It is imperative for United States expatriates residing in Australia to take into account the tax implications in both Australia and the United States when contemplating the withdrawal of their US Retirement Plan, which include a 401K, Traditional IRA, or Roth IRA.
Tax considerations in Australia and the United States for the 401k
It is crucial to acknowledge that, in the context of Australian tax regulations, a US Retirement Plan often does not satisfy the criteria to be classified as a 'Foreign Superannuation Fund'.
Hence, it might be inferred that the withdrawal of a United States Retirement Plan would be liable to Australian taxation.
Nevertheless, it is crucial to acknowledge certain significant factors and consider tax planning strategies that might potentially lower the overall effective tax rate in both the United States and Australia when withdrawing funds from a US Retirement Plan.
Initially, it should be noted that Australia alone imposes taxes on the expansion of the plan that exceeds the payments paid to the 401k or IRA. The act of transferring funds from a 401k retirement account to an Individual Retirement Account (IRA) has the potential to reset the cost basis, or corpus, of the investment. This reset can offer some tax advantages when seen from an Australian tax standpoint.
Australia has implemented a provision that permits individuals to claim a tax credit for taxes paid to the United States on withdrawals.
The withdrawal of a 401k/IRA (except a Roth) is often subject to taxation as ordinary income in the United States. Consequently, it is generally advantageous to spread out the distribution across numerous tax years in both the United States and Australia. This approach helps to minimise the taxable income for the respective income year.
The comprehensive consideration of the tax status of US states is crucial.
In the United States, it is often the case that withdrawals made prior to reaching the age of 59.5 are subject to a 10% early withdrawal penalty.
Payments sent to non-US residents by US financial institutions may be subject to a withholding tax of 30%. However, it is possible that the Australia and US Tax Treaty may assign sole taxing authority to Australia, rendering the withholding tax inapplicable. Ensuring the accurate completion of the W-8BEN form holds significant importance.
The tax treaty between Australia and the United States holds potential significance for individuals who are not nationals of the United States or Green Card holders aged above 59.5. This is because the tax treaty often designates Australia as the country with the authority to impose taxes.
It is important to take into account the option of making concessional deductible superannuation contributions in Australia for individuals who are not nationals of the United States or Green Card holders. This can serve as a means to lower the effective tax rate.
Hence, it is imperative to do comprehensive tax planning that takes into account the tax consequences in both the United States and Australia, with the aim of optimising the reduction of the overall tax burden in both jurisdictions.