Rollover to IRA in Puerto Rico?

[Guest PensionPrincess]

I have a participant who worked here in the US for a US company and has a balance in the 401(k) plan. He has terminated employment, is moving to Puerto Rico, and would like to roll the funds over to an IRA there. Does the plan have to withhold the mandatory 20% in federal taxes before rolling his money over to a Puerto Rican IRA?

Any info/references/or experiences you can share about this topic would be greatly appreciated, thanks!!

[Ron Snyder]

Would you attempt to impose 20% withholding because someone was moving to Colorado?

Since Puerto Rico is "here in the US", there is no such thing as a "Puerto Rican IRA". Any IRA in Puerto Rico is the same as an IRA in the District of Columbia, the 50 states, Guam, the US Virgin Islands, etc.

No withholding is required.

[Guest PensionPrincess]

Not true. Puerto Rico does not fall under the US tax code, they are an "independent tax-levying authority, by mutual agreement with the United States Congress" and follow the Internal Revenue Code of Puerto Rico, which is similar but not exactly the same as the United States.

Original question: should the US plan withhold taxes on a rollover to a Puerto Rican IRA?

[masteff]

Plenty of companies w/ presence in Puerto Rico have US operations/connections such that they can maintain a US IRA.

In addition to asking whether mandatory 20% withholding applies, you need to ask what the tax consequence is of trying to "rollover" from a US plan to a PR IRA. And the answer is that everything I'm seeing in google searches says it counts as a distribution subject to tax and early withdrawal penalty and then a contribution subject to PR IRA contribution limits. The person should talk to a competent professional tax advisor for both US and PR taxes.

As to the 20% withholding, the US code is in section 3405 and the regs are in section 31.3405 if you're inclined to research it. http://www.irs.gov/taxpros/article/0,,id=98137,00.html Also see IRS Pub 15-A Chapter 8 http://www.irs.gov/pub/irs-pdf/p15a.pdf