Taxes for Participant with Foreign Address

[Guest Dee401kLady]

A participant (in a 401(k) plan) has a foreign address (they moved out of the country, unclear as to whether this was before or after terminating service). We utilize state of residence (for tax withholding), but this is a first.

When a distribution is processed, what tax withholding is necessary? Is the withdrawal subject to US federal taxes? Does the answer vary depending on the county?

[Lou S.]

Yes it depends on whether or not there is a tax treaty with the country of residence.

30% federal withholding is assumed unless tax treaty exception applies.

If you do a search I think there are a number of threads on this.

[ESOP Guy]

This isn't an easy question. It matters if the person is a US citizen or not. It matters if the country is a tax treaty country or not.

You need to find a look up the instructions on when you need this person to file a Form W8-Ben. You also need to look into the instruction for a Form 1042S. These two tend to cover a non-US citizen.

It has been a while since I processed a US citizen living outside the US. I do a number every year that are Non-US citizens outside the US.

[Calavera]

Usefull links:

Determining alien status of a non-U.S. citizen

http://www.irs.gov/Individuals/International-Taxpayers/Determining-Alien-Tax-Status

Form W-8 BEN - http://www.irs.gov/uac/Form-W-8BEN,-Certificate-of-Foreign-Status-of-Beneficial-Owner-for-United-States-Tax-Withholding

Tax treaties - http://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties---A-to-Z

U.S. citizen (even if resides outside the United States) or other U.S. person (including a resident alien individual may need to fill out Form W-9 - http://www.irs.gov/pub/irs-pdf/fw9.pdf

[Guest Dee401kLady]

Thank you all and great references too. One point I don't see clear is when individual is non-US citizen and elects to roll distribution over. They are not subject to withholding ( so Form 1042S is not applicable). Have you encountered this - so a Form 1099-R would be issued?

[Calavera]

Looks like this situation should be covered in tax treaties. I just Googled "rollover to foreign ira" and the following article may give you an idea how to recearch it further: http://www.aicpa.org/publications/taxadviser/2013/august/pages/tax-clinic-story-04.aspx

Here are couple more that may be useful:

http://www.ehow.com/how_6192812_roll-ira-account-foreign-bank.html

http://www.brighthub.com/money/investing/articles/111453.aspx

[Guest Dee401kLady]

Again, thanks for the helpful references.

The other scenario I was exploring is the distribution (as a direct rollover) from the 401(k) plan to an IRA in a US Financial institution. Some think a 1099-R is needed; I don't see it (very clearly), if the individual is non-US citizen (non US resident), as opposed to a US citizen in a foreign country.

Participant (when Non-US citizen):

1) completes W8BEN

2) for cash (non-rollover) payment, tax withholding may or may not apply (depending on the tax treaty that may or may not exist). If it applies then default is 30% and the reporting is on Form 1042S

3) for rollover payment, no tax is withheld (regardless of tax treaty), and the reporting is {Maybe 1099-R???}. No rollovers allow to non-US financial institutions

[ESOP Guy]

Regarding #2 if there is a treaty the withholding rate can be less then 30%. In fact it can be less then 20% and I have found some banks reluctant to withhold less then 20% just because that is what they see most of the time. More of a practical issue then a legal issue.

[Guest Dee401kLady]

ESOP Guy, you are absolutely right. It was my oversight in #2, I intended to state that:

If it (tax treaty) DID NOT apply, then the default withholding is 30%.

Thanks

[aGordeno]

On 3/27/2014 at 7:53 PM, Calavera said:

U.S. citizen (even if resides outside the United States) or other U.S. person (including a resident alien individual may need to fill out Form W-9 - http://www.irs.gov/pub/irs-pdf/fw9.pdf

 

I've posted this here already, yet it can come in use somebody in this thread. IRS accepts the online forms filled with other software like this for w9 forms exactly. The same thing for issues with W8BEN works as well