# How to intentionally get a "deemed distribution" of my 401k?



## CharTro82 (Feb 14, 2021)

I am trying to figure out how to intentionally trigger a "deemed distribution" of my 401(k) but there doesn't seem to be any obvious process for this. I think it's because doing so would typically be a terrible choice as it could create a massive income tax bill on the entire balance. However, my balance is relatively small ($45k in principle and $5k in gains) and I am okay with paying the income tax. Further, I reside in a country that has a territorial tax system, so I will be able to grow the funds tax-free in many foreign markets anyway. I want to distribute the entire balance in order to have full control of my investments and remove the risk of the US someday changing rules on compensation deferred accounts.

How do I go about doing this? The W-8CE doesn't present such an option.

My situation:

I am 38 years old. I reside in a country that uses a territorial tax system. I renounced my US citizenship just a couple weeks ago. I originally hired a law firm to assist in the associated tax fallout, but I have lost faith in their competency. I am likely filling out the paperwork myself now. I am a covered expatriate due to a multi million dollar income windfall in 2018. There is no tax treaty between my country and the US.

Thanks for any help,

-CharTro82


----------



## Nononymous (Jul 12, 2011)

Don't take this the wrong way, but "covered expatriate due to a multi million dollar income windfall" + "I originally hired a law firm to assist in the associated tax fallout, but I have lost faith in their competency" + coming to an internet message board for advice = possibly this will end expensively.


----------



## CharTro82 (Feb 14, 2021)

Nononymous said:


> Don't take this the wrong way, but "covered expatriate due to a multi million dollar income windfall" + "I originally hired a law firm to assist in the associated tax fallout, but I have lost faith in their competency" + coming to an internet message board for advice = possibly this will end expensively.


Noted. Thank you for your concern. I am simultaneously seeking the assistance of different lawyers. However, I have found that even experienced lawyers may not always know best.


----------



## Nononymous (Jul 12, 2011)

Depending on the exit tax situation, it might be a hell of a lot cheaper to kiss the 401(k) goodbye and forget about filing Form 8854, if the rest of your money is safely outside the US.

PS on edit: per the risks of renouncing and walking away, this makes for amusing reading:



https://www.treasury.gov/tigta/auditreports/2020reports/202030071fr.pdf



Apparently 40 percent of renunciants skip the farewell paperwork, and the IRS does not follow up.


----------



## JustLurking (Mar 25, 2015)

CharTro82 said:


> I am trying to figure out how to intentionally trigger a "deemed distribution" of my 401(k) but there doesn't seem to be any obvious process for this.


I'm not clear on what you're trying to achieve with a "deemed distribution". Most people would want to avoid that -- it leaves you having to pay tax _now_ on money you've yet to receive, and may in fact never receive. Almost always undesirable. (FWIW, the way to trigger a 'deemed distribution' as you ask would have been to have rolled the 401k into an IRA before renouncing. The rules for 401ks and IRAs are completely different.)

Maybe I'm missing something, but can't you simply take a withdrawal of the entire 401k balance? This would be an early withdrawal, so US federal income tax plus a 10% early withdrawal penalty. If done after leaving the US though, you escape any state tax on it, which could help offset the 10% penalty.

Assuming that you have no other exposure to the US's soviet-style exit tax -- that is, unrealised capital gains below $700k or so, no likelihood of gifts/bequests back to US persons (see section 2801 for that), and no other US based retirement accounts -- a full 401k withdrawal may not be a bad option. Once done, you're out of the US system entirely, never have to think about it again, and can move about the planet and invest freely.

All this assuming you desire a 'clean' exit from US tax. Other less clean options are of course possible.


----------



## CharTro82 (Feb 14, 2021)

JustLurking said:


> I'm not clear on what you're trying to achieve with a "deemed distribution".


I am trying to remove the balance of my 401(k) from the US financial system and bring it 100% under my control. Because my balance is only $50k, paying income tax on this amount is a non-issue.



JustLurking said:


> FWIW, the way to trigger a 'deemed distribution' as you ask would have been to have rolled the 401k into an IRA before renouncing.


From what I've read, failing to file the W-8CE with your 401(k) custodian within 30 days of renouncing is a means to trigger a deemed distribution. I am reluctant to exercise the option in such a manner because it would appear as a mistake on my part. I rather declare outright that a deemed distribution is my intent.



JustLurking said:


> Maybe I'm missing something, but can't you simply take a withdrawal of the entire 401k balance?


Yes, I can log into my Fidelity 401(k) account, navigate to "withdrawal", and withdrawal the entire balance to my checking account. They will withhold 20% as income tax. This is fine as I'll have to pay at least 22% in federal income taxes for it. It's my responsibility to handle the 10% penalty if applicable.



JustLurking said:


> This would be an early withdrawal, so US federal income tax plus a 10% early withdrawal penalty.


From what I've read, the 10% penalty does not apply to those who have renounced citizenship:

"Other retirement plans, such as 401(k) plan or 403(b) accounts, are subject to different rules as “Deferred Compensation.” Eligible deferred compensation plans, including 401k accounts, will provide the expatriate with additional choices on how the exit taxes can be paid: [1] Take an actual lump sum distribution before expatriating (which could be subject to early withdrawal penalties before age 59 ½). [2] Pay the ordinary income tax upon expatriation – the deemed distribution (no penalty). [3] The expatriate may elect to defer the tax on a qualified plan, so no tax comes due upon exit; however, the expatriate thereby agrees to pay 30% withholding tax on all subsequent distributions and waives all potential treaty relief that might otherwise lower the withholding tax paid by nonresidents on distributions from their U.S. pensions."

https://thunfinancial.com/PDF/2019-Expatriation-Look-Before-You-Leap.pdf

"As to the taxation of an ineligible deferred compensation item, generally speaking, the present value of the covered expatriate’s accrued benefit is treated as received by the expatriating individual on the day before the expatriation date as if there is a distribution. An early distribution tax is not applied, and appropriate adjustment is made to subsequent distributions from the plan to reflect such treatment."

https://www.marcumllp.com/wp-content/uploads/RaginiSubramanian-Bloomberg-07112018.pdf


----------



## Bevdeforges (Nov 16, 2007)

Be careful - I think what you really want to do is simply take a distribution of the balance in the account and then close the account. But you say you have already renounced. There is a good to excellent chance that they'll be required to withhold the full 30% NRA tax on the amount - and if they do then it's all done and dusted (at least the tax on the distribution). There is nothing "deemed" about it - you're simply closing out the account. For the amount involved this might be your simplest solution.


----------



## JustLurking (Mar 25, 2015)

CharTro82 said:


> I am trying to remove the balance of my 401(k) from the US financial system and bring it 100% under my control. Because my balance is only $50k, paying income tax on this amount is a non-issue.


Okay.



CharTro82 said:


> From what I've read, failing to file the W-8CE with your 401(k) custodian within 30 days of renouncing is a means to trigger a deemed distribution. I am reluctant to exercise the option in such a manner because it would appear as a mistake on my part. I rather declare outright that a deemed distribution is my intent.


I don't see that as a valid worry. If you pay the tax on the deemed distribution with your 8854, that's a pretty clear statement that you've "elected" not to take the deferral offered by W-8CE.



CharTro82 said:


> From what I've read, the 10% penalty does not apply to those who have renounced citizenship: ...


... and you want to take your money out now yet escape it entirely.

In that case, does this article help? (spoiler: the 10% penalty _does_ apply, but only to gains since renouncing, so unless your 401k has gained hugely since you renounced, it looks like the above may be mostly feasible):

Early distribution penalties, IRAs, and expatriation - HodgenLaw PC

As for professionals ... I hear you. When I tangled with the covered expat rules, I could not find one that knew anything more than me on the topic. And their quoted costs were horrific. If you're seeing similar quotes, they may well dwarf any US exit tax liability for your 401k. So I understand your reluctance to use them. Do remember though that what you read here is from just random folk on the internet, and could be wrong.


----------



## 255 (Sep 8, 2018)

CharTro82 -- Just close the account and take whatever is left, after taxes, and do with it, what you want! Cheers, 255


----------

