A Guide to RMDs for Americans Living Abroad
If you’re nearing — or already in — retirement, you’re likely familiar with IRS rules surrounding required minimum distributions (RMDs), such as the requirement that you begin withdrawing from your tax-deferred retirement accounts each year starting at age 73 for those born in 1959 or earlier who aren’t already subject to RMDs and age 75 for those born in 1960 or later.
However, as with many financial planning topics, U.S. expats have unique RMD planning considerations. Here, we highlight five important facts about RMDs for U.S. expats.
#1 – 401ks and IRAs have slightly different rules.
Unlike IRAs, the IRS doesn’t allow taxpayers to aggregate RMDs from employer-sponsored retirement plans. If you have multiple employer-sponsored plans, such as 401ks and 403bs, you must take a separate RMD from each account based on a life expectancy factor.
Another important difference between IRAs and 401ks is that, if you’re still working at age 73 (or 75) and don’t own more than 5% of your company, you can choose to delay taking your first 401k RMD until the year you stop working. However, you must begin taking IRA RMDs at age 73 (or 75) regardless of your employment status.
#2 – RMD rules can differ for inherited IRAs.
With a few exceptions, if you inherit an IRA or another tax-deferred account from someone other than your spouse, and the original account holder died in 2020 or later, you’re required to withdraw the full account balance within 10 years. For example, if the original account holder died in January 2020, you must withdraw the full account balance by December 31, 2030. This is a recent change from previous rules that allowed payments to be stretched out over the course of most beneficiaries’ lifetimes.
Also, many foreign countries impose an inheritance tax, so it’s important to familiarize yourself with your potential tax liabilities if you’re in line to receive an inheritance.
#3 – IRA RMDs can be aggregated.
If you own multiple traditional IRAs, you have the option to aggregate the RMD amount and take the total distribution from one or more accounts of your choice. This flexibility allows you to strategically plan your withdrawal strategy in order to optimize your tax situation.
#4 – The penalty for missing an RMD is steep, but it can be waived.
Did you know that if you fail to withdraw your RMD amount, you’ll be assessed a 25% penalty on any amount not distributed? That’s a steep penalty.
However, if you take the necessary RMD by the end of the year following the year it was due, the penalty drops to 10%. And the IRS may waive the penalty completely if you can prove the missed distribution was due to reasonable error and you’re taking steps to remedy the shortfall. In order to qualify for a penalty waiver, you must file IRS Form 5329 along with a letter of explanation and withdraw the missed RMD as soon as possible.
#5 – RMD taxation may vary depending on your citizenship status.
The IRS mandates that custodians automatically withhold up to 30% of IRA distributions, including RMDs, to cover taxes for non-U.S. persons with a foreign address. Based on your citizenship status and tax treaties between the United States and your country of residence, this withholding may exceed your actual tax liability. If you live in a country that has a tax treaty with the United States, it’s important to understand how RMDs are taxed and adjust your withholding accordingly. Conversely, if you live in a country without a tax treaty, you may need to accept the standard withholding. Be sure to consult with a tax advisor about the proper withholding on your RMD distributions.
Need some help navigating your RMDs as a U.S. expat? Creative Planning International is here for you. We work with expats and cross-border families to help them 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.