Advice for U.S. & Foreign nationals w/ IRA's moving abroad...

[Guest kevinrm]

My wife is from Japan. Both of us have been regular contributors to our IRA's. We have to move to Japan in a year or two from now, and we'll be there for 5-10 years at least. Both incomes will be from foreign sources at that point. My question is:

1) What is the status of the money that we've already contributed? Do we leave it to acrue interest, or what?

2) Is there a way that we could keep contributing? Does investment income from investments remaining in the US count towards income?

Any advice here most appreciated!

[Appleby]

You could keep the money is your IRA or take a total distribution and pay taxes now. That decision is entirely up to you. The IRS will not force you to take a distrbution because you are leaving the country. However, if you take a distribution while you are abroad, and have the distrbution mailed to your overseas address, you will be subjected to non-redisent alien or US resident living abroad tax withholding. This means that the IRA custodian will withhold 10%. This withholding can be waived is you are able to provide a US HOME address to which the distrbution can be mailed.

If your wife is an alien ( i.e. not a US citizen or a non-resident alien, i.e. green card holder), she will alos be subjected to this 10% mandatory withholding. However, she has the option to waive it . However, is she does, she will be subjected to withholding based on IRA trety rates which could be more thna the 10%. Some custodians default to a 30% treaty rate, and require additional documentation from the IRA owner.

The following is an excerpt from IRS publication 590 which cna be found at http://www.irs.gov . And should answer the second part of your question

Both spouses have compensation. If both you and your spouse have compensation and are under age 70 1/2, each of you can set up an IRA. You cannot both participate in the same IRA.

What Is Compensation?

As stated earlier, to set up and contribute to a traditional IRA, you or your spouse must have received taxable compensation. This rule applies to both deductible and nondeductible contributions. Generally, what you earn from working is compensation.

Compensation includes the items discussed next.

Wages, salaries, etc. Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for this purpose only if shown in box 1 of Form W-2.

Commissions. An amount you receive that is a percentage of profits or sales price is compensation.

Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor), reduced by the deduction for contributions made on your behalf to retirement plans and the deduction allowed for one-half of your self-employment taxes.

Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. See Publication 533, Self-Employment Tax, for more information.

When you have both self-employment income and salaries and wages, your compensation includes both amounts.

Self-employment loss. If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation.

Alimony and separate maintenance. Treat as compensation any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance.

What Is Not Compensation?

Compensation does not include any of the following items.

Earnings and profits from property, such as rental income, interest income, and dividend income.

Pension or annuity income.

Deferred compensation received (compensation payments postponed from a past year).

Income from a partnership for which you do not provide services that are a material income-producing factor.

Any amounts you exclude from income, such as foreign earned income and housing costs.

[Guest kevinrm]

Sir, thank you for your reply!