EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

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Topic Author
assyadh
Posts: 87
Joined: Tue Sep 18, 2018 12:44 pm

EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Fri Nov 08, 2019 6:15 pm

Hi Everyone,

I am originally from France, and currently working in the US. I just had a green card, and don't plan to take the citizenship route in light of the current nightmare for US Persons living out of the US (FATCA, PFIC, FBARs, Worldwide taxation) as I know I will leave the US at some point.

I plan to leave the US in the next 7/10 years and not be subject to an exit tax (< 2M net worth anyways).

I participate into my workplace 401k up to the match, and put the rest in a taxable brokerage account with Schwab (which I will transfer to IB before leaving the US) in a mix of VTI/VXUS.

Depending on the amount in the 401k at this point, I may or may not withdraw everything. My best choice would be to severe ties with the IRS because I don't want to have to file a 1040NR tax return, deal with witholding by my broker etc..


I am well aware of navigating the tax treaties, the saving clauses and how I could theoretically not pay US taxes (by applying a FTC) but I don't want the headache that comes with having ties with the IRS.

Also, After my time in the US, I will probably move to a no cap gains country and sell off my investments (Belgium, Switzerland, UAE or Malaysia are on my radar).

My question: To people with a similar experience (@ TedSwipett :sharebeer ), what do you think about my overall plan?
If you could do it again, would you still apply for US Citizenship?

Thanks.

TedSwippet
Posts: 2499
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by TedSwippet » Fri Nov 08, 2019 7:02 pm

assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I plan to leave the US in the next 7/10 years and not be subject to an exit tax (< 2M net worth anyways).
The sort of thing that might catch you out here would be an unexpected inheritance. Also stock option payoff. Or less likely, lottery win. Just a thought. I didn't expect to be caught by the 'exit tax' either, but circumstances change. Also, laws change. The exit tax didn't exist when I took out a green card, otherwise I probably would not have done so, but survived on L1 and H1b instead. The $2m asset limit might not be $2m when you encounter it. It could be higher, or it could be lower. Or it could be zero. Of note is that it is not indexed for inflation.
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I participate into my workplace 401k up to the match, and put the rest in a taxable brokerage account with Schwab (which I will transfer to IB before leaving the US) in a mix of VTI/VXUS.
If you do not withdraw everything (see below), look closely at how your new country will tax both VTI/VXUS (unwrapped) and your 401k. Some countries have PFIC-like tax for 'offshore' funds, though even at their worst these are normally mere pale shadows of the US's PFIC horror. And some do not recognise US retirement plans as retirement plans.
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
Depending on the amount in the 401k at this point, I may or may not withdraw everything. My best choice would be to sever ties with the IRS because I don't want to have to file a 1040NR tax return, deal with witholding by my broker etc..
It should be possible for you to live in many countries and not have to file 1040NRs or any of the other menagerie of US forms. If your broker or platform is competent -- and it seems a fair few are not, particularly when it comes to IRAs and 401ks -- and you send them a short W-8BEN every few years, the US tax withholding will exactly match your US tax liability, if any, on what they send you. In that case, you do not have to file any US tax returns. Unlike US citizens, nonresident aliens whose US tax is fully satisfied by withholding so that they have a zero tax liability have no US tax filing requirements.

Where you have a less than competent broker or pension provider though, you might want to file a 1040NR to get back what they overwithheld through not paying attention fully to the rules regarding receipt of a W-8BEN. So there's that danger. Closing and withdrawing everything would remove it entirely, but beware of the 10% early withdrawal penalty on IRAs and 401ks if under age 59.5. That might be quite a price to pay for just not having to file the occasional W-8BEN or US tax form.
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I am well aware of navigating the tax treaties, the saving clauses and how I could theoretically not pay US taxes (by applying a FTC) but I don't want the headache that comes with having ties with the IRS.
As noted above, headaches are entirely possible, but they are not guaranteed. Your level of interaction with the IRS might be painful, or it might be nonexistent. Mostly it depends on your broker's competence with foreign resident account holders. (There's always the spectre of having to file a 706NA nonresident alien estate tax return, but that's not strictly your problem at all!)
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
If you could do it again, would you still apply for US Citizenship?
I didn't apply for US citizenship the first time around. I certainly wouldn't do differently if given a second opportunity. It's worthwhile if you plan a definite return to the US in future. Otherwise, it's just a horrifically expensive option with perhaps a very low probability of exercise.

Topic Author
assyadh
Posts: 87
Joined: Tue Sep 18, 2018 12:44 pm

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Fri Nov 08, 2019 7:38 pm

First of all, thanks for your message.
I already have I strong EU Citizenship, and a backup plan with another North African citizenship, so really having a US Passport does not bring anything to the table for me.

My remarks follow:
TedSwippet wrote:
Fri Nov 08, 2019 7:02 pm
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I plan to leave the US in the next 7/10 years and not be subject to an exit tax (< 2M net worth anyways).
The sort of thing that might catch you out here would be an unexpected inheritance. Also stock option payoff. Or less likely, lottery win. Just a thought. I didn't expect to be caught by the 'exit tax' either, but circumstances change. Also, laws change. The exit tax didn't exist when I took out a green card, otherwise I probably would not have done so, but survived on L1 and H1b instead. The $2m asset limit might not be $2m when you encounter it. It could be higher, or it could be lower. Or it could be zero. Of note is that it is not indexed for inflation.
Yes, I have to be careful. My brokerage account is jointly held by my wifeand I, so in theory it could grow to slightly less than 4M before hitting the exit tax. I would be loooong gone before that as my target right now is around 1.5M. We would need a really high return/inflation to bring us to 4M before us exitting the US.
TedSwippet wrote:
Fri Nov 08, 2019 7:02 pm
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I participate into my workplace 401k up to the match, and put the rest in a taxable brokerage account with Schwab (which I will transfer to IB before leaving the US) in a mix of VTI/VXUS.
If you do not withdraw everything (see below), look closely at how your new country will tax both VTI/VXUS (unwrapped) and your 401k. Some countries have PFIC-like tax for 'offshore' funds, though even at their worst these are normally mere pale shadows of the US's PFIC horror. And some do not recognise US retirement plans as retirement plans.
The French tax treaty with the US only taxes IRAs in the US. It is shielded by the most recent protocol (even roths). Also, France has an estate tax treaty with the US.
Concerning VTI/VXUS (which are the bulk of my taxable), the position would be closed in a no cap gains country in favor of a VWRA or IWDA EMIM mix before going back to France.
TedSwippet wrote:
Fri Nov 08, 2019 7:02 pm
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
Depending on the amount in the 401k at this point, I may or may not withdraw everything. My best choice would be to sever ties with the IRS because I don't want to have to file a 1040NR tax return, deal with witholding by my broker etc..
It should be possible for you to live in many countries and not have to file 1040NRs or any of the other menagerie of US forms. If your broker or platform is competent -- and it seems a fair few are not, particularly when it comes to IRAs and 401ks -- and you send them a short W-8BEN every few years, the US tax withholding will exactly match your US tax liability, if any, on what they send you. In that case, you do not have to file any US tax returns. Unlike US citizens, nonresident aliens whose US tax is fully satisfied by withholding so that they have a zero tax liability have no US tax filing requirements.

Where you have a less than competent broker or pension provider though, you might want to file a 1040NR to get back what they overwithheld through not paying attention fully to the rules regarding receipt of a W-8BEN. So there's that danger. Closing and withdrawing everything would remove it entirely, but beware of the 10% early withdrawal penalty on IRAs and 401ks if under age 59.5. That might be quite a price to pay for just not having to file the occasional W-8BEN or US tax form.
Right, My tought is that if I relinquish a green card in the beginning of the year after selling it all, then even with the 10% penalty, the tax bill could not be that high (exemption, child tax credit etc..). Of course, if the 401k is worth 500k+ it's another story. Right now we are talking 30k, however it may go up fast if I get an employer with a relatively high match (think large tech megacorp with 50% match no limit).
TedSwippet wrote:
Fri Nov 08, 2019 7:02 pm
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
I am well aware of navigating the tax treaties, the saving clauses and how I could theoretically not pay US taxes (by applying a FTC) but I don't want the headache that comes with having ties with the IRS.
As noted above, headaches are entirely possible, but they are not guaranteed. Your level of interaction with the IRS might be painful, or it might be nonexistent. Mostly it depends on your broker's competence with foreign resident account holders. (There's always the spectre of having to file a 706NA nonresident alien estate tax return, but that's not strictly your problem at all!)
I have read good things about IB and how they apply withholding. But I still feel that it's a luck game. ie getting your broker to respect a 0% withholding..
TedSwippet wrote:
Fri Nov 08, 2019 7:02 pm
assyadh wrote:
Fri Nov 08, 2019 6:15 pm
If you could do it again, would you still apply for US Citizenship?
I didn't apply for US citizenship the first time around. I certainly wouldn't do differently if given a second opportunity. It's worthwhile if you plan a definite return to the US in future. Otherwise, it's just a horrifically expensive option with perhaps a very low probability of exercise.
Thanks for your feedback, I do think it's an expensive bill. I am not a doom and gloom guy, but with the incoming election and the tax plans of some candidates, I don't see thing going a good way for US Persons abroad and non US Persons. Even if they pass a residency based taxation bill, what would happen with PFICs, FBARs etc. I think the dream of a real RBT is still far away.

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Watty
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Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by Watty » Fri Nov 08, 2019 8:21 pm

A few thoughts.

1) You did not mention a spouse or any kids so I would assume that you are single. If so there is a reasonable chance that you might end up getting married and having your plans change so you might decide to stay in the US because of spouse and and possible kids. It would be good to keep your plans flexible since they might change.

2) In your planning you also need to consider your state taxes and maybe move to a state with no income tax before your leave the US. This could help you avoid the state taxes if you do liquidate your investments. Establishing tax residency in a different state can be more complex than just moving so be sure to research how to do it right. Some states will be aggressive in trying to collect the state taxes.

3) I have only heard a little bit about it but it sounds like French inheritance laws are very different than US laws. It would be good to make sure that your will, account beneficiaries, and related paperwork is all in order and will not run into problems with the differences in the two countries laws. The US estate taxes for a non-resident alien can be outrageous so you should look into this if you leave the US.

4) Normally you need to pay into Social Security for 10 years to collect any Social Security when you are retired. If you are thinking of leaving the US after you have worked in the US for 9.5 years then it might make sense to work six months longer to qualify for Social Security. The exact rules are a bit more complicated and the tax treaties with the country you have citizenship in and the country you are living in also make a big difference. A non-US citizen who paid into Social Security may or may not be able to collect Social Security depending on the details of the tax treaties with the countries involved. This gets complex but you should be sure to research this.

Topic Author
assyadh
Posts: 87
Joined: Tue Sep 18, 2018 12:44 pm

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Fri Nov 08, 2019 8:29 pm

Watty wrote:
Fri Nov 08, 2019 8:21 pm
A few thoughts.

1) You did not mention a spouse or any kids so I would assume that you are single. If so there is a reasonable chance that you might end up getting married and having your plans change so you might decide to stay in the US because of spouse and and possible kids. It would be good to keep your plans flexible since they might change.

2) In your planning you also need to consider your state taxes and move to a state with no income tax before your leave the US. This could help you avoid the state taxes if you do liquidate your investments. Establishing tax residency in a different state can be more complex than just moving so be sure to research how to do it right. Some states will be aggressive in trying to collect the state taxes.

3) I have only heard a little bit about it but it sounds like French inheritance laws are very different than US laws. It would be good to make sure that your will, account beneficiaries, and related paperwork is all in order and will not run into problems with the differences in the two countries laws. The US estate taxes for a non-resident alien can be outrageous so you should look into this if you leave the US.

4) Normally you need to pay into Social Security for 10 years to collect any Social Security when you are retired. If you are thinking of leaving the US after have worked in the US for 9.5 years then it might make sense to work six months longer to qualify for Social Security. The exact rules are a bit more complicated and the tax treaties with the country you have citizenship in and the country you are living in also make a big difference. A non-US citizen who paid into Social Security may or may not be able to collect Social Security depending on the details of the tax treaties with the countries involved. This gets complex but you should be sure to research this.
Thanks Watty, I am married (both French) and all of our family is in France. Staying in the US long term would not make sense for us.

I live in a no income tax state.

I plan to use Ireland based ETFs with IB. Avoiding the US taxation, but will still have to wait for my estate to be released by the IRS.

Regarding social security, France has a totalization agreement with the US, which means that my working years in France count towards the 10 year minimum (the payment is prorated though) which means I should qualify next year (started working in 2010).

wineandplaya
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Joined: Fri Sep 14, 2018 9:42 am

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by wineandplaya » Fri Nov 08, 2019 9:08 pm

You might want to do Roth 401(k) instead of traditional. You can then get your contributions back when quitting your job without tax consequences. Traditional (on top of your pretax employer match) might push you up to a higher tax bracket. Your penalty will be much smaller also since it will only apply to the earnings.

Topic Author
assyadh
Posts: 87
Joined: Tue Sep 18, 2018 12:44 pm

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Fri Nov 08, 2019 11:01 pm

wineandplaya wrote:
Fri Nov 08, 2019 9:08 pm
You might want to do Roth 401(k) instead of traditional. You can then get your contributions back when quitting your job without tax consequences. Traditional (on top of your pretax employer match) might push you up to a higher tax bracket. Your penalty will be much smaller also since it will only apply to the earnings.
Good idea. I have already put some money in a traditional 401k this year. Any possibility of recharacterization of this year's contributions?

Starting next year, I'll probably do roth.

The match is still going to be pre-tax

wineandplaya
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Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by wineandplaya » Fri Nov 08, 2019 11:22 pm

assyadh wrote:
Fri Nov 08, 2019 11:01 pm
Good idea. I have already put some money in a traditional 401k this year. Any possibility of recharacterization of this year's contributions?
I doubt you can do that. If you change employer, you could roll it over to a Roth IRA however, and be able to access the money penalty-free five years later. You might also want to make use of the first-time home buyer rule to access IRA money penalty-free; it should also work if you are buying a house oversees, assuming that you are renting now. Another idea: use the possibility to roll IRA into an HSA and use up the money for medical expenses.

This all assumes that you want to empty all your 401(k)/IRA money when leaving the US, which I'm not sure is the best idea. If you leave it there once in Europe, it will continue to grow tax-deferred protected from European taxation by double taxation treaties in many cases.

TedSwippet
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Location: UK

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by TedSwippet » Sat Nov 09, 2019 4:55 am

assyadh wrote:
Fri Nov 08, 2019 7:38 pm
Thanks for your feedback, I do think it's an expensive bill. I am not a doom and gloom guy, but with the incoming election and the tax plans of some candidates, I don't see thing going a good way for US Persons abroad and non US Persons. Even if they pass a residency based taxation bill, what would happen with PFICs, FBARs etc. I think the dream of a real RBT is still far away.
This is for me the the core of the problem. The continual deterioration of tax laws for people with international lifestyles. Not specifically the "incoming election" -- expat-bashing is one of congress' very few bipartisan activities, and both parties are equally good at it -- but rather the continual change in rules that inevitably disadvantage non-voting expats and foreigners. HEART, FATCA, GILTI, Ex-PATRIOT (if they ever get it through), and so on. All with names that torture the English language in order to childishly come up with a 'snappy' acronym.

You have the advantage of saving in 401ks and IRAs in an era where the exit tax is a known feature, giving you an element of control. I did not. I saved heavily, so that my 401k was a significant chunk of my net worth when I left the US. Secure in the knowledge that it would be fully protected by treaty until retirement and withdrawals. Then, boom. A new treaty-violating US tax law with effectively retroactive effects, that had it been in place at the time would have significantly changed my plans and approach.

This, more than any lingering paperwork burden with the IRS, should I think be your major driver here. The probability that congress will pass something new that messes up your plans and costs you a significant sum in unavoidable double-tax. Or makes pensions entirely unavailable. It is not hard to imagine some new anti-terrorism law that mandates that 401k providers erect withdrawal security features that are impossible for nonresident aliens to overcome.

While you live in the US, you are in a majority when it comes to holding 401ks and IRAs, and being in a majority helps keep you insulated from nonsense like this; too much potential backlash from large numbers of people keeps US tax law at least somewhat in check. Once you have left though, you are not just a minority, you are an outlier. And a non-voting one, at that. At best, congress will simply not give a fig about you. At worst, it will view you as a defenceless cash cow.

In a nutshell, the current tax laws such as the exit tax, bad though they are, can be mitigated by good long-term planning. What you really need to fear are the unknown future tax laws. They may be financially devastating, and you cannot plan for them. The only real defence is to stay flexible, monitor every proposed tax law, and make sure that not only can you exit at very short notice, but also -- critically -- that you can take your money with you when you go.

Topic Author
assyadh
Posts: 87
Joined: Tue Sep 18, 2018 12:44 pm

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Sat Nov 09, 2019 11:21 am

TedSwippet wrote:
Sat Nov 09, 2019 4:55 am
assyadh wrote:
Fri Nov 08, 2019 7:38 pm
Thanks for your feedback, I do think it's an expensive bill. I am not a doom and gloom guy, but with the incoming election and the tax plans of some candidates, I don't see thing going a good way for US Persons abroad and non US Persons. Even if they pass a residency based taxation bill, what would happen with PFICs, FBARs etc. I think the dream of a real RBT is still far away.
This is for me the the core of the problem. The continual deterioration of tax laws for people with international lifestyles. Not specifically the "incoming election" -- expat-bashing is one of congress' very few bipartisan activities, and both parties are equally good at it -- but rather the continual change in rules that inevitably disadvantage non-voting expats and foreigners. HEART, FATCA, GILTI, Ex-PATRIOT (if they ever get it through), and so on. All with names that torture the English language in order to childishly come up with a 'snappy' acronym.

You have the advantage of saving in 401ks and IRAs in an era where the exit tax is a known feature, giving you an element of control. I did not. I saved heavily, so that my 401k was a significant chunk of my net worth when I left the US. Secure in the knowledge that it would be fully protected by treaty until retirement and withdrawals. Then, boom. A new treaty-violating US tax law with effectively retroactive effects, that had it been in place at the time would have significantly changed my plans and approach.

This, more than any lingering paperwork burden with the IRS, should I think be your major driver here. The probability that congress will pass something new that messes up your plans and costs you a significant sum in unavoidable double-tax. Or makes pensions entirely unavailable. It is not hard to imagine some new anti-terrorism law that mandates that 401k providers erect withdrawal security features that are impossible for nonresident aliens to overcome.

While you live in the US, you are in a majority when it comes to holding 401ks and IRAs, and being in a majority helps keep you insulated from nonsense like this; too much potential backlash from large numbers of people keeps US tax law at least somewhat in check. Once you have left though, you are not just a minority, you are an outlier. And a non-voting one, at that. At best, congress will simply not give a fig about you. At worst, it will view you as a defenceless cash cow.

In a nutshell, the current tax laws such as the exit tax, bad though they are, can be mitigated by good long-term planning. What you really need to fear are the unknown future tax laws. They may be financially devastating, and you cannot plan for them. The only real defence is to stay flexible, monitor every proposed tax law, and make sure that not only can you exit at very short notice, but also -- critically -- that you can take your money with you when you go.
Agreed. All the law changes in the last 10 years against people living abroad are painful.

I have made a change to my 401k contribution to go to roth rather than traditional.

This way I minimize the impact when I'll be leaving

Topic Author
assyadh
Posts: 87
Joined: Tue Sep 18, 2018 12:44 pm

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Mon Nov 18, 2019 3:47 pm

So I tought about a different plan.

I am thinking about maximizing the Roth 401k (above the match), backdoor Roth Ira route for me and spouse and maybe MegaBackdoor roth ira.

My reasoning is what if I actually want to apply for/keep a US Citizenship? At least in this method, some tax diversification is done, and I can enjoy some tax free growth.

Worse case is I pull all my contributions and leave the Roth Ira / traditional match in the US ?

What do you think @TedSwippet?

wineandplaya
Posts: 72
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Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by wineandplaya » Wed Nov 20, 2019 5:19 am

assyadh wrote:
Mon Nov 18, 2019 3:47 pm
So I tought about a different plan.

I am thinking about maximizing the Roth 401k (above the match), backdoor Roth Ira route for me and spouse and maybe MegaBackdoor roth ira.

My reasoning is what if I actually want to apply for/keep a US Citizenship? At least in this method, some tax diversification is done, and I can enjoy some tax free growth.

Worse case is I pull all my contributions and leave the Roth Ira / traditional match in the US ?

What do you think @TedSwippet?
I'm not @TedSwippet, but:

Why would you do Roth 401(k) and not traditional 401(k) if you were not to give up your green card? It doesn't make sense too me, especially if your income is large enough to require backdoor IRA.

With Roth and expatriation you are always at risk of taxation of the earnings at income tax rate, unless you are old enough to cash it all out before you move.

For Spain, I ran the numbers and concluded that Roth IRA + mega backdoor was worth it, even if I end up having to pay income taxes on Roth earnings 40-ish years from now. And there is a high probability that my wife and I will want to live in the US for some period of time post-retirement, allowing us to access earnings tax free. If you are not planning to ever return to the US and if the investment period is shorter, you probably come ahead with taxable.

Being a mathematician, I found it useful to calculate a "worst case equivalent tax drag" for my Roth IRA, should it be taxed as income in the future:

1-((1-IT)/(1-LTCG))^(1/YRS)

IT: Income tax rate in expatriation country
LTCG: Capital gains rate in expatriation country
YRS: Years of investment

TedSwippet
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Location: UK

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by TedSwippet » Wed Nov 20, 2019 7:00 am

wineandplaya wrote:
Wed Nov 20, 2019 5:19 am
Why would you do Roth 401(k) and not traditional 401(k) if you were not to give up your green card? It doesn't make sense too me, especially if your income is large enough to require backdoor IRA.

With Roth and expatriation you are always at risk of taxation of the earnings at income tax rate, unless you are old enough to cash it all out before you move.
Yes. The problem is that what works for one case could be madness for another.

Using a Roth minimises threats from the US expatriation tax, because it is already post-tax. However, not all countries recognise and respect the tax-freeness of Roths for local tax, so whether or not this is useful very much depends on where you end up. On the other hand, pre-tax IRAs and 401ks are under significant threat from US expatriation taxes, but more countries recognise and respect those for local tax than recognise Roths; even so, not all countries.

The appalling US expatriation tax is not a threat if you plan to take out US citizenship and remain shackled to the IRS for life -- in that case you instead have to contend with all the issues that US citizenship-based tax causes for US expats. Otherwise, it is a huge threat to pre-tax accounts, but much less so to Roths. If you become a US citizen you also lose most of any tax treaty benefits between the US and your home country, which could have a bearing on the tax you pay on withdrawals from pre-tax accounts.

If you take one path based what you plan in future and then change your mind later, or congress passes yet more hostile expat-bashing tax laws with effectively retroactive effects, or anything else that drastically changes your plans, there is no unwinding the earlier decisions. Events that may or may not be under your control can easily invalidate what you did in earlier years, but those years cannot be relived in a different way.

elderwise
Posts: 191
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Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by elderwise » Wed Nov 20, 2019 9:24 am

TedSwippet wrote:
Wed Nov 20, 2019 7:00 am
wineandplaya wrote:
Wed Nov 20, 2019 5:19 am
Why would you do Roth 401(k) and not traditional 401(k) if you were not to give up your green card? It doesn't make sense too me, especially if your income is large enough to require backdoor IRA.

With Roth and expatriation you are always at risk of taxation of the earnings at income tax rate, unless you are old enough to cash it all out before you move.
Yes. The problem is that what works for one case could be madness for another.

Using a Roth minimises threats from the US expatriation tax, because it is already post-tax. However, not all countries recognise and respect the tax-freeness of Roths for local tax, so whether or not this is useful very much depends on where you end up. On the other hand, pre-tax IRAs and 401ks are under significant threat from US expatriation taxes, but more countries recognise and respect those for local tax than recognise Roths; even so, not all countries.

The appalling US expatriation tax is not a threat if you plan to take out US citizenship and remain shackled to the IRS for life -- in that case you instead have to contend with all the issues that US citizenship-based tax causes for US expats. Otherwise, it is a huge threat to pre-tax accounts, but much less so to Roths. If you become a US citizen you also lose most of any tax treaty benefits between the US and your home country, which could have a bearing on the tax you pay on withdrawals from pre-tax accounts.

If you take one path based what you plan in future and then change your mind later, or congress passes yet more hostile expat-bashing tax laws with effectively retroactive effects, or anything else that drastically changes your plans, there is no unwinding the earlier decisions. Events that may or may not be under your control can easily invalidate what you did in earlier years, but those years cannot be relived in a different way.
Ted I have a question for you, see my italic quote of your post - why would a EX- US citizen lose any treaty benefit? Let me give an example, say Netherlands (EU country) does not allow dual citizenship and you renounce your US passport have a networth less than 2 MM only maybe 300K at renouncing time.Then when you become 65 or older eligible withdraw on your US 401k, wont (assuming once takes up Dutch nationality) then be eligible for the USA - NL tax treaty?

Secondly I read somewhere that the mark to market if you are a covered expat does not consider any 401k, 457B balance as liquidated however there is a 30% tax on it for life? for ex citizens of US..?

So say I am an American Citizen now but wish to retire in EU (dont have EU passport now), build up a decent 401k balance but less than 1 mm even and safely not *covered expat* (1mm or net tax liability less than current 161,000 which I assume is not pay but the tax so you've got to be raking in good amount to pay 161K just tax :D) ...then reside in an EU country 5+ years then get EU passport and renounce, later when eligible withdraw 20-30 years down the line from the 401K.What would you lose in that situation other than what you covered? viz. lowering of the covered expat net worth, tax liability and PFIC which wont apply once you renounce.

@assyadh - FWIW although its cheaper to give up green card perhaps, than renounce US passport.I would believe the FATCA, GILTI, PFIC tax nightmares apply even if you just hold the green card.Isnt that the beauty of the IRS / US Taxation system?Also I research Netherlands as USA has a special treaty with NL that allows you to settle down and get Permanent Residency / Dutch citizenship based on solely self employment (another topic) and Netherlands does NOT recognize any flavor of Roth's only 401k, govt pension etc is recognized and no tax is due.Its interesting to see how France does not tax Roth's during the accumulation phase.

TedSwippet
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Location: UK

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by TedSwippet » Wed Nov 20, 2019 10:00 am

elderwise wrote:
Wed Nov 20, 2019 9:24 am
TedSwippet wrote:
Wed Nov 20, 2019 7:00 am
If you become a US citizen you also lose most of any tax treaty benefits between the US and your home country, which could have a bearing on the tax you pay on withdrawals from pre-tax accounts.
Ted I have a question for you, see my italic quote of your post - why would a EX- US citizen lose any treaty benefit?
The assumption is that this person takes out US citizenship and then goes to live in a country that has a tax treaty with the US. Normally, tax treaties protect you from taxes applied by the country you are not a resident of, but US tax treaties have a special clause in them that negates most of the treaty for US citizens. For example, from Article 24 of the US/Netherlands treaty:
1. Notwithstanding any provision of the Convention except paragraph 2, each of the States may tax its residents and nationals as if the Convention had not come into effect. For this purpose, as regards the United States, the term national shall include a former citizen, not being a national of the Netherlands, whose loss of United States citizenship has as one of its principal purposes the avoidance of income tax, but only for a period of 10 years following such loss.
This has no effect on dual US/NL citizens living in the US, because NL taxes only on residency, not on citizenship, so this person gets full treaty protection from NL taxes. The US however taxes on both, so in the converse situation a dual US/NL citizen living in NL gets very little treaty protection from from US taxes. There are a handful of exceptions listed in paragraph 2, but the effect here is to put most of the treaty off limits for US or dual US/NL citizens living in NL.
elderwise wrote:
Wed Nov 20, 2019 9:24 am
Let me give an example, say Netherlands (EU country) does not allow dual citizenship and you renounce your US passport have a networth less than 2 MM only maybe 300K at renouncing time.Then when you become 65 or older eligible withdraw on your US 401k, wont (assuming once takes up Dutch nationality) then be eligible for the USA - NL tax treaty?
Yes, because once you have renounced you are no longer a US citizen, so you get the full treaty treatment back. The topic author seems to be considering taking out US citizenship and then keeping it but moving to a treaty country. That would put them into the mostly unprotected situation shown above, because of the asymmetry in the way the countries (US, and any other) apply their taxes.
elderwise wrote:
Wed Nov 20, 2019 9:24 am
Secondly I read somewhere that the mark to market if you are a covered expat does not consider any 401k, 457B balance as liquidated however there is a 30% tax on it for life? for ex citizens of US..?
The way it works is this. If you are a covered expat, everything you own is 'deemed' sold. This is a fiction. If you have assets with built in capital gains, the unrealised gains become taxable to the US, but with a $700k or so exemption, which would probably cover most cases. For retirement accounts though, such as IRAs (but not 401ks), they get no benefit from this $700k exemption. Instead, the entire balance is 'deemed' (again, a fiction) distributed on the day you expatriate, and so becomes instantly taxable at single-year high income tax rates right away. That can potentially destroy a retirement.

The 401k treatment is different, but equally unpleasant. To avoid the 'deemed' distribution you have to "voluntarily" waive your tax treaty rights. Once you have done that, the US will tax your 401k withdrawals at a flat 30%. The likely outcome is double tax, because your home country will very likely also tax them, and is not bound to give you any foreign tax credit for the 30% you lose to the US (a general rule of treaties is that countries will only allow credits up to the amount of US tax the US can apply under the treaty, but the 30% from "voluntarily" waiving treaty rights is an effective US tax treaty override, and so not allowable as a local tax credit against foreign taxes). The US is reasonably keen on signing treaties, but not nearly as keen on abiding by them, once signed.
elderwise wrote:
Wed Nov 20, 2019 9:24 am
So say I am an American Citizen now but wish to retire in EU (dont have EU passport now), build up a decent 401k balance but less than 1 mm even and safely not *covered expat* (1mm or net tax liability less than current 161,000 which I assume is not pay but the tax so you've got to be raking in good amount to pay 161K just tax :D) ...then reside in an EU country 5+ years then get EU passport and renounce, later when eligible withdraw 20-30 years down the line from the 401K.What would you lose in that situation other than what you covered? viz. lowering of the covered expat net worth, tax liability and PFIC which wont apply once you renounce.
If you don't meet the asset test or income tax test for the spiteful expatriation tax, you are safe from that at least. You then get the normal treatment on your accounts, either by treaty or just general if no treaty applies. The results will usually be relatively fair and equitable thanks to treaties.

When it passed the expatriation tax, the US trampled all over chunks of its treaties as if they were doormats. Once hit by the expatriation tax, you face a bunch of highly unfair and unpalatable options, because congress wished to punish expatriates whether or not they moved to countries with US tax treaties.

elderwise
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Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by elderwise » Wed Nov 20, 2019 10:12 am

The assumption is that this person takes out US citizenship and then goes to live in a country that has a tax treaty with the US. Normally, tax treaties protect you from taxes applied by the country you are not a resident of, but US tax treaties have a special clause in them that negates most of the treaty for US citizens. For example, from Article 24 of the US/Netherlands treaty:
1. Notwithstanding any provision of the Convention except paragraph 2, each of the States may tax its residents and nationals as if the Convention had not come into effect. For this purpose, as regards the United States, the term national shall include a former citizen, not being a national of the Netherlands, whose loss of United States citizenship has as one of its principal purposes the avoidance of income tax, but only for a period of 10 years following such loss.

This has no effect on dual US/NL citizens living in the US, because NL taxes only on residency, not on citizenship, so this person gets full treaty protection from NL taxes. The US however taxes on both, so in the converse situation a dual US/NL citizen living in NL gets very little treaty protection from from US taxes. There are a handful of exceptions listed in paragraph 2, but the effect here is to put most of the treaty off limits for US or dual US/NL citizens living in NL.

elderwise wrote:
Wed Nov 20, 2019 9:24 am
Let me give an example, say Netherlands (EU country) does not allow dual citizenship and you renounce your US passport have a networth less than 2 MM only maybe 300K at renouncing time.Then when you become 65 or older eligible withdraw on your US 401k, wont (assuming once takes up Dutch nationality) then be eligible for the USA - NL tax treaty?
Yes, because once you have renounced you are no longer a US citizen, so you get the full treaty treatment back. The topic author seems to be considering taking out US citizenship and then keeping it but moving to a treaty country. That would put them into the mostly unprotected situation shown above, because of the asymmetry in the way the countries (US, and any other) apply their taxes.


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Thanks for clarifying Ted, though are you saying as per the Article quote and the current USA-NL Treaty, even a US citizen goes to live in NL (work , or whatever permit and is thus a Dutch Tax resident too), None of the US - NL tax treaty helps in paying less income tax? I always though the way the USA - Foreign country treaty works (or my understanding from reading the US - NL Treaty) is that the country of income source would require the person to pay the tax to that country.So a US citizen living / working / residing in NL even if self employed in NL would only generally pay Dutch income tax to NL not to IRS? My understanding was you can benefit from the treaty even if you are USC residing / working in NL...interesting how they always make it one sided benefiting uncle sam.

Netherlands Taxes all Dutch tax resident so hypothetically even if am only a US Citizen, but also a Dutch tax resident living / working in the Netherlands would be taxed on Dutch income never thought I would owe IRS taxes (even if self employed in NL) as Dutch taxes are higher however they do give bigger breaks (business deductions) to ZZP'ers or self employed people.

TedSwippet
Posts: 2499
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Location: UK

Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by TedSwippet » Wed Nov 20, 2019 10:42 am

elderwise wrote:
Wed Nov 20, 2019 10:12 am
... are you saying as per the Article quote and the current USA-NL Treaty, even a US citizen goes to live in NL (work , or whatever permit and is thus a Dutch Tax resident too), None of the US - NL tax treaty helps in paying less income tax?
Not none of the treaty, but almost none of it. Specifically, everything not mentioned in Article 24 paragraph 2:
2. The provisions of paragraph 1 shall not affect
a) the benefits conferred by one of the States under paragraph 2 of Article 9 (Associated Enterprises), under paragraph 4 of Article 19 (Pensions, Annuities, Alimony), and under Articles 25 (Methods of Elimination of Double Taxation), 28 (Non-Discrimination), and 29 (Mutual Agreement Procedure); and
b) the benefits conferred by one of the States under Articles 20 (Government Service), 21 (Professors and Teachers), 22 (Students and Trainees), and 33 (Diplomatic Agents and Consular Officers), upon individuals who are neither citizens of that State, nor, in the case of the United States, lawful permanent residents of the United States.
That's a small set of exceptions. Aside from these, a US citizen living in NL cannot use any other parts of the treaty. The whole thing, apart from these tiny portions, is taken away from them by this treaty clause.
elderwise wrote:
Wed Nov 20, 2019 10:12 am
So a US citizen living / working / residing in NL even if self employed in NL would only generally pay Dutch income tax to NL not to IRS?
Not at all. There might be no actual US tax to pay, depending on the FEIE and foreign tax credits. However, these are imperfect and do not cover all cases. The usual result is that you end up paying the highest rate of the two countries, and with the lowest tax-free allowances of the two countries. True double-tax is also possible, in edge cases.

Taxpayers Living Abroad | Internal Revenue Service
If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.
Self Employment Tax for Businesses Abroad | Internal Revenue Service
If you are a self-employed U.S. citizen or resident, the rules for paying self-employment tax are generally the same whether you are living in the United States or abroad.

Topic Author
assyadh
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Re: EU citizen- US Green card holder - Feedback on my plan for the next 10 years.

Post by assyadh » Wed Nov 20, 2019 3:34 pm

So the reason why I am thinking of doing Roth only is because having a traditional IRA may expose myself to high taxation in some western European countries.

Also, being French, I may settle back in France or Belgium, which recognizes the tax free nature of Roth. Having Roth money in France is amazing because you avoid the typical crazy French high rates. France also has an estate tax treaty so I could in theory leave everything in the US. Just keep some money on hands in case my estate takes some times to be dissolved.

In France, tradional money would be taxed by the US (which is in theory good because of the low rates) . And taxed by Belgium if resident of Belgium (crazy high rates).

Also, I would say that I am 75% confident I will not apply for the US citizenship, so having Roth money when I leave and rescind my green card is useful, I can withdraw the contributions (keep in mind they could still grow tax free if I settle in a no cap gains tax country), and depending of the amount in gains and 401k money I may or may not withdraw everything.

Option 2 is what we discussed above, Roth 401k up to the match and taxable after. This is what I am doing right now.

Without going into politics, the plan may change depending on new tax reforms.

Right now my marginal tax rate is 24%, so I feel like it's a relatively low rate to remove some uncertainties.

Truthfully I don't even need another passport, having already two.

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