If you are a former US resident who has previously contributed to an individual retirement account (IRA), your provider may have advised you that they are closing your account as you are no longer a US resident. 

Why are providers doing this?

The simple reason is that over the past few years, pension providers have removed their IRA account offerings to non-US residents due to more stringent regulations introduced by the Foreign Account Tax Compliance Act (FACTA). This piece of legislation was introduced by the US Congress to target non-compliance by U.S taxpayers using foreign accounts. 

Therefore, if you have built up a pension fund and subsequently left the US, account providers are requesting the account owners (you as the individual) close the IRA account. Large providers such as Morgan Stanley, Wells Fargo and Merrill Lynch are just a few of the big names to do this. 

What are the implications?

One of the main issues with the IRA account closure is that it will be deemed as a withdrawal and therefore you could potentially be subject to US withholding tax on the lump sum amount, even though you have not voluntarily accessed the pension. If you have a large fund value, this could mean withholding tax payable at the highest rate of US Federal Tax (37%). It will be best to speak to a tax advisor in your country of residence to confirm the tax treatment of this payment. 

To add insult to injury, if you are under the age of 59 ½ years old, you will also be subject to a 10% withdrawal penalty. As it will be an account closure and you will be deemed to withdraw the full amount – this means a 10% penalty on the total value of your pension. For example, if you had an IRA with a value of $200,000, you automatically have to hand over $20,000 to the IRS. 

Is there anything I can do to prevent my IRA being closed?

Your first option would be to speak to your IRA provider to confirm whether they can keep the account open. In most cases, they will not offer this solution.

The second and most suitable option would be to transfer the funds to a separate IRA account (a pension transfer), which does offer an IRA account for non-US residents. Although limited, there are providers accepting these transfers which would help avoid a large tax bill on the deemed lump sum withdrawal as well as the 10% penalty. 

If you are a non-US resident who has been notified by your provider of your IRA being closed, Harrison Brook works with IRA providers who do allow non-US residents, even if you are not intending to return to the US at all or if you will be in a few years time. To begin the process please visit our Get Started page. 

The information contained herein is for informational purposes only which is subject to change and should not be relied upon. You should seek advice from a professional adviser before embarking on any financial planning activity.