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

90 posts in this topic

1 hour ago, IMSpartacus said:

Am I in the Fußballstadion?

 

Nope.  You're stuck in traffic about 25 miles out.

 

Reread the thread.

 

Carefully.

 

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So is this post from you regarding the "3 tax phases/aspects of any pension plan" as close to a consensus without speaking to a tax expert:

     https://www.toytowngermany.com/forum/topic/354821-living-in-germany-with-us-retirement-accounts-401k-ira-roth/?do=findComment&comment=3863879

Regarding the Accumulation phase:

On 1/16/2021, 5:08:46, Straightpoop said:

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

To correct my Takeaway 1:

  • Any gains from sales or dividend and capital gains distributions during this phase have no tax consequent, US or Germany.

 

Regarding the Distribution phase:

On 1/16/2021, 5:08:46, Straightpoop said:

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.

To correct my Takeaway 2:

  • The sale of $1,100 worth of ABC is the result of a $100 contribution to the Roth.  Germany will consider the cost basis to be $100 and tax me for capital gains of $1,000.

 

Am I at least close to my Parkplatz?

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12 hours ago, IMSpartacus said:

To correct my Takeaway 1:

  • Any gains from sales or dividend and capital gains distributions during this phase have no tax consequent, US or Germany.

 

 

Right.

 

12 hours ago, IMSpartacus said:

To correct my Takeaway 2:

  • The sale of $1,100 worth of ABC is the result of a $100 contribution to the Roth.  Germany will consider the cost basis to be $100 and tax me for capital gains of $1,000.

 

Not quite.  The original "character" of the increase in value within the IRA is "erased" on distribution and becomes taxable under the Abgeltungsteuer as a generic "Kapitalertrag" in Germany or as a "pension distribution" in the US.  Under the treaty, both countries characterize the distribution as a "pension".

 

Your basis in either a traditional IRA or a Roth is the sum total of all your contributions, pre-tax or post-tax respectively. Like the distribution itself, basis has no "character" attributable to the manner in which it was used to generate value within the IRA.

 

The German system of computing the taxable portion of each distribution is very similar to the US system that applies when you have made non-deductible contributions to a traditional IRA.  The portion of the distribution that is recovered tax-free is expressed as the ratio of all contributions (adjusted for previous recoveries through distributions) divided by the total market value of the IRA at the time of distribution.  (In the US the denominator is fixed as of 31.12 of the calendar year preceding the calendar year of distribution. In my inexpert understanding, in Germany the denominator "floats", i.e. it is determined as of the date of each distribution within a calendar year.)

 

Caveat:  the German Tax authorities have taken the position that a pre-tax contribution to a traditional IRA should not be allowed to escape German taxation when distributed if the contribution "woulda, coulda, shoulda" have enjoyed German tax deferral if made during a period of hypothetical German tax residence after 2008. The Tax Court rejected this position - correctly in my view - but the Finanzamt has appealed.

 

Now go get some popcorn and a beer and enjoy the game.

 

 

 

 

 

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I'm much better with numbers than words so I must correct my correction of Takeaway 2 just to make sure I've reached full understanding ;-)

 

I take a distribution of $100 from either IRA.  

  • Total contributions for this IRA is $1,000.  The value of my IRA at the time of the distribution is $10,000 which makes $1,000 contributions 10% of the value.
  • Of my $100 distribution, $90 is taxed and $10(the aforementioned 10%) is recovered contribution which is tax-free.

I take another distribution of $100 from the same IRA later that calendar year.

  • Total contributions for this IRA is now $990($1,000-$10 from the previous recovered portion of my contribution).  The value of my IRA at the time of the 2nd distribution is $10,000 which makes $990 contributions 9.9% of the value.
  • Of my $100 distribution, $90.10 is taxed and $9.90 is recovered contribution which is tax-free.

Leaves me with a contribution total of $981.10 moving forward.

 

 

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8 hours ago, IMSpartacus said:

I'm much better with numbers than words so I must correct my correction of Takeaway 2 just to make sure I've reached full understanding ;-)

 

You've got it exactly right.

 

NB:  If and when you take distributions subject to German tax be sure you have records to support your IRA contributions in the event the FA challenges your numbers.

 

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12 hours ago, Straightpoop said:

NB:  If and when you take distributions subject to German tax be sure you have records to support your IRA contributions in the event the FA challenges your numbers.

As the muddy waters start to clear, the joy rushes through my brain as I now try to recall the documentation I saved from former jobs' 401ks that we've rolled into our IRAs.  

 

Thank you

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I've read quite a bit of the posts here and they seem to disagree with some of the statements that my "advisors" in the US have said, especially regarding the 18a rule.

 

But they were in the US so I think i might get better answers here.

 

50+ yr old american working in germany.  i have 2 US  brokerage accounts  and 1 US rollover IRA. 

 

1) I've been told that the IRA is not taxable in germany since I am not withdrawing anything.  

2) I've been told that the 2 individual accounts would have all increases from growth/reinvested dividends be taxable(  which were about 70k)  even if I did not withdraw anything from them. There  was a 1099 generated with  some small capital gains taken ( about 3k) for some administrative reason by my US accountant.

 

my company gave me a tax advisor and completed 3/4 of my german return - only providing details for the  2 of the 3 mutual funds in the brokerage accounts .  They only detailed the 3k and not the total increases over the year. 

 

 

Can someone validate for me that #1 is true and whether or not i should owe all of the increases or just the capital gains actually withdrawn?

 

thanks,

-Dawn

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6 hours ago, DochGru said:

50+ yr old american working in germany.  i have 2 US  brokerage accounts  and 1 US rollover IRA. 

 

1) I've been told that the IRA is not taxable in germany since I am not withdrawing anything.  

 

Correct.  Activities within an IRA account established prior to German residence are tax non-events (under both German and US law) until withdrawn.  If you have read the many previous posts on this subject you will know, however, that when you take distributions from your IRA both the US and Germany will have their hands out. 

 

6 hours ago, DochGru said:

2) I've been told that the 2 individual accounts would have all increases from growth/reinvested dividends be taxable(  which were about 70k)  even if I did not withdraw anything from them. There  was a 1099 generated with  some small capital gains taken ( about 3k) for some administrative reason by my US accountant.

 

Assuming you are referring only to the taxation of mutual funds held in a (taxable) US brokerage account this advice is also technically correct.  However, since US registered funds are required to distribute 90% of their income annually, as a practical matter it is unlikely - absent a mid-year sale - that the application of the German formula for taxing annual unrealized accretions in value ("Vorabpauschale") will result in any taxable investment income over and above the gains and dividends actually distributed.

 

6 hours ago, DochGru said:

my company gave me a tax advisor and completed 3/4 of my german return - only providing details for the  2 of the 3 mutual funds in the brokerage accounts .  They only detailed the 3k and not the total increases over the year. 

 

 

See the answer above. The actual fund distributions likely exceeded the amount of income computed using the respectively applicable Vorabpauschale thus preempting the Vorabpauschale amounts from the tax computation of your income from the funds.

 

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greatly appreciated @Straightpoop.   

 

 

based on this statement below

35 minutes ago, Straightpoop said:

The actual fund distributions likely exceeded the amount of income computed using the respectively applicable Vorabpauschale thus preempting the Vorabpauschale amounts from the tax computation of your income from the funds.

 

I was totally expecting to be hit with a tax on the 70k "unrealized accretions " that the mutual funds generated, even though it was never distributed to me.

 

so i only have to worry about the 3k that was detailed by the steurberater my company hired . Thats fantastic.

 

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I am hoping someone could help me here Maybe @Straightpoop-

I find myself in a very complicated situation.

 

I am an Indian citizen who used to live and work in the US on an H1B visa from 2012-2015. During this period I had an employer sponsored retirement account first with Fidelity which I later moved to Vanguard just as I quit.

 

I moved out of the US to Germany and never contributed to the account and just left them there for until after retirement. 

 

Fast forward to May 2022 and I get an email from Fidelity that the amount in my account was too low for them to keep my account open and that they cashed it out and sent me checks for the leftover amounts. 

I was very confused as I had closed that account and moved all my money over to Vanguard and I call them.

I find out that unbeknownst to me my employer had deposited the last employer match contribution to the Fidelity account after I had moved everything to Vanguard and I had about 600$ in that account which was taxed and cashed out to me in May 2022 since it was too low of an amount for them to keep the account open for.

 

20% federal taxes were withheld before sending out the check as it was pre-tax money and I will need to pay an early withdrawal penalty of 10% while filing for my taxes.

 

The catch is - I don't pay or file US taxes since I am not a US citizen and nor am I a tax resident in the US. I pay my taxes in Germany and I am a permanent resident here.

 

Now I have these checks for about 500$ in retirement money and I am unsure of what to do.

 

I was told that I have three options:

 

1. I can open a Fiidelity personal retirement account and deposit these checks into it within 60 days but I have to put in the gross amount so add in the 20% they took out myself. Then while filing US taxes I can show that I rolled over the retirement money that was cashed out into a personal retirement account and claim the 20% that was withheld and not pay the 10% early withdrawal penalty.

I was told that Fidelity will accept non-resident aliens to open a retirement account.

But I don't have any income in the US and I don't file taxes there. Could I go with this option and file a tax return showing no income in US and just this and claim it back? Does anyone know? I will likely need a very expensive tax accountant to do this. :(

 

2. Not cash the check and forget about it and let it be claimed by the city of Atlanta - I would have done this if it was only about 100$ but 500$ is a lot to throw away

 

3. Cash the check in Germany and pay taxes on it along with my income and any penalty - Is this an option? What is the penalty? what are the implications with respect to the US if I do this? They already kept my 20%. 

 

Can someone help me with this? I am so confused. This is a super messy situation caused by Fidelity and my old employer and now I am stressed out about this/

 

Thank you for your help.

 

Regards

escalera

 

 

 

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