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Tim Carthy · Nov 3, 2007, 01:08 PM

I am an Irish resident who worked in US in 1990s. I have approx $200k in IRA. I am currently resident in Ireland for 10 years, have no US income and am aged 45 and want to withdraw with minimum taxes. Does anyone have the best method of doing so. What US taxes are payable and what forms need be completed.

Are there benefits to transferring to Irish equivalent retirement fund or can I withdraw funds with minimum US taxes.

Tim. Ireland

AtlantaTaxExpert · Nov 4, 2007, 10:16 AM

You MAY be able to transfer the money to an Irish=equivalent retirement fund; you will need to contact a tax professional in Ireland to determine HOW to do it.

If a transfer is not possible, you can start withdrawing the money without incurring a 10% Early Withdrawal Penalty by setting up a withdrawal plan that withdraws the money in roughly equal portions based on your life expectancy. You WILL have to file a non-resident tax return and pay some taxes, but, given your age, the annual withdrawal amount should not exceed $10,000, so the taxes will be less than 10%.

IntlTax · Nov 5, 2007, 08:16 PM

Tim,

Article 18 of the U.S.-Ireland Income Tax Treaty would seem to indicate that no U.S. tax would be imposed on the withdrawl. Only Irish tax should be imposed. The Technical Explanation to the treaty (at http://www.irs.gov/pub/irs-trty/iretech.pdf page 54 of 100) indicates that Article 18 includes IRAs and that it includes lump sum distributions. The 10% early withdrawl penalty is an addition to the amount of tax due. Since no tax should be due, no 10% penalty should apply. The administrator of the IRA may feel obligated to withhold U.S. tax on the distribution to cover themselves. If this occurs, you would need to file Form 1040NR to request a refund. I would recommend that you discuss this with the IRA administrator or a U.S. tax advisor that deals in this area. I vague recall something about the U.S. IRS not treating certain IRAs as pensions if certain requirements are not met. If not treated as a pension then Article 18 of the treaty would not apply and U.S. tax (plus the 10% penalty) could apply.

AtlantaTaxExpert · Nov 6, 2007, 08:26 AM

I agree with IntlTax's answer.

If you show the treaty citation to the IRS administrator, he should waive the mandated 20% withholding and send you the entire distribution.

He would, however, have to send the Form 1099-R to BOTH the IRS and to Ireland Department of Taxation.

You may still have to file a non-resident tax return (Form 1040NR) to account for the distribution and file Form 5329 with the Form 1040NR to explain the exception for the non-payment of the 10% Early withdrawal Penalty.

markjbloggs · Dec 8, 2009, 10:22 AM

Guys,

I find myself in a remarkably similar position to the OP. Can I just clarify something from your answers - the distribution may not be subject to the 10% penalty plus taxes, but is this contingent on it being invested in an Irish pension plan? The implication is that the distribution could be used for day-to-day spending.

With the economy over here in such bad shape, I could see a lot of people in similar circumstances having to resort to this

M

AtlantaTaxExpert · Dec 8, 2009, 02:44 PM

Actually, in my original answer, the implication was NOT that it could be used for day-to-day spedning, but rather it had to be reinvested in an Irish pension plan.

The extract from the U.S.-Ireland Tax Treaty technical explanation is below in bold red:

Subparagraph 1(a) provides that pensions and other similar remuneration derived and beneficially owned by a resident of a Contracting State in consideration of past employment are taxable only in the State of residence of the beneficiary. Although the Convention does not make explicit the fact that the term “pensions and other similar remuneration” includes both periodic and single sum payments, it is understood that this would be the case under the domestic law of both Contracting States. The treatment of such payments under the Convention is essentially the same as under the 1951 Convention. The term “pensions and other similar remuneration” is intended to encompass payments made by all private retirement plans and arrangements in consideration of past employment, regardless of whether they are qualified plans under U.S. law, including plans and arrangements described in section 457 or 414(d) of the Internal Revenue Code. It also includes an Individual Retirement Account.

The last sentence specifically notes this also applies to an IRA, so, logically, you should be able to withdraw the IRA from the U.S. custodian with NO penalty or taxes dues to the IRS, but you WOULD be liable for taxes to Ireland under the Irish income tax laws.

IntlTax · Dec 8, 2009, 06:52 PM

Unfortunately I must retract my statements above from over two years ago. As I have learned about this more, I believe my prior advice was erroneous (so much for free advice).

If you are taking a lump sum distribution, the distribution may not be considered a "pension" for treaty purposes until you are at least 62 years old.

Further, it appears that the 10% penalty would be imposed unless you are at least 59 and a half.

I do not believe that the U.S. taxation of the distribution has anything to do with how the money is used in Ireland or elsewhere after it is distributed.

Five Rings · Dec 9, 2009, 10:52 AM

That is interesting IntlTax.

I had a case this year wherein a nonresident alien, less than 62, received a refund of withheld tax for over $25,000 on the withdrawal of his/her 401K plan.

Could you give me the authority for your statement?

IntlTax · Dec 10, 2009, 07:59 PM

See http://www.irs.gov/pub/irs-trty/usmtech.pdf page 54.

This is from the 1996 model treaty technical explanation. There are a number of rulings applying these criteria. The technical explanation to the 2006 model treaty does not contain similar language, and it is unclear what criteria would be used now.

juliopv · Mar 9, 2010, 01:00 PM

I think Tim's case is similar to mine. I believe that Tim should not pay taxes in the US and that a withholding should not be made. However, this would not be my bank's opinion.

I am a Spanish citizen and a resident of Spain with an IRA from the time I was a green card holder. I made distributions in the past two years and the bank never made a withholding. Now, the bank wants to take a 30% withholding.

I inquired to the IRS and I was told by email, and I quote:
â€œHowever, Article 20 (Pensions, Annuities, Alimony, and Child Support) of the United States-Spain Income Tax Treaty provides that only the country of residence may tax the IRA distributionâ€
And
â€œIf you live in a foreign country and receive a pension/annuity paid by a U.S. payor, you may claim an exemption from withholding of U.S. Federal Income Tax (FIT) under a tax treaty by completing Form W-8BEN and delivering it to the U.S. payor. You must report your U.S. Taxpayer Identification Number (TIN) on Form W-8BEN for it to be valid for treaty purposes

The bank now says that, according to their research with the IRS, an IRA is not considered a pension, therefore the Treaty does not apply. But this is not in agreement with the "Technical Explanation of the US Tax Treaties". See www.ustreas.gov/press/releases/reports/hp16802.pdf, page 54

I think the bank is trying to mislead me and I am considering legal advice. Anybody has any idea where to seek legal advice?

AtlantaTaxExpert · Apr 29, 2010, 10:35 AM

Use a tax lawyer with experience in international tax issues.

pereobrador · Feb 26, 2013, 09:30 AM

I'm also a spanish citizen in a similar situation... how did your situation end up ?
Thanks!

AtlantaTaxExpert · Feb 26, 2013, 10:44 AM

He never got back to me with any answer as to how he proceeded.

However, I have since determined that there is no methodology for rolling over IRAs into foreign pension plans.

If you want to take an early distribution, you WILL pay the 10% Early Withdrawal Penalty, and that penalty CANNOT be mitigated by deductions, credits or exemptions.

The only way to avoid the penalty is to meet one of the exceptions (health care costs, higher education costs, etc.) or wait until you are 59.5 years of age.