Required Minimum Distributions refers to the minimum amount that individuals must withdraw annually from most US retirement accounts starting at age 72. This changes to age 73 if you reach age 72 after Dec. 31, 2022, and increases further to age 75 in 2033. Inherited retirement accounts have different rules and times frames. RMDs are mandatory to ensure that individuals do not indefinitely defer paying taxes on their retirement savings. If you do not take your RMD, the IRS will charge a 25% tax penalty for every dollar not taken. The penalty drops to 10% if the mistake is corrected within 2 years.

If you live abroad and have a US retirement account, then you are not exempt from RMD requirements and living abroad can present unique challenges.

Managing account withdrawals from overseas can be a challenge for a variety of reasons. Some financial institutions are simply unwilling to work with non-US residents and may say that you can no longer hold a retirement account with them. In this situation you may need to move your account elsewhere. Others may allow you to hold an account but only make distributions to a US bank account or restrict the flexibility by only allowing the distribution as one lump sum, rather than a series of payments over time. It is also not uncommon for that payment to be made by check.

When the time comes to start taking distributions, whether by choice or as RMDs, tax is an important consideration. Some financial institutions apply a default federal withholding tax of 30% for anyone who lives outside of the US. For certain countries there will be no way around that, but if the US has a double taxation agreement (DTA) with the country where the individual resides, then it may be possible to reduce the rate of withholding tax or remove it completely. To ensure the correct rate of withholding tax is applied the individual will need to complete either a W9 or W8-BEN depending on their US tax status.

As well as considering the US tax consequences, it is equally important to determine whether the individual will need to pay tax in the country they reside in and establish how much that will be. Determining which country has taxing rights on the distribution can be impacted by how the distribution is made, for example, whether the distribution is considered a lump sum payment or income payment.

Once an individual understands the tax consequences, another often overlooked consideration is currency. Payments firm, Caxton, recommends working with an expert to manage exchange rate fluctuations and maximize the value of your distributions when converting USD to your local currency. Strategies such as using forward contracts to lock in favorable rates or setting up regular transfer plans can mitigate volatility. Opening a multi-currency account allows you to hold funds in USD until conversion rates are optimal. Additionally, by minimizing currency conversion fees and staying informed with regular market analysis, you can ensure your retirement savings work harder for you.

Cross Border Financial Planning USA (CBFP USA) can help manage RMDs effectively for individuals who live overseas. Working with an advisor who specializes in cross border financial planning can help an individual set up a retirement account with a custodian that offers flexibility to non-US residents.  They will also be able to build a financial plan which incorporates investments held outside of the US, and by managing withdrawals strategically they can try to help minimize the tax implications in both the U.S. and the country of residence. Proactive management of RMDs not only fulfills distribution requirements, but also contributes to a secure and stable retirement plan, regardless of your global location.

If you would like to find out more about how we can help, please email Edward Cole at ecole@cbfpusa.com.

Cross Border Financial Planning USA LLC is an investment adviser located and registered in Pennsylvania and California.  Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commonwealth of Pennsylvania or the State of California.  Cross Border Financial Planning USA LLC only transacts business in states in which it is properly registered or is excluded or exempted from registration.  A copy of Cross Border Financial Planning USA LLC’s current written disclosure brochure which discusses among other things, Cross Border Financial Planning USA LLC’s business practices, services, and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.

Information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Any mention of a particular security or type of security is not a recommendation to buy or sell that security. Investing involves risks including the possible loss of capital. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Cross Border Financial Planning USA are not tax or legal advisors, and you should discuss any tax or legal matters with the appropriate tax or legal professional.