Let’s get straight to the point: if your country of current or planned residence is listed below, then you can withdrawal your entire U.S.-based retirement plan with 0% tax owed to the IRS. Even if your country is not listed, it may be beneficial to engage us for tax residence planning. Read the full details below.
- Czech Republic
- New Zealand
- South Korea
- Sri Lanka
- Trinidad & Tobago
- United Kingdom
Generally, when you withdraw funds from a U.S.-based retirement fund, such as a 401(k), 403(b), Individual Retirement Accounts (IRAs), and even an executive Non-Qualified Deferred Compensation (NQDC) Plan, there’s a 20% withholding tax. In addition to that, if you’re under the age of 59½ at the time of the withdrawal, there’s an additional 10% early withdrawal penalty, which is designed to discourage people from withdrawing funds prior to retirement age. For nonresident non-U.S. citizens, there’s a gross-basis 30% withholding tax. In just about any scenario, you’d be looking at losing 30% (nearly one-third) to the IRS.
As long as you’re not a U.S. citizen, our firm can get your effective income tax rate down to 0% in both the U.S. and your country of residence.
In the absence of planning, an individual will pay 30% tax to the U.S. Although your country of residence will likely grant you a tax credit for the 30% paid to the IRS, you could end up owing additional tax in your effective income tax rate in your country of residence is greater than 30%. For example, let’s say you’re an Australian tax resident with an effective Australian income tax rate of 35%. Although you would get credit for the 30% paid to the IRS, you may still owe an additional 5% to Australia without proper planning.
By engaging our firm, we can reduce the total worldwide effective tax rate on the withdrawal down to as low as 0% with proper planning in advance, which is just about as good as it gets in the tax world.
We accomplish this by employing various international treaty-based tax planning techniques we can discuss during a free consultation. Most importantly, the engagement will also cover the preparation of next year’s U.S. federal income tax return with regard to reporting the withdrawal and formally explain the treaty-based legal position to the IRS on Form 8833. This part is absolutely critical because, if it is not properly reported on your U.S. tax return, the IRS will definitely assess tax and penalties and utilize the mutual cooperation article of the applicable income tax treaty to compel the tax authorities in your country of residence to collect the tax on behalf of the IRS. If you doubt that, just ask the Mayor of London who found himself in that scenario several years ago.
Long story made short: don’t try this on your own. Our fee for this strategy is 25% of the tax savings, but our standard fee for refund recoveries from the IRS is 50%. In other words, if you try it on your own, one of two things will happen; either you’ll convince the financial institution but then fumble the tax filing resulting in an IRS assessment with penalties that will effectively double our fee when you inevitably contact us to fix the situation, or the financial institution will surprise you with a 30% withholding again doubling our fee when we have to recover the tax withholdings from the IRS by filing a tax return after the close of the tax year. We’re saying this now because of how common it’s become.
When feasible, we always empower clients with the knowledge to handle their affairs independently. However, attempting to navigate the complexities of international tax planning in your own personal affairs is akin to trying to land a plane for the first time during an actual flight without a pilot instructing you. You’re too close to retirement and have worked too hard to mess it up now.
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