6 Things that Expats Need to Know about RMDs
Understanding the ins and outs of required minimum distributions (RMDs) is frustrating enough, but it can be downright overwhelming to navigate RMDs while living abroad. So, what should expats consider when it comes to taking RMDs? First, a quick introduction to RMDs for expats.
RMD Basics for Expats
In the United States, many families use tax-deferred retirement accounts to build up their retirement savings, which can be a great way to save. Regardless of whether you’re an American living stateside, a U.S. expat living abroad or a non-U.S. citizen who worked in the U.S. for a period of time and has since moved away, the IRS requires you to begin taking RMDs from your tax-deferred retirement accounts once you reach age 73. The penalty is steep for those who fail to take an RMD in any given year: a 50% penalty tax liability (this 50% would cover the income taxes).
If you no longer live in the U.S., you may discover your RMD considerations are even more complex, especially when it comes to determining how your retirement plan withdrawals will impact your final tax bill. At Creative Planning International, we understand. That’s why we’ve put together this list of the top six things you need to know about RMDs as an American retiring overseas.
#1 – IRA distributions are not considered earned income.
IRA distributions are not considered “earned” income; therefore, they do not qualify for the foreign earned income tax exclusion. To save on taxes, you’ll need to use the foreign tax credit instead.
The foreign tax credit is a dollar-for-dollar credit on taxes paid to a foreign authority, by U.S. expats on income, including passive income sources such as the withdrawals taken from a traditional IRA or other tax-deferred retirement account.
#2 – If you live in a low-tax country, you may owe additional U.S. taxes.
The amount you owe in U.S. taxes is impacted, in part, by your country of residence’s tax policies. If you live in a country that has higher taxes than the United States, you may be able to offset your entire U.S. tax bill and avoid paying additional U.S. taxes, and possibly have a tax credit carry forward.
If, on the other hand, your country of residence has lower taxes than the United States, you will likely owe additional taxes to Uncle Sam on your RMD.
#3 – It’s important to understand how RMDs are treated by any tax treaty that may exist between your country of residence and the United States.
The tax treatment of RMDs differs based your country of residence’s tax treaty with the United States, which is why it’s important to have a solid understand of the treaty’s provisions. As with so many U.S. expat tax considerations, it’s wise to work with a qualified tax professional who understands the ins and outs of any tax treaties that may exist.
#4 – Making a qualified charitable distribution (QCD) from your IRA can help you save on U.S. taxes.
Even if you live abroad, you’re still eligible to take advantage of the U.S. tax benefits associated with charitable giving, and a QCD can be a good way to do so. For 2024, IRA owners over age 70 and a half can directly transfer up to $105,000 per year in RMDs to a qualified charitable organization without paying U.S. , on the amount given to charity The tax treatment of QCDs varies by country of residence, so, again, it’s wise to consult with an international tax professional before making a move.
#5 – Roth IRAs are never subject to RMDs.
Because Roth contributions are made with after-tax dollars, qualified withdrawals are not taxed, and these accounts aren’t subject to RMDs. However, in addition to the United States, only 10 other countries clearly recognize the tax-exempt status of Roth IRAs. If you’re planning to retire abroad, it’s important to work with a qualified financial professional who has experience helping clients navigate the complex international implications of owning a Roth IRA.
#6 – Never blindly accept your custodian’s standard withholding.
Some U.S. custodians impose a mandatory withholding on RMDs for overseas accounts with a foreign address that, can be as high as 30%. This withholding may be more than your tax liability, so it’s never wise to blindly accept such a withholding without knowing the specifics of your current country’s tax treaty with the United States.
However, if you live in a country without a tax treaty, you’ll likely need to accept the standard withholding, as there’s no supporting documentation to state that you should owe less.
Need some help navigating RMDs as an expat living overseas? Creative Planning International is here for you. We work with expats and cross-border families to help maximize their wealth and avoid costly mistakes, especially when it comes to paying taxes. We understand the complex interaction of multi-jurisdiction tax and regulatory regimes and take into account currency, diversification and other portfolio considerations as we help implement custom tax planning strategies to meet your specific needs.
To learn more, request a meeting with a member of our team.