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

86 posts in this topic

3 hours ago, Straightpoop said:

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.

 

So the bottom line is that you could avoid taxation of a 401k by surrendering your green card and moving to a country that has a tax treaty with the US which gives the right to taxation of dividends / interest / capital gains to that country even though the tax rate on those is zero there? Or would there be some sort of withholding tax applied retroactively?

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3 hours ago, BethAnnBitt said:

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.

 

The treaty gives Germany the exclusive right to tax this income.  Consequently, Germany will NOT give you a credit for taxes paid to the US rather, the US will give you a credit for taxes paid to Germany.

 

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4 minutes ago, Straightpoop said:

The treaty gives Germany the exclusive right to tax this income.  Consequently, Germany will NOT give you a credit for taxes paid to the US rather, the US will give you a credit for taxes paid to Germany.

That’s exactly what I meant. Sorry that I did not express that clearly.  

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19 minutes ago, jeba said:

a country that has a tax treaty with the US which gives the right to taxation of dividends / interest / capital gains to that country even though the tax rate on those is zero there?

 

I know of no country with which the US has a tax treaty by whose terms the US is excluded from imposing taxes on US source dividends.  I also no know of no country with which the US has a treaty that imposes no income tax on dividends, interest or capital gains under its domestic tax (but I would gladly hear of such a place and consider moving there).  In any event those items of investment income are not the subject of this thread rather, it is the taxation of 401(k) distributions - a totally different kettle of fish.

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5 minutes ago, BethAnnBitt said:

Sorry that I did not express that clearly.  

 

My apologies to you, BethAnn. You did express that clearly and accurately. I just read it in haste.

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12 minutes ago, Straightpoop said:

In any event those items of investment income are not the subject of this thread rather, it is the taxation of 401(k) distributions - a totally different kettle of fish.

At the end of the day it is fitting and proper that income tax should be paid on the distributions.  After all, they stem from untaxed contributions that were allowed to grow tax free over the years.  No complaints here.

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35 minutes ago, Straightpoop said:

I also no know of no country with which the US has a treaty that imposes no income tax on dividends, interest or capital gains under its domestic tax (but I would gladly hear of such a place and consider moving there)

Cyprus. There is no income tax on dividends / interest / capital gains from abroad. There is a "defence contribution" of up to 17% but if you move there and apply for non-domiciled status you´ll be exempt for 17 years (unless your father was Cypriot). Contribution to public healthcare is 2,65% (unless you´re a S1 holder, in which case you won´t be charged).

I think Malaysia also doesn´t tax foreign income and Thailand does it only if you transfer it into the country during the year it was earned (at least in effect, not sure about the details).

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31 minutes ago, jeba said:

Cyprus. There is no income tax on dividends / interest / capital gains from abroad. Malaysia ... and Thailand.

 

No treaty with Malaysia.

 

Treaty tax rate on US source interest (other than bank and portfolio interest exempt under US domestic tax law): 

Cyprus:  10%

Thailand: 15%

 

US source Dividends:  15% Cyprus & Thailand

 

Capital gains on intangibles (e.g. stocks, bonds, etc.) is sourced according to the residence of the payee (unless the the payee is a US citizen).

 

Here is a handy compendium published by the IRS:

 

https://www.irs.gov/pub/irs-utl/Tax_Treaty_Table_1_2019_Feb.pdf

 

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Please correct me if I’m wrong @Straightpoop.  If one retires to a country with a lower income tax rate than the US, one has less of a foreign tax credit and must pay the US the difference between the foreign and the US assessed tax amounts anyway. So at minimum one ponies up at the US rate.

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7 minutes ago, BethAnnBitt said:

So at minimum one ponies up at the US rate.

 

That is correct for US citizens.

 

Generally speaking, if you are a US citizen resident abroad your effective overall tax rate is the highest rate that can be imposed by either the US, the country of residence or a third country on any particular item of income.

 

 

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10 minutes ago, Straightpoop said:

That is correct for US citizens.

Thanks so much for your confirmation.  A US resident green card holder, or a person who surrenders a green card, won’t get out of paying that minimum amount either I believe.  But that’s neither here nor there for me.  It’s time to walk the 🐶 and enjoy the upcoming 🌅 here.  😊  Enjoy your evening.

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42 minutes ago, Straightpoop said:

Treaty tax rate on US source interest (other than bank and portfolio interest exempt under US domestic tax law): 

Cyprus:  10%

Do you mean "withholding tax" when you say "source tax"?. My broker doesn´t withhold tax on US sourced interest (only on dividends and MLP distributions).

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2 hours ago, jeba said:

My broker doesn´t withhold tax on US sourced interest

 

Probably, like most US sourced interest, it falls within the US domestic tax exemption for NRA recipients of portfolio interest (IRC § 871(h) and bank "deposit" interest § 871 (i).

 

https://www.law.cornell.edu/uscode/text/26/871

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6 hours ago, Straightpoop said:

 

Probably, like most US sourced interest, it falls within the US domestic tax exemption for NRA recipients of portfolio interest (IRC § 871(h) and bank "deposit" interest § 871 (i).

 

https://www.law.cornell.edu/uscode/text/26/871

Maybe. As long as I don´t have to pay withholding tax I´m happy even without understanding why that is.:)

 

The strange thing is that there are US corporations the dividends of which I´m also not being charged withholding tax for. PAGP is an example (it´s the incorporated twin of a PAA, which is a MLP). I read that the explanation may be that their dividends are regarded return of capital. However, if that´s the case dividends of e.g. WMB´s dividends should also be (almost completely) tax free (which they aren´t) as 95% of their dividends are return of capital as well. But what I said above applies here as well. No complaints - even though I don´t understand it.

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7 hours ago, jeba said:

I read that the explanation may be that their dividends are regarded return of capital.

 

PAGP is a partnership. WMB is a corporation.  Hence, money distributed to you by PAGP is regarded as "tax-free" because it represents either a portion of your capital contribution to the partnership or the partnership's previously taxed profits.  Your taxable income from PAGP is shown on the annual K-1 you receive.  Amounts in Line 1 of that K-1 reflect that year's ordinary operating income (or loss) which is (usually) considered "effectively connected trade or business income" and is subject to withholding under IRC § 1446 at the maximum individual ordinary income tax rate.  Amounts so withheld are reported to you on a Form 8805.  Since this income is subject to progressive rates of tax, if the max rate is withheld you would have to file a Form 1040NR every year to obtain a refund of the excess.

 

If the partnership had other forms of income, e.g. interest, dividends, gains, etc.  these too will be allocated to you on the K-1 and independently subject to withholding depending on their character. Withholding is reported (mostly) on Form 1042-S or, as in the case of §1231 gains on a Form 8805.

 

Your annual K-1 will typically show the effect of all the various comings and goings for the year on your "capital account".  Should you sell the partnership interest, that "capital account" will be your adjusted tax basis for computing gain or loss. Because of a 2017 tax law change, the gross proceeds from such sale will be subject to a 10% withholding tax because gain from the sale of a US partnership interest is now considered "effectively connected" US source trade or business income.

 

Please note:  all of the above assumes that "you" are a Nonresident alien.  The rules are vastly different if you are a US citizen or resident.

 

 

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47 minutes ago, Straightpoop said:

PAGP is a partnership.

I thought that PAGP must be a corporation because their dividends aren´t subject to withholding tax whereas PAA - their economically identical twin - is a MLP and it´s dividends are subject to 37% withholding tax. This is what I´ve read in a stockholder forum (seems I need to look for a more trustworthy forum). I´ve always been confused though because of the L.P. at the end of the company name. I´m wondering what may be the point of having 2 companies intertwined if none of them is a corporation? I always thought that forming a corporation was to provide would-be MLP investors who dislike K1-forms with an investment option. But I don´t see the point in that if you get a K1 for both (PAA and PAGP).

Btw, I just checked whether I have received a K1 but I haven´t received any tax documents yet (even though the interactive brokers website claims a 10242-S should have been available as of 15 March.). Not that it bothers me though as I sold all MLPs the dividends of which were subject to the 37% withholding tax (i.e. all except for PAGP).

1 hour ago, Straightpoop said:

WMB is a corporation.

Is return of capital paid by corporations still subject to withholding tax? I´m a nonresident alien to the US

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1 hour ago, jeba said:

I thought that PAGP must be a corporation because their dividends aren´t subject to withholding tax whereas PAA - their economically identical twin - is a MLP and it´s dividends are subject to 37% withholding tax.

 

I was unfamiliar with PAGP and you were correct about its corporate status.  I looked up the relationship between the two:

 

https://www.plainsallamerican.com/investor-relations

 

PAGP is the CORPORATE holding company of an interest in the general partner of the PAA limited PARTNERSHIP.

 

As a NRA and owned both you would get a 1042-S for dividends paid by PAGP and an 8805/1042-S/K-1 for PAA.

 

1 hour ago, jeba said:

Is return of capital paid by corporations still subject to withholding tax?

 

Shouldn't be.  If WMB's prognosis is correct (see:  https://investor.williams.com/earnings-and-reports/quarterly-earnings-and-annual-reports/default.aspx ) some or all of its distributions in 2020 and 2021 will represent a non-taxable return of capital, AKA "non-dividend distribution".  It should show up on your 1042-S as a Code 37 "non-dividend distribution" and will show exemption Code 21.

 

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16 hours ago, Straightpoop said:

If WMB's prognosis is correct (see:  https://investor.williams.com/earnings-and-reports/quarterly-earnings-and-annual-reports/default.aspx ) some or all of its distributions in 2020 and 2021 will represent a non-taxable return of capital, AKA "non-dividend distribution".

I´m even more confused now. Looking at the yearly report from the website you linked I can´t find info on "return of capital" nor "non-dividend distribution". When I checked my brokerage account for form 1042-S I found 31 of them (all for 2020) and when I checked my yearly account statement I realized that I´ve been credited more withholding tax (as in 4 times as much) than I ever paid (I had mixed up credits with charges before). Again: No complaints. I don´t have to understand everything.

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Thanks to all who have contributed good info on this topic.  No doubt the best takeaway from any of these posts are, seek professional tax help.  However, it's still interesting and nice to hear from others' experiences and understandings to help get at least some idea of what to expect.

 

I'm interested in confirming my understanding on what Germany uses for Cost basis on IRAs, Roth and Traditional.  A few variables defined for this and perhaps a follow-up I may have:

  • We have not yet moved to Germany
  • When we do, we will be done putting into IRAs/401ks of any kind.
  • I want to only focus on German taxes as of today's laws so for arguments sake let's take the US taxation out of the equation, assuming my wife and I will never have more income than the tax credit we'll receive in the US.  

Takeaway 1:  Considering my understanding that Roth and Traditional IRAs are not recognized in Germany, I have concluded that any transactions from either(regardless if it's a distribution or rebalancing) will be treated the same, as it pertains to tax laws in Germany, as a regular brokerage account.

  • I sell $1,100 of ABC in my Roth that has a current cost basis of $1,000, I'll pay capital gains taxes on $100.
  • I sell $1,100 of XYZ in my Traditional that has a current cost basis of $1,000, I'll pay capital gains taxes on $100.

Takeaway 2:  Until we're officially tax citizens of Germany, every transaction that has happened before that won't matter except for determining cost basis.  So my understanding is that since Germany does not recognize US tax advantaged accounts, they don't care about original contributions and this won't be factored into Germany's calculation of taxes owed on sales in either IRA.  Using the above stock sale example:

  • The sale of $1,100 worth of ABC with a current cost basis of $1,000 is actually from years of rebalancing a $100 contribution.  Germany only considers the current cost basis of $1,000 when calculating taxes owed.

Am I in the Fußballstadion?

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