IRAs for US Non-Residents – Account being Closed.
An Individual Retirement Account (IRA) is a US tax advantaged account that allows you to save for retirement. IRAs can be opened by US residents, and depending on the type of IRA you hold, you receive different tax benefits.
There are typically three main IRA accounts:
- Traditional IRA – Contributions are made pre-tax and are therefore deducted from gross income. You then pay tax when you withdraw gains from the plan.
- Roth IRA – Contributions are made post-tax (no relief on the money being contributed). However, the withdrawals are tax free subject to certain conditions.
- Rollover IRA – Money from a qualifying retirement plan (like a 401K) is moved into a traditional IRA. You can preserve the tax-deferred status of the investments – tax is due on withdrawals as is the case with a traditional IRA.
What are the IRA eligibility rules?
To contribute to an IRA, you need to be a US resident. The rules are then further broken down depending on the type of IRA you open.
For a Traditional IRA, you need to earn taxable income and be aged under 70 1/2. Whether the contributions are tax deductible is slightly more nuanced and relates to your income level.
You can contribute to a Roth IRA if your gross income is:
- Less than $194,000 if file a joint tax return.
- Less than $132,000 if filing separately.
Can I keep my IRA if I am no longer a US resident?
Despite not being a US resident, as long as the IRA was established while you were a US resident, there is no legislation excluding you from keeping your account.
However, this hasn’t stopped the providers forcing non-US residents to close accounts held with them.
The reason providers are doing this is due to more stringent regulations introduced by the Foreign Account Tax Compliance Act (FATCA). This piece of legislation was introduced by the US Congress to target non-compliance by U.S taxpayers using foreign accounts.
Can I be taxed if my account is closed?
If your account is closed, the IRS will deem it as a withdrawal. Despite not voluntarily accessing the scheme, the IRS will still tax the whole amount as if you had. Depending on the value of your IRA, this could result in a substantial tax bill.
Furthermore, if your account was closed before you are 59 1/2, a 10% withdrawal penalty is imposed. This is on top of the federal tax bill you will receive.
What are my options?
From the above, you can clearly see why you would not want your IRA to be closed. Although not straight forward, there are a couple of options:
- Speak to your current provider. Confirm whether they can keep the account open as you wouldn’t incur the cost nor the hassle of a transfer. In a lot of cases, they wouldn’t be able to but it is always worth checking.
- If the first option doesn’t work, the next best solution would be to transfer to a separate IRA account that does offer an account to non-US residents. You may incur costs for the transfer, but it will avoid the 10% penalty.
If you are a non-US resident who has been notified by your provider of your IRA closure, please feel free to get in touch. Here at Harrison Brook, we work with IRA providers who allow non-US residents to hold IRA accounts. We can take stock of your position to offer the best solution for your individual position.