This week, Gail looks at the implications of naming a non-U.S. resident as your IRA beneficiary, and explains the tax consequences of rolling over your 401(k) if you are a non-resident.
Dear Gail —
After high school I left my parents and my native Italy and moved to the United States to live with my cousins. I became a U.S. citizen years ago. Hard work and good luck have given me more money than I could ever spend in my lifetime. (This is truly the Land of Opportunity!) However, the rest of the family that stayed behind in Italy is still quite poor. I'd like to name my mother as the beneficiary of my IRA in the event something happens to me. Obviously, she doesn't have a Social Security number. Could you tell me if this is possible?
You most definitely CAN name your Italian mother as the beneficiary of your IRA even though she is a foreign citizen. Ed Slott, a CPA who writes extensively on the topic of IRAs, says naming someone who does not have a Social Security number will not affect you while you are alive. In other words, it won't change the amount the IRA owner is required to withdraw when they reach age 70 1/2.
However, if you were to die before your mother and she inherited your IRA, then the fact that she is not a U.S. citizen will be a factor. A "beneficiary" IRA* can only be established if the person inheriting the account has a tax Social Security number. Since this is not possible, it also means that your mother cannot "stretch" out the IRA and just take out a minimum amount each year over her own life expectancy. Your mom's only choice would be to withdraw the value of your IRA in a lump sum.
However, before the check would be sent to her, your IRA provider would have to subtract a "Non-resident Withholding" tax of 30% unless there is a tax treaty between Italy and the United States that would enable her to claim a lower rate. (See IRS Publication 515 for more information about foreign withholding tax.)
Frankly, if you're rolling in the dough right now, why don't you just send mama a big fat check she can use today instead of when you die — and only if she happens to still be alive at the time?
Be a good son!
*Some IRA providers call this a "decedent" IRA. The concept is identical: the dead IRA owner's name stays on the account, but the beneficiary's Social Security number is used because they are the one receiving the distributions.
Hi Gail —
My uncle was president of the U.S. subsidiary of a Japanese corporation. When he lived and worked in this country, he participated in the company's 401(k). Now he has retired and moved back to Tokyo. He'd like to roll his 401(k) into an IRA. Can he do this even though he's no longer living in the U.S.?
Dear Kim —
I checked with two experts who say there is nothing in the U.S. tax code which would prevent a foreign national who now lives outside the United States from rolling his retirement plan balance into an IRA. Since the money in his 401(k) was U.S. earned income and he still has a Social Security number, there's no problem. I consulted Mark Luscombe, the principal tax analyst at CCH, a major provider of tax and legal information service for further guidance.
According to Luscombe, withdrawals from your uncle's IRA would be considered "other income", meaning it could be subject to nonresident withholding tax (see first letter) but the amount of tax will depend upon any tax treaties between the United States and Japan and could be subject to taxation by either country. There is an additional issue if your uncle is under age 59 1/2 when he starts withdrawals. "He could be subject to the 10% early withdrawal penalty," says Luscombe. This penalty is less likely to be considered exempt under a tax treaty.
Hope this helps,
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