Imagine over the years that you’ve built a nest egg in a U.S. Individual Retirement Account, Roth IRA, or Simplified Employee Pension IRA. This is a common scenario for many U.S. citizens and green card holders while working in the United States. In a scenario that is becoming increasingly more common, imagine that after years of contributions, you decide to relinquish your U.S. citizenship or green card, move abroad, and become a nonresident alien for U.S. tax purposes.
Suddenly, accessing your retirement savings becomes a maze of tax rules, withholding requirements, and international complexities. How do you withdraw funds without losing a chunk to U.S. taxes? Are these accounts still part of your U.S. taxable estate at death?
For the millions of former U.S. persons living abroad, understanding the tax implications of U.S. retirement accounts is critical. IRAs, Roths, and SEPs remain tethered to U.S. tax rules long after you give up U.S. status. There’s income, estate, and exit tax exposure to wrangle.
This article explores the unique challenges faced by NRAs with IRAs, Roth IRAs, and SEP IRAs. It offers practical strategies to minimize taxes and navigate cross-border complexities.
Understanding NRA Status And U.S. Retirement Accounts
Assuming you do not have substantial physical presence in the U.S., when you relinquish your U.S. citizenship or green card, you are a nonresident alien for U.S. income tax purposes. NRAs are taxed only on U.S.-source income. IRAs, Roth IRAs, and SEP IRAs held with U.S. custodians, are considered to be U.S.-source, subjecting distributions to U.S. tax rules.
Here’s how each account works for NRAs:
- Traditional IRAs and SEP IRAs: These accounts hold pre-tax contributions, so withdrawals are taxed as ordinary income in the U.S. For NRAs, a 30% flat withholding tax typically applies unless reduced by a tax treaty.
- Roth IRAs: Contributions are made with after-tax dollars, so the contributions can be withdrawn tax-free at any time. Earnings are tax-free only for “qualified distributions” (after age 59½ and a five-year holding period). Non-qualified earnings face the 30% withholding tax for NRAs, plus a 10% penalty if under 59½, unless an exception applies.
The U.S. doesn’t allow direct transfers of IRA funds to foreign retirement accounts without treating them as taxable distributions, complicating access for NRAs living abroad.
U.S. Tax Challenges For NRAs Holding An IRA, SEP IRA, Roth IRA
When managing U.S. retirement accounts, NRAs have a host of tax issues to consider:
30% Withholding Tax: Distributions from traditional IRAs, SEP IRAs, or non-qualified Roth IRA earnings are treated as U.S. source income and are subject to a 30% withholding tax. Some countries have negotiated tax treaties with the U.S. and if the NRA is resident in such a treaty country, this may reduce or eliminate the tax. Many countries, however, lack such agreements, meaning the NRA loses 30% of the distribution.
10% Early Withdrawal Penalty: If the NRA withdraws funds from the traditional IRA, SEP IRA, or Roth IRA earnings before reaching age 59½, the amounts are subject to a 10% early withdrawal penalty. Certain exceptions can apply to waive the 10% penalty. Exceptions include qualified higher education expenses (e.g., tuition, books), certain amounts for a first-time home purchase, certain unreimbursed medical expenses, health insurance premiums during unemployment or disability. The exceptions do not reduce or eliminate the 30% U.S. withholding tax, however.
A benefit of having a Roth IRA is that contributions (but not earnings) can be withdrawn at any time without penalty or tax. Roth IRA contributions are funded using after-tax dollars. This means an individual can withdraw the contributions at any time without U.S. tax or penalty, regardless of age or residency. This allows readily available tax-free access to a portion of the Roth IRA.
Foreign Taxation: The country where the NRA resides may also tax IRA distributions, potentially leading to double taxation. Depending on the tax laws of the particular country, taxation of the distribution can be as ordinary income or capital gains. Countries with a territorial taxation system, such as Singapore, may not tax U.S. distributions, providing a respite for NRAs.
Covered Expatriate Rules And Specified Tax-Deferred Accounts IRA, SEP IRA, Roth IRA
Relinquishing U.S. citizenship or a green card held for at least 8 tax years, may classify the individual as a “covered expatriate” under the U.S. expatriation tax regime. Meeting any one of three tests can result in covered expatriate status: having a net worth of $2 million or more (not indexed for inflation), having an average annual U.S. income tax liability exceeding $206,000 (2025, indexed for inflation) over the five years prior to the expatriation year, or failing to certify full U.S. tax compliance for that five-year period. The State Department and IRS are focusing more and more on expatriations with recent probing changes made to the various government forms.
Covered expatriates face a harsh tax surprise when it comes to specified tax-deferred accounts like traditional IRAs and SEP IRAs. Absent a special election, they are deemed fully distributed the day before expatriation, with the entire balance taxed as ordinary income in the final U.S. tax return.
Since Roth IRAs are funded with after-tax dollars, they avoid this deemed distribution treatment but may face withholding on future earnings withdrawals. In cases of expatriation, the individual should always consult a U.S. international tax advisor for advance planning as it may be possible to prevent covered expatriate status or mitigate the tax effects.
Estate Tax Concerns For NRAs With IRA, SEP IRA, Or Roth IRA
In addition to income tax concerns, NRAs must consider U.S. estate tax on IRAs, Roth IRAs, and SEP IRAs at death. NRAs are subject to estate tax on U.S.-situs assets and are given only a paltry $60,000 exemption amount. Tax rates are as high as 40%. Generally, U.S. IRAs, Roth IRAs, and SEP IRAs held at a U.S. institution are often fully included in the NRA’s U.S. estate.
Some estate tax treaties can provide relief by modifying situs rules or expanded exemptions. However, many treaties simply don’t address IRAs. This leaves significant U.S. retirement account balances subject to U.S. estate tax upon the NRA’s death.
Conclusion
Leaving the U.S. doesn’t mean leaving U.S. tax rules behind, especially when it comes to commonly held U.S. retirement accounts. IRAs, Roth IRAs, and SEP IRAs remain tied to U.S. tax rules which carry significant tax consequences. Withholding taxes, U.S. estate tax exposure and the harsh “covered expatriate” tax regime are often overlooked until the time for planning has passed.
U.S. citizens and green card holders who are contemplating giving up U.S. status need to be proactive in their tax planning to preserve hard-earned wealth. Understanding the tax treatment of retirement accounts can help avoid unintended tax consequences.
We are living in an increasingly mobile world. This makes it essential for estate planners, global family offices, and international advisors to stay attuned to these complex rules — and to seek specialized guidance when navigating areas beyond their expertise.
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Reach me at vljeker@us-taxes.org
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NO ATTORNEY-CLIENT RELATIONSHIP OR LEGAL ADVICE
This communication is for general informational purposes only. It is not intended to constitute tax advice or a recommended course of action. Professional tax advice should be sought as the information here is not intended to be, and should not be, relied upon by the reader in making a decision.