View Full Version : Non-Resident Alien Tax on IRA Distribution

Aug 1, 2010, 05:11 AM
I am a british citizen living in Israel for the last 30 years. (I am an Israeli citizen).
I have never lived or worked in the United States.
My father recently passed away in the States, (he was an american citizen).
My sister and I have been left a small IRA fund. We are the beneficiaries of this fund and the company is now workiing on splitting the fund into two separate accounts (my sister and I)
We are trying to find out the following with little luck!

1. we understand a distribution has to be taken out yearly, but don't understand how to file with the IRS, if we have to file with the IRS and how much we will be taxed?
2. I am not sure if this is correct but I understand we have three options;
a) take yearly distributions
b) don't take distributions for 5 years and then take out the full amount (how much tax would this include)
c) take out the money now (how much tax would I have to pay if I don't work there or live there or anything else there)

This is not a very large sum of money but money I really do need now...
If anyone could give me details of IRS, IRA, Vanguard, Israeli/US tax laws I would be very very appreciative.

Aug 2, 2010, 06:55 AM
The rules for distributions and what is taxable in the US depend on what type of IRA this was. If your father had a traditional IRA - the type that generates taxable income when you take withdrawals - then you have these options:

1. Take the money now. You will pay ordinary income tax on the amount.

2. Roll your portion of your father's IRA account into a new "Inherited IRA" in your name. This may be advantageous if you don't need the money now, as the account can continue to appreciate in value tax-deferred. The timing and amounts of required distributions depend on your father's age at time of death, One option is to start taking an annual distribution by Dec 31 of next year. Or if your father was less than 70-1/2 years old at the time of death you have the option of waiting 5 years at which point the entire amount is distributed to you. If your father was older than 70-1/2, then you must start distributions prior to Dec 31 of next year.

Although you have to pay income tax each year as you receive distributions there is no early witrhdrawal penalty. Based on your statement that you can use the money now, it may be best (and simplest for you long term) to take the money now.

If your father actually had a Roth IRA (as opposed to a traditional IRA) the rules are different. For a Roth IRA if the money in the account has met the 5-year holding period then any distributions you take will be tax-free. As with a traditional IRA, you can take the money now, or roll it to an inherited IRA and take mandatory distributions later.

You might find this information pamphlet helpful. Refer to pages 5 and 9 to see your options for inheriting an IRA:

I do not know how Israel would treat this income, but my guess (emphasis on "guess") is that you will have to report the income and pay tax on it, but they may give you a credit for foreign taxes paid on it (to the US). I suggest you talk to a tax pro in Israel to understand the implications.

Aug 2, 2010, 09:44 AM
Thanks so much, I am going to read through this slowly and reply to you, so thoughtful of you to write back to me, very much appreciated.

Aug 2, 2010, 10:34 AM
Excellent post, ebaines!