Are the tax rules the same if a foreigner inherits a 401K?

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Lynette
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Joined: Sun Jul 27, 2014 9:47 am

Are the tax rules the same if a foreigner inherits a 401K?

Post by Lynette »

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Last edited by Lynette on Tue Jan 08, 2019 6:23 pm, edited 1 time in total.
bsteiner
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Re: Are the tax rules the same if a foreigner inherits a 401

Post by bsteiner »

The main issue is whether the beneficiary's home country recognizes the status of the retirement plan or IRA. If it doesn't, then the income and gains within the plan or IRA might be currently taxable. The U.S.-UK treaty is helpful in this regard, but it only applies in the case of UK beneficiaries of U.S. plans/IRAs, or vice versa. You or your lawyer can check the U.S.-South Africa treaty.

One possible solution is to leave the retirement benefits in trust rather than outright.

Another possible solution is to leave the retirement benefits to the U.S. beneficiaries or charities, and other assets to the foreign beneficiaries.

A knowledgeable trusts and estates lawyer should be familiar with this issue, since it comes up from time to time.

As to the Roth conversion, while each case should be considered based on the particular facts, and if you're going to leave your retirement benefits to charity then the Roth conversion wouldn't make sense. However, as a general rule, assuming you have other money with which to pay the tax on the conversion, the conversion makes sense to the extent you can convert at a tax rate less than, equal to, or even somewhat higher (but not too much higher) than the tax rate that would otherwise apply to the distributions. Often the issue isn't whether to convert, but rather whether to convert all at once or to spread the conversion out over a number of years, and whether to convert (or begin to convert) now, or wait until retirement to convert (or to begin to convert). I've spoken and written about this many times, and continue to be frustrated that so many accountants still don't understand the Roth conversion.
Topic Author
Lynette
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Joined: Sun Jul 27, 2014 9:47 am

Re: Are the tax rules the same if a foreigner inherits a 401

Post by Lynette »

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Last edited by Lynette on Tue Jan 08, 2019 6:23 pm, edited 1 time in total.
Spirit Rider
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Re: Are the tax rules the same if a foreigner inherits a 401

Post by Spirit Rider »

Lynette wrote:At the moment I have my beneficiaries in my 401K and Roth IRA are "my will".
While it might be just be semantics, I have never heard the term "my will" used, rather the estate of the account holder is named as the beneficiary. It is seldom if ever a good idea. Estates do not have the ability to select lifetime RMDs as a distribution option.

Generally, beneficiaries should be actual identifiable persons or trusts with qualified look-thru status to identifiable persons. I believe the experts on here have mentioned that there are certain workarounds (especially where the spouse is the sole beneficiary of the estate). However, why take the chance, just name your specific beneficiaries now. Figure out the tax issues later.

"A good plan today is better than a perfect plan tomorrow." Comes from Voltaire “The best is the enemy of the good.”, or if you prefer the George Patton version “The best is the enemy of the good. By this I mean that a good plan violently executed now is better than a perfect plan next week.”
Topic Author
Lynette
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Joined: Sun Jul 27, 2014 9:47 am

Re: Are the tax rules the same if a foreigner inherits a 401

Post by Lynette »

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Last edited by Lynette on Tue Jan 08, 2019 6:24 pm, edited 1 time in total.
Alan S.
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Re: Are the tax rules the same if a foreigner inherits a 401

Post by Alan S. »

Here is a good article by a noted retirement plan expert Natalie Choate on the ramifications of naming your estate as beneficiary on a 401k. Doing so on an IRA is not good, but on a 401k it is considerably worse.

3 page article here: http://www.morningstar.com/advisor/t/93 ... d-plan.htm?
Topic Author
Lynette
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Joined: Sun Jul 27, 2014 9:47 am

Re: Are the tax rules the same if a foreigner inherits a 401

Post by Lynette »

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Last edited by Lynette on Tue Jan 08, 2019 6:22 pm, edited 1 time in total.
bsteiner
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Re: Are the tax rules the same if a foreigner inherits a 401

Post by bsteiner »

Lynette wrote:...I have an option to get legal advice as part of my benefits - $15 per month....
Are the $15 a month lawyers familiar with international tax and estate planning?
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