IRA Beneficiary as non-citizen alien spouse

Submitted by Michael Draheim on Fri, 2018-09-28 02:27

Can you please help provide some IRA guidance regarding the following?

I have a traditional IRA currently worth approximately 190K and a Roth IRA currently worth approximately 30K.
I’m 57 and my spouse is 54.
I have a daughter from a previous marriage age 22. My spouse does not have any children.
My spouse is a non-US resident alien living in another country for at least the next few years, at which time we hope to get her a green card if she decides to move here permanently.

My question is – given the above situation, what’s the best way to handle my IRA beneficiaries?

I would like both my spouse and daughter to be taken care of if I were to pass away. I’m asking because I’ve read that IRA beneficiaries who are not U.S. citizens will be taxed 30% right off the top before the money is distributed to them. This seems excessive but, I’m not sure how to avoid this. My spouse may not become a U.S. citizen OR at the soonest 5+ years from now.

Thank you for any guidance you can provide or direction for which you can point me.



Submitted by David Mertz on Fri, 2018-09-28 02:42

30% is the default tax withholding rate, not the tax liability, on a distribution to a nonresident alien.  The tax liability is not known until the nonresident alien files Form 1040NR to report the US-source income.  In most cases 30% is a large enough amount of withholding to encourage the nonresident alien to file the required tax return and obtain a refund of the withholding in excess of the tax liability or to cover the tax liability if no tax return is filed.

Submitted by Bruce Steiner on Sun, 2018-09-30 01:59

  • Nonresident aliens (NRAs) are taxable at regular rates on salaries and business income.  However, they’re taxable at 30% (or the treaty rate, if lower) on fixed and determinable annual or periodical (FDAP) income (income other than salaries or business income).  The tax is withheld so the NRA doesn’t have to file a return.
  • For example, if you own stock of a foreign company, the other country withholds tax from the dividends, so you don’t have to file a return in the other country, and vice versa.
  • As set forth in my subsequent comment, retirement benefits can be either effectively connected or not effectively connected.
  • Bruce Steiner

Submitted by David Mertz on Sun, 2018-09-30 02:47

  • Bruce, is this income from an IRA considered to be NEC because it’s paid to a beneficiary?  Form 1040-NR has lines 16a and 16b in the Income Effectively Connected section for distributions from IRAs; are only distributions paid to the participants to be included on lines 16a and 16b?  In the instructions for Form 1040-NR I only see mention of including Form 1099-R income on Schedule NEC line 7 for NEC income that would otherwise be reported on Form 1040-NR lines 17a and 17b as pension or annuity income.
  • Some payers seem to withhold at the 30% rate even if there is a lower tax-treaty rate.

Submitted by Bruce Steiner on Sun, 2018-09-30 03:52

The Form 1040-NR and instructions show that retirement benefits can be either effectively connected or not effectively connected, as does Treas. Reg. § 1.864-4(c)(6)(ii).  The withholding rules are different depending on whether they’re effectively connected.

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