Author Topic: Renouncing US Citizenship...tax headache for retirement accounts?  (Read 2194 times)

pmac

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I've looked into this a little bit, but wanted to see if anybody had any good details.

What happens if 20 years from now you renounce U.S. citizenship and take up residencey/citizenship in another country?

How are your taxable and non-taxable accounts handled when you leave the U.S.?

If you plan to do this in 20 years, would you be better of putting money into a taxable account and doing tax-gain harvesting up until the point you leave the US?

Abe

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #1 on: January 14, 2019, 08:22:23 PM »
You are exempt from the above if all are true:
Less than $2 million in all assets anywhere in the world
Less than $169k average federal income tax for last 5 years
All tax forms filed properly for last 5 years and no outstanding taxes due.

If not, your 401k can still be deferred but you will owe taxes of 30% once you start withdrawing from it.

https://www.irs.gov/forms-pubs/about-form-8854
This can be complicated and failure to pay properly can lead to asset seizure, account freezing, and barred entry to the US. Consult a tax lawyer with experience in this!

pmac

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #2 on: January 14, 2019, 08:33:02 PM »
If not, your 401k can still be deferred but you will owe taxes of 30% once you start withdrawing from it.

Can you explain what you mean by this?

I'm really trying to figure out if it's best to put money in a taxable account instead of a 401k to avoid situations like this "owe taxes of 30%" on 401k money.

Thanks!

pmac

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #3 on: January 14, 2019, 08:36:58 PM »
Also,
I find this SUPER interesting as it relates to this question....

Eduardo Luiz Saverin (/ˈsśvərɪn/; Portuguese: [eduˈaɾdu luˈis ˈsaveɾĩ]; born March 19, 1982)[4] is a Brazilian-born entrepreneur and angel investor.[5] Saverin is one of the co-founders of Facebook.[6] In 2012, he owned 53 million Facebook shares[7] (approximately 2% of all outstanding shares), valued at approximately $2 billion at the time.[8][9] He also invested in early-stage startups such as Qwiki[10] and Jumio.[11]

Saverin renounced his U.S. citizenship in September 2011,[12][13] and therefore avoided an estimated $700 million in capital gains taxes; this generated some media attention and controversy.[5][14][15] Saverin stated that he renounced his citizenship because of his "interest in working and living in Singapore" where he has been since 2009,[16] and denied that he left the U.S. to avoid paying taxes.[12]

From Wikipedia: https://en.wikipedia.org/wiki/Eduardo_Saverin

Paul der Krake

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #4 on: January 14, 2019, 09:44:09 PM »
The only reason to be looking into this is if you have good reasons to believe you're currently a pleb but about to skyrocket out of plebville and  become filthy rich, where filthy means 9 figures or more. In which case you should be paying a professional pleb with expertise in pleb transition to help you with your future ex-pleb problems. Do not rely on unpaid, forever plebs found on forums that rely on ads for GEICO to keep the lights on.
« Last Edit: January 14, 2019, 10:32:21 PM by Paul der Krake »

pmac

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #5 on: January 14, 2019, 10:23:18 PM »
on forums that rely on ads for GEICO to keep the lights on.

haha.


reminds me of this pleb: https://www.thestreet.com/story/10367437/1/whole-foods-ceo-admits-to-message-board-posts.html

Plenty of "plebs" on this forum have found help from other "plebs"

PDXTabs

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #6 on: January 14, 2019, 10:50:26 PM »
The only reason to be looking into this is if you have good reasons to believe you're currently a pleb but about to skyrocket out of plebville and  become filthy rich, where filthy means 9 figures or more. In which case you should be paying a professional pleb with expertise in pleb transition to help you with your future ex-pleb problems. Do not rely on unpaid, forever plebs found on forums that rely on ads for GEICO to keep the lights on.

Ummm, the only reason I would renounce my US citizenship is to get German or Spanish citizenship.

MrThatsDifferent

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #7 on: January 15, 2019, 05:01:14 AM »
I honestly canít imagine why someone who isnít a multi-billionaire would even consider doing this? The US tax situation for citizens living abroad is annoying but not fatal by any means.

pmac

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #8 on: January 15, 2019, 09:55:34 AM »
I honestly canít imagine why someone who isnít a multi-billionaire would even consider doing this? The US tax situation for citizens living abroad is annoying but not fatal by any means.


There are several countries with no capital gains taxes, so that right there seems better than the US tax situation.

flipboard

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #9 on: January 15, 2019, 11:34:35 AM »
I've looked into this a little bit, but wanted to see if anybody had any good details.

What happens if 20 years from now you renounce U.S. citizenship and take up residencey/citizenship in another country?

How are your taxable and non-taxable accounts handled when you leave the U.S.?

If you plan to do this in 20 years, would you be better of putting money into a taxable account and doing tax-gain harvesting up until the point you leave the US?
First off, for all the haters in this thread: you clearly haven't ever had to deal with filing taxes in two countries. All the americans I know have to pay hundreds of dollars ever year to a professional just to get their taxes filed because of the nightmare of combining two tax systems. (I.e. local country taxes first, then you need to figure out US liability.) And most of them end up paying thousands to the US for the privilege of... I don't actually know what.

It gets worse: if you make mistakes, or forget to file the right forms (FBAR anyone?) you can get fined.


Now, for OP:
The answer is, it depends. Specifically: it depends on what country you're withdrawing in, and more significantly: the dual tax treaties between the USA and country X. And finally: it depends on how taxes in country X work.

If you're lucky, country X and the USA might have a dual tax treaty that only permits country X to tax the 401k/IRA withdrawal. In which case: you only pay taxes in country X. The US would still withhold a certain percentage of the withdrawal (default of 30%, can be smaller for residents of certain countries) - but they return it when you file the relevant tax return.

If you're unlucky, there's no agreement, and both the US and country of residence tax the withdrawal. The US would still withhold a flat 30%, country X could have any arbitrary tax system.

In general, most dual-taxation agreements with the US seem to cover 401k's and IRA's (but the details vary depending on country) - so that's not something to worry about too much. Roth's (Roth IRA, Roth 401k) however often aren't covered, which makes it impossible to give any clear answer.


But finally: you may need to watch out for that exit tax BS. Apparently if you have too many assets the US will charge an "exit tax" when renouncing (or even when giving up a green card under certain circumstances).

// Edit: for an example of countries - I looked up New Zealand, and (A) the US-NZ tax agreement only let's New Zealand tax withdrawals of NZ residents (except for US citizen ofc), and (B) NZ apparently doesn't charge any tax on retirement withdrawals within a 4 year transition period. That sounds like a dream place for anyone who's resided and worked in the US for a while.
« Last Edit: January 15, 2019, 12:07:57 PM by flipboard »

pmac

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #10 on: January 15, 2019, 12:26:59 PM »

// Edit: for an example of countries - I looked up New Zealand, and (A) the US-NZ tax agreement only let's New Zealand tax withdrawals of NZ residents (except for US citizen ofc), and (B) NZ apparently doesn't charge any tax on retirement withdrawals within a 4 year transition period. That sounds like a dream place for anyone who's resided and worked in the US for a while.

Thanks for the detailed response. This is the question I was getting at.

So many people are doing these IRA to Roth conversions, when from your New Zealand example looks like you could just move there for 4 years and take all your money out of your 401k tax free.


MrThatsDifferent

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #11 on: January 15, 2019, 12:36:24 PM »
You should read or contact gocurrycracker, he does lots of posts about expats, FIRE and taxes and doesnít seem to have any issues and he hasnít renounced.

flipboard

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #12 on: January 15, 2019, 01:17:10 PM »

// Edit: for an example of countries - I looked up New Zealand, and (A) the US-NZ tax agreement only let's New Zealand tax withdrawals of NZ residents (except for US citizen ofc), and (B) NZ apparently doesn't charge any tax on retirement withdrawals within a 4 year transition period. That sounds like a dream place for anyone who's resided and worked in the US for a while.

Thanks for the detailed response. This is the question I was getting at.

So many people are doing these IRA to Roth conversions, when from your New Zealand example looks like you could just move there for 4 years and take all your money out of your 401k tax free.
Yes - but that probably only works if you already don't have US citizenship. (Most of the agreements have a carve out that states that the US can still tax citizens anywhere - but it does at least force the US to credit taxes in country of residence first. So if e.g. NZ did tax the 401k withdrawal at 5%, then the US would simply charge the usual 401k tax, and then subtract the 5% already paid to NZ.)

AFAIUI NZ also doesn't have capital gains, which further simplifies retirement planning, as long as you aren't Eritrean or American.

Disclaimer: my familiarity with NZ is limited, verify everything with a tax lawyer if you want to be safe.

(And that's a general rule: the tax agreements are great for normal people who only pay tax in place of residence. Americans however will always need to cough up the dough to Uncle Sam, but the dual tax agreement at least helps avoid increasing the tax by too much.)
« Last Edit: January 15, 2019, 01:22:42 PM by flipboard »

PDXTabs

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #13 on: January 15, 2019, 02:09:49 PM »
I honestly canít imagine why someone who isnít a multi-billionaire would even consider doing this?

Some people do it just to get citizenship somewhere nice. For example Germany, Spain, Japan, or Singapore.

MrThatsDifferent

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #14 on: January 15, 2019, 02:34:04 PM »
I honestly canít imagine why someone who isnít a multi-billionaire would even consider doing this?

Some people do it just to get citizenship somewhere nice. For example Germany, Spain, Japan, or Singapore.

You donít need citizenship in those places if youíre a permanent resident.

Paul der Krake

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #15 on: January 15, 2019, 03:18:00 PM »
I honestly canít imagine why someone who isnít a multi-billionaire would even consider doing this?

Some people do it just to get citizenship somewhere nice. For example Germany, Spain, Japan, or Singapore.
True, there are a couple of first world countries that don't allow dual citizenship. If your life is truly in Germany and you have no plans to ever be an American again, sure, go ahead and renounce.

PDXTabs

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #16 on: January 15, 2019, 03:34:18 PM »
Some people do it just to get citizenship somewhere nice. For example Germany, Spain, Japan, or Singapore.

You donít need citizenship in those places if youíre a permanent resident.

Strictly speaking that is true, but some people want to be able to vote and get access to government programs. AFAIK certain occupations are reserved for citizens in Japan and certain government programs (schools and public housing) are better in Singapore if you are a citizen. Similarly, being a Germany or Spanish citizen would let you live/work in any EEA country where as residency will not.

pmac

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #17 on: January 15, 2019, 07:04:35 PM »
To throw one more hatchet into this discussion,


What if you renounce you're U.S. Citizenship, become a citizen of a Central or South American country, cross over into the southern border illegally to get your kids "Dreamer" scholarships to college, etc... live in one of the sanctuary cities.

Or, how do you come back in legally to visit relatives or friends.....

PDXTabs

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Re: Renouncing US Citizenship...tax headache for retirement accounts?
« Reply #18 on: January 15, 2019, 07:29:50 PM »
Or, how do you come back in legally to visit relatives or friends.....

Well, presumably you don't give up your US passport for a far inferior one. Lots of people can easily come visit with the Visa Waiver Program.

My older brother has never had US citizenship, but he still gets visa free travel on his UK passport to come see me.

But I mostly agree, I would be very reluctant to give up my US citizenship. I definitely plan to get an EU passport, and will for sure pick a country where I don't have to renounce any other citizenships.