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ofmc1 · Oct 22, 2012, 06:41 PM

A EU citizen has, due to prior employment in USA, a US qualified pesnion plan and an IRA. He moves to israel with an A-1 visa thus obtaining the 10 year exemption for non isareli source income.
Question is under the tax treaty he presumably would be subject to taxes only in Israel on his withdrawals from pension plan and IRA. But since he has the 10 year exemption, would those withdrawals be totally tax free in both countries?

AtlantaTaxExpert · Oct 22, 2012, 07:20 PM

I believe your assumption is NOT correct.

Under virtually every tax treaty I have reviewed, the U.S. definitely treats IRAs as deferred compensation and WILL tax any disbursement from the IRA as taxable income, usually at a flat rate of at most 30%.

As for the qualified pension, it depends on the tax treaty between the U.S. and his home country in the European Union.

ofmc1 · Oct 23, 2012, 08:36 AM

Hi
Thanks for input.this is excerpt from exact treaty language.
The term "periodic payments" is NOT in every treaty. Not sure exactly what that means. Do you know?

4. The term "pensions and other similar remuneration", as used in this Article, means periodic payments made
(a) by reason of retirement or death and in consideration for services rendered, or (c) by reason of payments made under a plan benefiting self-employed individuals all or some of the contributions to which qualify for special tax treatment.

AtlantaTaxExpert · Oct 23, 2012, 10:46 AM

WHICH tax treaty?

taxesforaliens · Oct 23, 2012, 12:03 PM

I read somewhere, that Israel treats IRAs like mutual funds. Payments from an IRA would not be periodical, as you can influence the payment yourself (like for a mutual fund).
You would be able to take credit for taxes paid in the US (due to article 26 about avoiding double taxation), but since you are using the 10-years tax holiday, there would be no credit.

The only way to avoid taxation would be to withdraw just the amount of the personal exemption.

ofmc1 · Oct 23, 2012, 01:01 PM

Atlanta- It is for israel.

Taxesforaliens- That would make sense as IRA, I believe, is often looked at as a form of deferred compensation.

Do you thin a 401K or a Keogh would be viewed as periodic?

taxesforaliens · Oct 23, 2012, 03:59 PM

I would suspect that 401ks are treated the same.
However, I'm not sure.
You could contact Nathan Shori, he specializes in US-Israel tax issues, I know him from a lecture he gave at my university several years ago: TAX US-ISRAEL, Income tax and other financial matters concerning U.S. tax for Israelis - Income Tax Consulting - NATHAN M. SCHORI, MBA

ofmc1 · Oct 27, 2012, 06:20 PM

Hi
I wrote him but no answer.
I found out that 401k's are treated as other qualified plans (NOT IRA's).

How much is the amount of the Personal Exemption?

Whe you sain "no credit as using 10 year tax holiday," you meant that there will be no credit from which taxing authority?

taxesforaliens · Oct 27, 2012, 06:41 PM

There is no credit in Israel for foreign paid taxes as the credit is limited to any amount you would have to pay in Israel. Since that is zero due to the 10 year tax holiday, you cannot take a credit in Israel.
The personal exemption for 2012 is $3800. So if you take a distribution of $3800 or less, there would be no income tax (assuming you have no other US source income), only the 10% penalty if you are younger than the age limit.