IRA contributions by foreign nationals: long-term investments with short-term returns.

• Author: Koch, Artemis Velahos
• Position: Individual retirement account

Individual retirement accounts (IRAs) provide a unique opportunity for foreign nationals in the United States. Generally, IRAs are available to individuals who earn below a certain income amount or who are not covered (or eligible to be covered) by a U.S. qualified retirement plan. Since many company pension/retirement plans exclude individuals on temporary assignments from participating these individuals are then eligible to make deductible IRA contributions. These contributions provide a direct offset to taxable earned income and would continue to earn interest and/or dividends that would not be currently taxed in the United States. When such an individual receives a distribution from an IRA, it is then taxed at normal U.S. graduated rates. If the individual were to take the money before reaching age 59 1/2, in addition to regular tax, he would pay a 10% penalty.

The reason an IRA contribution is an especially good opportunity for a foreign national is that he would receive a tax benefit in the year the contribution was made at his highest marginal tax rate; however, in the year the contribution is withdrawn from the account, assuming the foreign national is no longer a permanent U.S. resident, the first $2,350 (personal exemption available to non-resident aliens) would be tax free, and any remaining distribution would be taxed according to the graduated tax brackets, starting with 15%. Even if the foreign national were to receive the distribution before reaching age 59 1/2, the 10% penalty plus a 15% regular tax would still be lower than the benefit the individual received in the year of contribution, and the tax payment would have been deferred.

Another reason that IRA contributions provide a unique opportunity, particularly to foreign nationals from the United Kingdom, is the possibility that all tax, including the 10% penalty on early withdrawal, may not apply to the distribution. This position is based on IRS Letter Rulings 8422069 and 92534049. This second ruling allowed a U.K. citizen/resident to apply paragraph 1 of Article 22 (Other Income) of the U.S.-U.K. Income Tax Convention to the amount distributed from an IRA.

The facts...