US Expats and the tax implications of withdrawing your US Retirement Plans (401k, IRA) in Australia

For US expats residing in Australia, it will be important to consider the Australian and US tax treatment of withdrawing your US Retirement Plan, including a 401K, Traditional IRA or Roth IRA.

Australian and US Tax Considerations

It is first important to note that a US Retirement Plan would normally not meet the definition of a ‘Foreign Superannuation Fund’ for Australian tax purposes.

Therefore, the starting point would be that a withdrawal of a US Retirement Plan would be subject to Australian tax.

Nevertheless, it’s crucial to keep in mind certain key aspects and explore tax strategies applicable in both the United States and Australia for lowering the combined tax burden when withdrawing funds from a US Retirement Plan.

Here are the 8 factors about Australian and US Tax Considerations

1. First, Australia would only tax the growth of the plan over and above the contributions made to the 401k or IRA. A rollover from a 401k to an IRA may also reset the cost basis (or corpus) which can be advantageous from an Australian tax perspective.

2. Australia would allow a tax credit for US tax paid on withdrawal.

3. A withdrawal of a 401k/IRA (excluding a Roth) would be subject to US tax in that year as ordinary income and therefore it would normally be preferrable to take a distribution over multiple US and Australian tax years to reduce taxable income for that income year.

4. Careful consideration is necessary when evaluating the US state tax position.

5. Withdrawals before age 59.5 would also normally be subject to a 10% early withdrawal penalty in the US.

6. A 30% withholding tax may also be applied by the US financial institution for payments to non-US residents. However, the Australia and US Tax Treaty may allocate exclusive taxing rights to Australia and therefore the withholding tax may not be applicable. Completing the W-8BEN form correctly is of utmost importance.

7. The Australia and US Tax Treaty may also have important application for non-US citizens and Green Card Holders (aged over 59.5) as the tax treaty would normally allocate taxing rights to Australia.

8. Non-US residents and Green Card Holders should also explore the option of making tax-deductible superannuation contributions in Australia to lower their overall tax liability.

Hence, it’s crucial to execute comprehensive tax planning that encompasses the tax consequences in both the United States and Australia while strategizing to optimize the overall tax burden in both nations.

Please get in touch with any questions.