3 Questions and Answers for IRA Owners and Beneficiaries Living Abroad

By Jeffrey Levine, IRA Technical Expert
Follow on Twitter: @IRAGuru4EdSlott

IRAs are U.S.-based retirement accounts. Today, however, more than ever we live in a globalized world. Many U.S. citizens work, sometimes for many years, overseas. The reverse is also true. And many of our country’s citizens still have many close friends and family overseas. Put all that together and today, it’s possible that you may have questions about how the IRA rules work when either you or your beneficiaries live abroad. With that in mind, below we tackle three of the most common questions.

Can I contribute to my IRA if I am working overseas?

If you are a U.S. citizen, then you are generally taxed on your world-wide income. If that’s the case, then yes, you can make a contribution to an IRA or Roth IRA using that earned income. Be careful though! There are a lot of special tax rules for people working overseas, including the foreign earned income exclusion. If you excluded any income using this provision, then the excluded income cannot cbe used to make an IRA or Roth IRA contribution. For more on the foreign earned income exclusion, click here.

Can I leave my IRA to a foreign beneficiary?

Yes. You can leave your IRA to any person or entity you wish. There are no laws that require a person be a U.S. citizen, U.S. resident or otherwise. If, however, your IRA beneficiary is a foreign person, then some special rules might apply.

What special rules apply if I name a foreign person as my IRA beneficiary?

It’s a little hard to answer this question on a general basis, because the answer varies depending on a number of factors. In general, IRA distributions made to foreign beneficiaries are subject to a 30% U.S. income tax, for which there are no offsets or deductions. This is generally collected through a corresponding, automatic 30% withholding by IRA custodians when distributions are made to foreign persons.

Both the tax and the withholding rate, however, can be reduced if the U.S. has a tax treaty in place with the country in which the foreign beneficiary resides. In that case, the precise rules the beneficiary will have to adhere to will be determined by the applicable treaty. For a list of the countries the U.S. has a treaty with and for links to each of those treaties, you can click here.