Us Ex-pats In Thailand With 401-k

[Gumballl]

Hi,

Does anybody know what are the tax consequences for withdrawing 401-K retirement money while living in Thailand? Is the full amount of the money withdrawn taxed like it would be in the US, or is the first $80K exempt?

I have heard that if a US citizen works overseas, that the first $80,000 (perhaps more?) of their income is exempt from US taxes. Technically, monies reserved in 401-K account is "income" that is yet to be taxed... thus perhaps it may qualify for this exemption upon withdrawal if done overseas.

If you have any experience with this, any information you may have would be appreciated. Also please let me know if any of my data or assumptions are incorrect.

Thanks in advance.

[lanny]

The foreign earned income exclusion applies to up to $80,000 of EARNED income. That means income earned by current employment or business operation. Also, it only applies to payments made for services in the last 2 years. Deferred compensation plan distributions are not eligible for this exclusion.

So, if you withdraw money from your 401-K, it is taxable whether you live in the U.S. or Thailand (or any other country.) The good news, perhaps, is that it is not subject to Thai taxes. If you are not at least 59 1/2 years old on the day you withdraw the money, you could be subject to the 10% penalty, too.

I have had clients who were surprised and upset when told they owed money to IRS because of withdrawals from retirement plans. IRAs, in particular, are often thought to be excludable under the FEIE rules. In at least one case, I had a client who did not return after I gave him his return with the tax on an IRA .

[Smokin Joe]

The exemption you are refering to is for money earned overseas. Money from a 401K was "earned" in the US. Where it was earned is the key, not where you take it out. Same with my pension.

Would not apply in your case. That's the basic quick answer.

[Gary A]

Lanny hit it on the nose. You are entitled to a certain amount of income per year and if you go over you pay taxes regardless of where you live. I don't know the exact specifics but I thing it somewhere around $26,600 a year. (?) I know that I wanted to take some money out of my 401K and my accountant told me that I would be subject to a tax of 7%. Since I was not happy to pay any tax I decided to wait until after the first of the first of the year. If I want money out of my 401K plan I WILL have to pay some tax but that's how it is.

[Gumballl]

Thanks for your replies everyone. Seems like there is no way around the tax issue. Oh well, I was just looking at an angle to better my financial situation.

Who was it that said that "in life two things are certain... death and taxes"?

[lanny]

Lanny hit it on the nose. You are entitled to a certain amount of income per year and if you go over you pay taxes regardless of where you live. I don't know the exact specifics but I thing it somewhere around $26,600 a year. (?) I know that I wanted to take some money out of my 401K and my accountant told me that I would be subject to a tax of 7%. Since I was not happy to pay any tax I decided to wait until after the first of the first of the year. If I want money out of my 401K plan I WILL have to pay some tax but that's how it is. 

<{POST_SNAPBACK}>

Gary A -- You need an accountant to help with your taxes because you are somewhat wide of the mark here.

First, up to $80,000 of earned income may be excluded from taxable income if you meet certain rules. Note that this does not apply to any source of income other than salaries and wages or income from running a business. It does not apply to anything taken from a retirement plan -- pension, IRA, or 401-K.

Second, I don't know where you get the 7% tax. If you withdraw money from your 401-K, that amount will be taxable. In addition, if you are not yet 59 1/2 years old at the time you make the withdrawal, you will owe a 10% penalty tax.

Just for the record, I am a tax accountant so I would hope I can get it right.

[lopburi3]

Or perhaps he does not need an accountant?

my accountant told me that I would be subject to a tax of 7%

[Tiger7Moth]

The foreign earned income exclusion applies to up to $80,000 of EARNED income.  That means income earned by current employment or business operation.  Also, it only applies to payments made for services in the last 2 years.  Deferred compensation plan distributions are not eligible for this exclusion. 

So, if you withdraw money from your 401-K, it is taxable whether you live in the U.S. or Thailand (or any other country.)  The good news, perhaps, is that it is not subject to Thai taxes.  If you are not at least 59 1/2 years old on the day you withdraw the money, you could be subject to the 10% penalty, too.

I have had clients who were surprised and upset when told they owed money to IRS because of withdrawals from retirement plans.  IRAs, in particular, are often thought to be excludable under the FEIE rules.  In at least one case, I had a client who did not return after I gave him his return with the tax on an IRA .

<{POST_SNAPBACK}>

Lanny,

Well, first of all, since you are a professional, I would be willing to pay for your service. However, I think my situation is pretty simple, so, it would not require much of your time and therefore, I don't think the fee would be very substantial. Nonetheless, I am willing to pay a fee.

Here is my situation. I am retired in Thailand and living on a pension from my former employer (IBM). I participated in the IBM 401K, which was called TDSP (tax deferred retiremet program). There is an exception to the 59 1/2 rule that goes something like, if you are over 55 and retired from your employer .... you can make disbursements without the 10% penalty. this is restated on the IBM TDSP web site and I am 99.9% sure it applies in my case. I made a full withdrawal this year at the age of 58 1/2. In addition, I had a 401K with Mobil Corp, another former employer and roled it over into an account with Vanguard. The accout is called, Traditional IRA by Vanguard. About a month ago, I received a letter from Vanguard saying that since I am living outside the US, they would have to withhold 30% if I made a withdrawal from the account (which I would not do until I am 59 1/2, 5 months from now). I am confused about the 30%. I thought 28% was the max as this would be taxed at the same rate as income (max 28%, right?). IBM taxed my withdrawal at 20% and I expect I will have to pay an additonal 8% when I file my return this year.

So, why 30%?

I live in BKK and used TurboTax to file my return last year (which consisted only of my retirement income and some dividends from investments). I have no other assets or income.

I think my case is simple but, again, I would be willing to pay for your service if you think it would be to my advantage.

But, my immediate question is why Vanguard is using a figure of 30%?

[lopburi3]

So, why 30%?

They believe you are a non resident alien. If you are a US citizen and so state the withholding rate required is 10% if sent to a foreign address (although you can select any amount above that if you wish).

[Tiger7Moth]

So, why 30%?

They believe you are a non resident alien. If you are a US citizen and so state the withholding rate required is 10% if sent to a foreign address (although you can select any amount above that if you wish).

<{POST_SNAPBACK}>

OK, I am non resident alien. But, why 30%? Isn't that higher than any potential tax rate I would pay? Why not 28%, which I believe is the maximum rate I would actually pay?

[lopburi3]

So, why 30%?

They believe you are a non resident alien. If you are a US citizen and so state the withholding rate required is 10% if sent to a foreign address (although you can select any amount above that if you wish).

<{POST_SNAPBACK}>

OK, I am non resident alien. But, why 30%? Isn't that higher than any potential tax rate I would pay? Why not 28%, which I believe is the maximum rate I would actually pay?

<{POST_SNAPBACK}>

If you were paying the max tax rate it would be 35%. The 28% would be the max for most of us however. 30% is the amount required by law to be withheld from your IRA payments. Of course you should get a big portion of that back when you file your tax return (unless you turnover a very large amount or have other high income).

[Gary A]

I was over the 59 1/2 before I touched any money in my 401K. I was going to take about $10,000 more out this year and my accountant in the US told me that would put me in the taxable income range. I emailed back to him and asked him how much I would have to pay and he told me about 7% of the $10,000.

Second, I don't know where you get the 7% tax. If you withdraw money from your 401-K, that amount will be taxable. In addition, if you are not yet 59 1/2 years old at the time you make the withdrawal, you will owe a 10% penalty tax.

Just for the record, I am a tax accountant so I would hope I can get it right.

<{POST_SNAPBACK}>

[cwilliam]

Thanks for your replies everyone.  Seems like there is no way around the tax issue.  Oh well, I was just looking at an angle to better my financial situation. 

Who was it that said that "in life two things are certain... death and taxes"?

<{POST_SNAPBACK}>

Taxes are more certain

[PeaceBlondie]

Folks, if you want accurate replies to questions about something that's more complex than brain surgery, you have to provide a lot of detailed, personal information (that you wouldn't want to do on a website forum, anyway). Even the experts can't perfectly answer an imperfect question. I used to be an expert, but now I'm just an ex-spurt.

"Non-Resident Alien" in US tax law refers to an alien to the USA who's not residing in the USA. Not the same as what the term means in another country.

[Boon Mee]

The exemption you are refering to is for money earned overseas. Money from a 401K was "earned" in the US. Where it was earned is the key, not where you take it out. Same with my pension.

Would not apply in your case. That's the basic quick answer.

A good portion of my 401(k) was earned outside the states.

Going back and attempting to determine how much to exclude from the "earned income" portion seems daunting to say the least.

Any ideas, boys?

Thanks.

[lanny]

The exemption you are refering to is for money earned overseas. Money from a 401K was "earned" in the US. Where it was earned is the key, not where you take it out. Same with my pension.

Would not apply in your case. That's the basic quick answer.

A good portion of my 401(k) was earned outside the states.

Going back and attempting to determine how much to exclude from the "earned income" portion seems daunting to say the least.

Any ideas, boys?

Thanks.

You would be wasting time trying to determine the source of the the money in your 401K. Everything you withdraw will be taxable just the same, either way.

The "Foreign Earned Income Exclusion" is just that; an exclusion of money earned during the tax year from sources outside the US. While the exclusion does apply to income earned, rather than received, in the tax year, it must be paid within two years of being earned. This would apply to contract completion bonues and the like.

Income from a 401K, or any other retirement savings plan, is not earned income, in this sense. It is a payment for past services and has no relationship to current efforts to produce income. So, it does not matter if you earned the income from which deposits were made in the US or in one or more foreign countries. It is not income for current efforts and is not eligible for the exclusion.

Edited January 15, 2006 by lanny