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    guran2's Avatar
    guran2 Posts: 13, Reputation: 1
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    #1

    Jan 7, 2010, 02:03 AM
    401k penalty
    I really appreciate your efforts to answer this question thread! It seems to me that "AtlantaTaxExpert" and "IntlTax" provides different answers as to the level and mechanism of US taxation.
    I worked in the US in the 80'ties and have a substantial amount vested in my 401(k). I migrated out of the US almost 20 years ago and is a non-US citizen.
    I am considering a lump sum distribution of the total and would really like to understand if the mentioned 10% flat rate tax is correct. I do not mind to pay these 10% but additional tax calculated according to other rules starts to hurt really bad. If the LSD is taxed with the bases of my world-wide income, then the tax bracket would be ridiculous.
    Can you please clarify your answers above, prefereably with relevant references to IRS regulations and advisories.
    Five Rings's Avatar
    Five Rings Posts: 459, Reputation: 7
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    #2

    Jan 7, 2010, 09:10 AM

    What country are you from?
    guran2's Avatar
    guran2 Posts: 13, Reputation: 1
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    #3

    Jan 7, 2010, 07:29 PM

    Assume that I am not subjected to a tax treaty, hence will be taxed in the US only. Country is only relevant if a tax treaty applies and then the tax will be calculated according to the rules of the second state.

    Br
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
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    #4

    Jan 9, 2010, 05:42 PM
    Actually, the country DOES matter if there is a tax treaty, because some tax treaties make distributions from a pension TAX-FREE.
    ScottGem's Avatar
    ScottGem Posts: 64,966, Reputation: 6056
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    #5

    Jan 9, 2010, 06:01 PM

    What 10% flat tax rate? There is a 10% penalty for early withdrawal. In addition, the amount of the distribution would be added to your taxable income for the year. How this is affected by your expatriate staus, I don't know.
    guran2's Avatar
    guran2 Posts: 13, Reputation: 1
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    #6

    Jan 10, 2010, 12:24 AM

    Thank you all. Lets close this thread now and refer all continued Q&A to the original thread instead. Opening this special thread was a mistake of mine, my bad! It all belongs in the original k(401) thread, https://www.askmehelpdesk.com/taxes/...?highlight=401

    PS ScottGem: The 10% was mentioned in the other thread and I questioned that statement.

    PS AtlantaTaxExpert: Of course country of settlement matters as you state. Applicable rates per country/source of income, are detailed in pub. 901. The criteria for actually deciding on if a k(401) distribution is regarded as a pension is briefly listed I pub. 901 (http://www.irs.gov/pub/irs-pdf/p901.pdf). The criteria details are specified in each treaty and are sometimes very hard to decode in the legal text. Note also that pub.901 has a certain lag, so new and amended treaties are sometimes missing or incorrectly detailed in pub.901. Example: pub.901 is omitting "Malta" as a treaty country but a newly executed treaty between Malta and USA exists as of now. You need to scrutinize the actual valid treaty, subsequent amendments and added protocols, as well as additional IRS interpretations and decisions. The specific treaty needs to be subject to interpretation and sometimes a subsequent IRS ruling decision, for each country.

    As always, looking at "prior art", that is someone in an identical or similar tax situation during earlier year is a good guidance but not entirely failsafe anyway! Treaties are amended and new interpretations are implemented all the time.
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