 

 

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I am from US and planning to distribute my Roth IRA to here, Germany, but very concerned with local taxation. My Roth seats in a fixed annuity in US which I can distribute as a lump to bank in USA , It will be no income tax on it there, then take bank cashier check and bring it over as personal saving. Will Germany hit me with tax on bringing over here personal saving from USA?

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@jyuffa

 

You ask a very difficult question.

 

There is no question that your contributions to your Roth IRA made prior to your becoming tax resident in Germany will be tax-free when distributed both in the US and in Germany. Thus, if the only thing in your Roth is an annuity, then the premium(s) you paid for that annuity - if made before your becoming tax resident - will be tax-free.

 

There is also no question (DBA-USA Art. 18A 1)) that accruals of value within a pension plan (including a Roth IRA) established in the USA will not be currently income taxable by Germany even if they accrue after you become German tax-resident UNTIL they are distributed.

 

If you are a German tax resident at the time of distribution, then the question will be whether the accruals to your annuity's value that took place before you became a German tax resident that are tax-free under US tax law will also be distributed to you tax-free under German tax law.

 

My analysis - which you should not regard as authoritative - indicates that, unlike pre-residency contributions to the plan,  there is nothing in German tax law known to me that would prevent Germany from taxing any amount of the accrual portion of a distribution (regardless when it accrued) if the distribution takes place while you are a German tax resident. That is the German rule with respect to accruals within both 401(k) and traditional IRAs and I cannot think of any rationale why it would not apply to Roth IRA distributions simply because it would be tax-free under US tax law.

 

To avoid the issue you would be well-advised to consider leaving your Roth IRA safely within a treaty-protected plan (e.g. roll your annuity over using a non-taxable custodian-to-custodian transfer into a different Roth that has better economic prospects) until you cease to be a German tax resident and can then tap it tax-free from both countries.

 

 

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30 minutes ago, Straightpoop said:

There is no question that your contributions to your Roth IRA made prior to your becoming tax resident in Germany will be tax-free when distributed both in the US and in Germany. Thus, if the only thing in your Roth is an annuity, then the premium(s) you paid for that annuity - if made before your becoming tax resident - will be tax-free.

 

This was my experience last year.  I took a sizeable distribution from my Roth IRA during my first year as a tax resident of Germany.  I included the 1099-R with the other financial documents I gave my Steuerberater, and expected to have a huge tax bill.  Because the Roth IRA account was established many years ago while I was a legal resident of the U.S., the Finanzamt did not include the distribution in calculating my German tax bill.

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@JG52

 

I hope the happy outcome you reported will predictive of the experience of others similarly situated.

 

I am sad to say there are reasons to doubt that it will be.

 

First, the FA's reported rationale for excluding your distribution "Because [it] was established . . while .. a legal resident of the US" is not correct on its face. At a minimum, the portion of your distribution not allocable to your tax-free contributions to the Roth IRA should have been included in taxable income.

 

I would also be interested to learn how - and how much of - the distribution appeared on your Steuererklärung and what, if any, affirmative reaction to that specific item, i.e. questions, challenges, etc. you received from the FA.

 

 

 

 

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1 hour ago, Straightpoop said:

@JG52

 

I hope the happy outcome you reported will predictive of the experience of others similarly situated.

 

I am sad to say there are reasons to doubt that it will be.

 

First, the FA's reported rationale for excluding your distribution "Because [it] was established . . while .. a legal resident of the US" is not correct on its face. At a minimum, the portion of your distribution not allocable to your tax-free contributions to the Roth IRA should have been included in taxable income.

 

I would also be interested to learn how - and how much of - the distribution appeared on your Steuererklärung and what, if any, affirmative reaction to that specific item, i.e. questions, challenges, etc. you received from the FA.

 

 

 

 

 

If I ever run for public office, I will be happy to share my U.S. and German tax returns.  The entire Roth IRA distribution was provided to the FA and they decided to disregard it.  I did not challenge this decision.  I did not receive any comments from the FA and my tax return was accepted as submitted.

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@JG52

 

Then you are home free - at least for this distribution . . .with this Finanzamt.

 

Now, if only we could be sure the other 600-odd Finanzämter will make the same mistake.

 

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7 minutes ago, Straightpoop said:

@JG52

 

Then you are home free - at least for this distribution . . .with this Finanzamt.

 

Now, if only we could be sure the other 600-odd Finanzämter will make the same mistake.

 

 

Yes, but I am not naive enough to think the next distribution years from now won't be taxed if the return is reviewed by a different person in the same FA. 

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Hi everybody,

 

this is an amazing source of information! Thank you so much everybody for the information already provided here. I'm in a slightly different but still similar situation and I'm hoping to find some guidance here:

I'm in my early 30s (so still 40 years away from retirement by the way retirement ages are developing...), I'm German but have lived in the US for 8 years now (came here to study and now started my first "real" job in the US for the last 2.5 years on F1 visa, transitioning on H1B visa once consulates are opening up again. I have no intent to receive a Green Card or to become a US citizen. I'm still registered in Germany (gemeldeter Wohnsitz) and have filed German AND US income taxes for the last 8 years.). I have never worked in Germany (other than internships and as a Werkstudent) and therefore no retirement savings in Germany. I will probably stay in the US for another 2-5 years but want to move back to Europe/Germany eventually and for sure for retiring. 

 

My question is, whether it makes sense for me to invest in 401k accounts (probably yes?), traditional IRAs, Roth IRAs, and Mega Backdoor Roth IRAs (probably no?) given the post-tax retirement accounts are not recognized as such in Germany and might be taxed twice.

 

Any advice and further information is appreciated!

 

Thanks a lot!

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On 1/15/2021, 7:08:09, MunichSF said:

My question is, whether it makes sense for me to invest in 401k accounts (probably yes?), traditional IRAs, Roth IRAs, and Mega Backdoor Roth IRAs (probably no?) given the post-tax retirement accounts are not recognized as such in Germany and might be taxed twice.

 

There are 3 tax phases/aspects of any pension plan:

 

- The contribution phase: is the contribution deductible from taxable income in the year it is made

- The accumulation phase: is the income/growth in value within the plan excluded from current income in the year it accrues

- The distribution phase:  what amount of the distribution is taxable?

 

1. Contribution phase:  Roth contributions are not deductible from current income either in the US or in Germany

2. Accumulation phase:  Income/growth within a Roth IRA (since 2006) are excluded from current income taxes in both the US and Germany

3. Distribution phase:    (qualified) Roth distributions are tax-free to US resident taxpayers

                                      In my non-authoritative opinion: The portion of a Roth distribution allocable to prior contributions is received tax-free in Germany but the portion allocable to income/growth accruals is taxable.

 

You meet the tax residency requirements of both the US and Germany but you do not indicate whether you have invoked the "tie-breaker" rules of Article 4 of the DBA-USA to be taxed as a resident in one and a non-resident of the other.

 

This, however, is not likely to be relevant to your question since you anticipate being a resident of only Germany at the time you receive a Roth distribution. That being the case, the only phases relevant to you will be 2. and 3.

 

Since the tax treatment in Germany of a Roth and a traditional IRA are - in my opinion - identical, you derive no benefit from contributing to a Roth IRA while earning wages in the US that are (possibly) subject to US resident taxation. If you make a contribution to a traditional IRA while a US tax resident you can reduce your current US tax bill.  If you then wait to take distributions until you are exclusively a German tax resident, the contributions will escape US taxes (through deferral and application of Article 18 of the DBA-USA) and German taxes by exclusion under the current formula for German taxation of 401(k)/IRAs.

 

In other words:  contributing to a Roth brings you no advantage anywhere (but not double taxation).

                          contribution to a traditional IRA then returning to Germany brings you the potential advantage of double non-taxation of your contributions.

 

NB:

 

At the time of the 2006 amendment of the DBA-USA this problem of double non-taxation of traditional IRA contributions was recognized and the protocol of the amendment made vague noises about Germany and the US getting together some day to do something about it; like a 15% withholding tax imposed by the US on traditional IRA distributions to German tax residents.  I haven't researched it recently, but so far as I know no action has been taken to close this double non-taxation loophole.

 

 

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What if a green card holder who is not a US citizen retires outside the US and is withdrawing from their 401k? Will there be US tax due even though they aren't tax resident anymore?

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13 hours ago, jeba said:

What if a green card holder who is not a US citizen retires outside the US and is withdrawing from their 401k? Will there be US tax due even though they aren't tax resident anymore?

 

Mere departure from the US and establishment of residence elsewhere does not abrogate a green card holder's US "lawful permanent residence" and tax status.  He would have to either formally abandon his status by surrendering his green card (Form I-407) or invoke a "tie-breaker" under a tax treaty to be considered a US tax non-resident despite continuing to hold his green card.

 

If he successfully and timely takes either action and there is a tax treaty between the US and the country of retirement that gives that country the exclusive right to tax the distribution, then the distribution will be US tax-free.

 

Otherwise, it will be subject to a 30% flat US tax rate on the 401(k) distribution to a non-resident alien.

 

 

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1 hour ago, Straightpoop said:

He would have to either formally abandon his status by surrendering his green card (Form I-407) or invoke a "tie-breaker" under a tax treaty to be considered a US tax non-resident despite continuing to hold his green card.

 

If he successfully and timely takes either action and there is a tax treaty between the US and the country of retirement that gives that country the exclusive right to tax the distribution, then the distribution will be US tax-free.

Thanks. What if he surrendered his/her green card and moved to a country which doesn´t have a tax treaty? How would a potential tax claim be enforced by the US? Are taxes withheld by the broker/bank or would the IRS rely on that you file your tax return correctly? Could a retiree simply surrender his/her green card, not file and simply never return (in order not to be arrested right at the border).

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7 hours ago, jeba said:

hat if he surrendered his/her green card and moved to a country which doesn´t have a tax treaty? How would a potential tax claim be enforced by the US? Are taxes withheld by the broker/bank or would the IRS rely on that you file your tax return correctly? Could a retiree simply surrender his/her green card, not file and simply never return (in order not to be arrested right at the border).

 

The answer to your questions is governed by Chapter 3 of the Internal Revenue Code.  All beneficiaries of an IRA (or brokerage) are required to certify their tax status to the custodian/broker either as a US citizen/resident (Form W-9) or a Non-resident Alien (W-8 BEN).  The W-8 BEN from a NRA will also indicate whether the beneficiary is entitled to the benefits of a tax treaty with a particular country.  Unless the custodian/broker has concrete evidence that the W-9/W-8 BEN is false, they will withhold tax accordingly.

 

 

 

 

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21 minutes ago, Straightpoop said:

All beneficiaries of an IRA (or brokerage) are required to certify their tax status to the custodian/broker

In our experience the custodian/broker scrutinizes this extremely carefully and errs on the side of caution in order that they not run afoul of the IRS.  If one lives abroad the broker may decide to withhold 20-30% of the distributed amount.  In Germany, given that there’s a double tax treaty, one can credit the German taxes paid on the distributed funds and then get a refund of the broker withheld 20-30% when filing the US tax return.

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