Does Expatriation Allow You to Escape 401k Taxes?March 20th, 2012 by The JetSetter Team | Comments Off on Does Expatriation Allow You to Escape 401k Taxes?
In short, you cannot avoid paying 401k taxes by uprooting yourself at retirement and fleeing to a different country. While we like where your head is at in seeking to minimize what is already an excruciating tax burden, blatantly crossing Uncle Sam is not the way to go. There are many great reasons to consider relocating to another country but it will not get you out of paying taxes on retirement plan distributions.
It’s easy to feel outrage at the idea that your pension plan nest egg will be taxed as ordinary income and, furthermore, you are required to begin withdrawing it from your
401k at the age of 70 and six months. We’d like to suggest you might be looking at this all wrong. Rather than focusing (obsessing) on the taxes you must pay, ponder instead all those years your tax free dollars were allowed to grow without interference by the government. Trust us, your nest egg is much bigger than it otherwise would have been. This is one of those times when you can choose to look at the glass as either half empty or half full. Life is much more pleasant to choose the latter. Expatriating is still might be a great idea, just don’t plan on doing it to skip out on taxes. There are a few rules from Internal Revenue Service Publication 509 to guide your thinking in this area.
The basic fact of the matter is that United States citizens are taxed on income they earn worldwide. No matter where you live, taxes must be paid as long as you retain your American citizenship status. Which brings us to the point we’ve discussed in the past of giving up your citizenship. There’s not enough time to develop that idea here properly but this is not a matter to be taken lightly and probably really shouldn’t be undertaken solely for the purpose of avoiding taxes at retirement. The bottom line is all 401k distributions will be taxed as long as you’re a U.S. Citizen. Keep in mind that some nations might also tax your income should you decide to move there, though many have laws in place to prevent double taxation.
If you do decide to expatriate and are wondering about the tax ramifications, the IRS loves to weave their verbal gobbledygook, and you should feel free to read about it to your heart’s content. Just remember to bring your lawyer and a thinking cap. It regards a little something they call the Expatriate Tax.
The law is quite clear on income earned in the United States and stashed in a 401k account, but the plot thickens, and becomes considerably more complicated, if we’re talking about income earned overseas. Once again, this goes beyond the scope and expertise of this column. You definitely should be talking to a tax professional if this condition applies.
Since your 401k retirement plan is an apparatus of the United States government, it must be formed and administered by U.S. Law. The custodian in charge of administering your account is required to withhold taxes as directed, no matter what your opinion on the matter might be. Should your custodian choose to disregard these laws, let you have a break, he will likely find himself either the subject of legal action or being forced to pay the taxes himself.
The effect of ever-increasing budget deficits shouldn’t be ignored either. As the federal government finds itself more squarely behind the financial eight ball with each passing year, expect that all effort will be expended to collect taxes due. In short, you’re probably not going to be able to fly under the radar when it comes time to pay what has deemed to be your fair share.
But once again, focus on the fact that you were allowed to invest tax free dollars for decades, in some cases, allowing your account to grow by hundreds of thousands or even millions of dollars if you were a savvy investor. Some battles are certainly worth fighting, but under current law, this one is not. Could you physically withdraw all your money, run and hide in the jungles of Borneo and hope that the IRS never finds you? You certainly could try that, but unless you plan to rob a bank at gunpoint of the exact amount of your 401k retirement account (an action we strongly discourage), expect that the taxes will be taken out before you ever see a red cent of the money.
What we’ve presented here are the facts of life related to retirement plans as we understand them. If you feel compelled to spend your Golden Years exploring ways to avoid taxation, be our guest, but there are many, MANY more pleasant ways to spend your precious time on this planet.
The Jetsetter Show Team
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