# Inherited IRA - how to handle?



## 75003 (4 mo ago)

Hello Bev and all. I've bren reading your conversation and maybe you can help. After the death of my American husband last February, his US bank had me rollover his IRA account into an inherited IRA to my name. Since I'm French, living in France, the US bank wants me now to close this account. How to do so without being hammered with taxes on both sides? I trid to find another bank either in the US or in France to host my inherited IRA but with no luck. I'm going in circle with this matter for month and I can't see what the best solution would be. Thank you in advance for your answers.


----------



## Bevdeforges (Nov 16, 2007)

I've moved you into a thread of your own since it's a question of interest to plenty of folks. (I had an issue similar a few years ago when I inherited my mother's IRA account.)

Since you're not a US citizen (or so I assume from what you've said), closing out the account will mean that the bank will withhold 30% for taxes (i.e. the NR - non-resident - tax rate). I don't believe that you can maintain an IRA as a non-US citizen, certainly not if you transfer the funds to an overseas account. 

But what you could do is simply to close the account, let them take out the 30% in taxes and move what's left to a French bank account. Now, on the French tax side, you can either declare the full amount on your French declaration and let them apply the tax credit at French rates (since an IRA is considered a US government pension), or just consider it a transfer of your husband's US bank account to your French bank account and not bother declaring it. It sort of depends on how large a sum we're talking about. 

But, given that the taxes will be withheld in the US, you may well want to just ask your local tax office what they recommend. It has already been taxed by the US, so should not be subject to taxes in France, though the precise route to do that is the thing that is unclear.


----------



## JustLurking (Mar 25, 2015)

Bevdeforges said:


> ... I don't believe that you can maintain an IRA as a non-US citizen, certainly not if you transfer the funds to an overseas account.


Just on this point, no _international_ transfers -- obviously, after all, this is the US we're talking about! -- but it is entirely possible to _maintain_ a US IRA, in the US, as a nonresident alien. I have held mine for well over a decade now since leaving the US. There are no legal, tax, or regulatory impediments to that.

What is a problem is _opening a new one_, for a transfer. So far, I have not found any IRA provider that would take a transfer from an existing IRA for a nonresident alien. Again, not illegal or disallowed under regulation; simply provider policy not to work with nonresident aliens, or perhaps all nonresidents. Interactive Brokers comes close -- they will deal with US citizens living outside the US, but not with non-citizens.

The problem is likely that the bank(*) has simply decided to apply a new internal policy that says, broadly, "no US nonresidents". For US citizens this is an inconvenience, but at least Interactive Brokers offers a bolthole. Perhaps other banks too. For non-US citizens it can be a huge problem. Depending on treaty and on tax rates, both local and US, a forced withdrawal of an entire pension in one lump sum can sometimes lead to total tax rates that are far higher than if the pension was drawn over time and as planned.

Nonresident aliens holding US IRAs are very much captive to the whim of not only congress and the IRS, but also the IRA provider's own whims and caprices. With banks and other US financial institutions facing a tsunami of US regulation on international payments that shifts like the sands of the Sahara, some are now (perhaps understandably) taking the risk-based decision to stop anything that has a whiff of "foreign" to it. That can leave some IRA holders entirely adrift.


(*) Wells Fargo? A perennial PITA bank at the best of times. Currently reported on assorted expat sites to be kicking out any customers who cannot provide a US residential address.


----------



## Bevdeforges (Nov 16, 2007)

JustLurking said:


> The problem is likely that the bank(*) has simply decided to apply a new internal policy that says, broadly, "no US nonresidents".


That's basically what I was trying to point out. I have managed to hold onto my IRA in the US, even now that I am also an NRA - however, I only am taking distributions from the balance that is there, now that I am comfortably over the minimum age for that.


JustLurking said:


> Depending on treaty and on tax rates, both local and US, a forced withdrawal of an entire pension in one lump sum can sometimes lead to total tax rates that are far higher than if the pension was drawn over time and as planned.


Except that in the case of a NRA, the closing out of an IRA account incurs the same US tax rate (i.e. 30%) as taking it slowly over the years. The issue becomes how the French Fisc wants to treat it (which doesn't necessarily have to be the same way the IRS does). For the IRS, they want their taxes on the money that went into the fund before tax (assuming this isn't a Roth IRA). So the rate is 30% if it's being paid out to a NRA.

As far as the French are concerned, you are transferring a bank account you inherited from someone else. As long as the taxes due in the US are paid, it can be treated here like a transfer of capital, on which there shouldn't be any French taxes. At least you can play it that way to get the money over here and into a French bank as savings.


----------



## JustLurking (Mar 25, 2015)

Bevdeforges said:


> Except that in the case of a NRA, the closing out of an IRA account incurs the same US tax rate (i.e. 30%) as taking it slowly over the years. ...


A 30% US tax _withholding_ in this particular case for France, because that's the US/France treaty treatment.

The final US tax rate may well be lower than a flat 30% rate though, since the US should tax at least part of the pension at graduated rates, because it is ECI. See form 1040 instructions. And the problem then, of course, is that a forced distribution of an entire IRA pushes the recipient into higher US tax brackets.

That aside, France is an exception to the general rule on pensions. If you look at the US tax/withholding rates for other treaty countries, shown in this IRS table, by far the majority have a 0% US rate, with treaties reserve taxing rights on US pension withdrawals to the country of residence only. (Although of course with a "saving clause" exception to this for US citizens, who must then navigate a torturous US tax filing process to obtain a US tax credit for non-US taxes paid.) So again, a forced distribution of an entire IRA will likely push tax to higher levels than otherwise; just that in this case it will be non-US tax brackets.


----------



## Bevdeforges (Nov 16, 2007)

OK - I'm not going to quibble with you over details. But we're talking about an IRA, not a regular "pension" and there is the notion that the ECI thing applies to pensions based on services performed in the US. If the spouse who inherited the IRA did not actually work in the US and is not a US citizen or "US taxpayer" things could get complicated. I expect that if the NRA spouse had lived and worked in the US, the husband's IRA would have simply been rolled over into her own US based IRA rather than having had to establish a new IRA for the spouse. (This, too, could be a company policy thing - when I had to handle the "inheritance" of my mother's IRA, there was a problem in that the company where my mother's IRA was held "could not" roll anything into an IRA of another financial company, which I would have preferred, already having an IRA with a different company.)

But there is nothing that says that you must declare a given transaction in the same manner on US and the foreign tax declarations. What is considered distribution of "regular income" in the US could very well be considered transfer of capital to the other country in these types of circumstances. Like the IRS loves to say "it depends on the specific facts and circumstances of the case."


----------



## 255 (Sep 8, 2018)

@75003 -- First there are two ways for a spouse to title an "inherited IRA," either as an Inherited IRA, for the benefit of the spouse or the spouse can title the IRA in their own name. Generally the first option is what brokerage firms default to, but the second option is generally the most flexible.

Secondly there are quite a few firms that will serve as IRA custodians (IRA custodians must be U.S. based) for non-resident aliens. The problem you're having is the firms' KYC rules that generally prohibit opening accounts for NRAs without U.S. income or a place of abode, in the U.S. -- so they can _*easily*_ validate the information provided.

There are a few boutique financial firms that cater to expats -- these are usually investment advisor firms that want to "manage" your account for you. I have no idea if they would service NRAs (there are a few older threads that mention a couple of specific firms,) with "new" accounts. It might be worth a query. A new google search might turn up some possibilities. A smaller IRA custodian (or one that supports expats,) weather self-directed or not might also be an option.

Sorry, I don't have a specific recommendation. Cheers, 255

P.S. IRAs are just trusts. You may want to consider consulting an ERISA attorney or a legal firm that specialize in preparing IRAs. They often have sister firms or partnerships with custodian firms, that might serve your purposes.


----------

