Roth IRAs with Foreign Beneficiaries
I am creating a new topic as apparently follow-up queries on previous posts are not addressed.
With regard to a foreign beneficiary, in the specific case of a Roth, and assuming that the five year rule has been met, any distribution to the bene, including gains, upon the passing of the account holder would not be considered income, right, and therefore not subject to withholding or taxation of any kind?
Permalink Submitted by Alan - IRA critic on Wed, 2013-01-23 01:20
No question that this Roth is qualified and distributions are tax free. But withholding is potentially not in sync with the ultimate tax bill. There are few sources that drill down completely enough for me to be totally confident on the withholding rules, but if the custodian knows the Roth to be qualified, they should not be withholding and the 1099R would be coded Q. Without their own record of the 5 year holding period however, I believe that they must consider the possibility of an unknown amount of taxable income in the inherited Roth. The beneficiary needs to file a W-8BEN which invokes the tax treaty between the US and their home country, and I don’t know that IRA custodians will be familiar enough with these treaties to look into them, or would simply withhold 30%, the general rate for non US IRA distributions. IRS Pubs such as 515 and the W-8BEN instructions are not specific with respect to IRAs and particularly Roth IRAs. Perhaps someone with experience in foreign tax withholding can comment.
Permalink Submitted by Michael Boster on Wed, 2013-01-23 02:16
FYI Alan. My persistence with this query was due to the fact that I am, in fact, in this situation. It is not just an academic exercise. I value your input.To be even more precise: – The beneficiary of my Roth IRA is a revocable trust (I am grantor/trustee) – One of the beneficiaries of the trust is a foreign individual. As such, doesn’t this mitigate your concern, that of an uninformed custodian? The custodian would write out a check to the Trust/Trustee, with no withholding as the Roth is qualified. The Successor Trustee, properly prepped, could then wire the funds to the foreign beneficiary, comfortable that the distributions were not in any way income or for that matter taxable.One of the reasons I converted all my TIRAs to Roths, with a Trust as bene, was to avoid the potential confusion of the higher and compressed Trust tax rates mistakenly being assessed by an uninformed Custodian. So my final question to you is: in your experience with TIRAs with Trusts as bene’s have you found that Custodians mistakenly apply Trust tax rates, and is this potential risk eliminated by having a Roth with a Trust as bene?
Permalink Submitted by Alan - IRA critic on Wed, 2013-01-23 04:03
Typically, the custodians will not withhold anything on Roth distributions, but you need to check with a CPA or trust attorney on the question of what the custodian will do when presented a copy of the trust showing a foreign beneficiary. The simplest thing you can do is to plan to keep your custodian long term, as the Roth qualification will be obvious to the custodian if they have held the assets at least 5 years at your death. That should eliminate any foreign withholding due to the foreign beneficiary share. I can’t help you with other trust accounting issues triggered by inclusion of the foreign trust beneficiary, but you need to be sure the trustee knows the time limits for presenting trust information to the Roth custodian because if the trust is not considered qualified, it will trigger the 5 year rule. In that case, even if Roth distributions are tax free, the stretch will be destroyed. The other terms of the trust will also affect tax issues since the trust will probably have to file a 1041, but you should check with a CPA with experience with foreign trust beneficiaires to get advice on the entire process of getting funds from the Roth through the trust to the foreign beneficiary. You might also want to explore the implications of having a separate Roth account for the foreign beneficiary with or without a trust, but I don’t know the situations with your other beneficiaries.
Permalink Submitted by Bruce Steiner on Sun, 2013-01-27 00:01
In the case of a traditional IRA, if it’s payable to a nonresident alien, you should check the applicable tax treaty (if any) to see if it provides a reduced rate of tax, or exempts the IRA benefits, from U.S. taxation. If there is a tax in the U.S., you’ll have to check the law in the beneficiary’s home country to see whether the beneficiary will get a credit for the tax in the U.S., and whether the foreign country will permit the same deferral for its tax purposes as the U.S. does. In some of the treaties, the other country will allow the same deferral as the U.S. does.If you name a trust as beneficiary, you should check to see whether the trust is considered domestic (U.S.) or foreign for U.S. income tax purposes, as well as whether the trust is taxable in another country. You’ll also have to consider the tax treatment, both in the U.S. and in the other country, of distributions from the trust to the beneficiary.Note that leaving IRA benefits to a revocable trust can create other problems from a tax standpoint. For more on trusts as beneficiaries of retirement benefits, see my article on that subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal: http://www.kkwc.com/docs/AR20041209132954.pdf.A Roth IRA is simpler from a U.S. tax standpoint, since distributions from a Roth IRA are generally not taxable in the U.S. However, you’ll have to check to see how the other country treats Roth IRA benefits. In some of the tax treaties, the other country will recognize the tax-exempt status of the Roth.The original poster may wish to consult with tax/estates counsel, who can give him more specific advice based upon the particular situation.