I'm retiring (62) after 10 years in NY and will become a NRA living in Spain as of 1/1/07. In order to avoid paying taxes on any withdrawal of my 401(k) I am proposing to do a direct rollover to an IRA and then purchase from there an immediate annuity period certain (say 5 years) without, I believe, incurring in the 20% tax for lump-sum distribution.

As the US-Spain tax treaty (and most other US tax treaties) eliminates withholding for annuity payments (filing a W-8BEN) for Spanish residents, I would then receive the full amount of each yearly payment, although I would have to pay Spanish taxes on them.

Is this a viable set-up? Are my assumptions correct?

Jorge

AtlantaTaxExpert

Jorge:

An annuity within an IRA is a BAD idea. Buying an annuity will incur a whole bunch of fees and other cost overhead that simply are not necessary.

The money in the IRA is already tax-deferred. Due to your age, you can pull it out on an incremental basis and pay NO taxes to the U.S. (as long as your annual distribution does not exceed the amount of your personal exemption, currently $3,300). I believe that the same treaty provision that exempts you from withholding on annuity payments also exempts tax withholding on normal IRA distributions.