[Baptou]

Hi everyone,
I'm a french citizen, currently living in the US, considering retiring back in France in about 10 years or so, to make the most out of both countries. I'll get my permanent residency this year, still unsure about citizenship in the future.

There's still plenty of time, but I like to think about things early to better plan for the future, especially as I can take actions today that will make things easier/more optimized for the future.

I've been reading about the tax treaty between the two countries (USA/FR) and had a few questions I'd like assistance on answering:
-how are 401K/IRA withdrawals/conversions to ROTH taxed when living in France?
-how are capital gains and dividends from US source taxed when in France?

I currently max out 401k (pre and post tax via mega backdoor), HSA, backdoor roth IRA and the rest in regular brokerage. I'm basically trying to think of the best approach for my future plans.

Anyone else in a similar situation? How would you go about planning for this?

Many thanks in advance for your help,

 

[Bevdeforges]

I would be wary of taking US citizenship just before moving back to France, since that will put you on the hook for US taxes for the rest of your life.

But, as for the questions you asked:

Referring to the tax treaty, those deferred tax retirement plans are considered to be "national" pension plans. Withdrawals from those planned are taxed by the US under their tax law. If you are not a US citizen, then all withdrawals (and actually most forms of income that is US sourced) are withheld at the NRA rate of 30%. (But the good news is that you don't have to file an NR return.) On the French side, these sorts of pension payments are reported (on form 2047 - for foreign source income - as well as on the regular main tax form) and credited at French tax rates so that in essence you only pay US taxes on your pension income.

The reason that you are withdrawing (i.e. to convert to Roth) doesn't count for anything. It's the withdrawal that is taxed at its full amount as income in the year you withdraw it. (So if you are back in France without having taken US citizenship, they'll take 30% on withdrawal.)

Capital gains and dividends are reported (also on form 2047 as well as the main form) but are subject to a specific calculation that allows for taxes paid in the US on the transactions. It might make more sense to you if you take a look at the instructions for the 2047 form on the Fisc website Recherche

If you are looking into how to invest/save your nest egg after your return to France, just be aware that if you are a US citizen on your return, your US tax returns may be seriously complicated by any sort of investments made outside the US (such as assurance vie, OPCVM, PEA or other common investment vehicles).

 

[Baptou]

I would be wary of taking US citizenship just before moving back to France, since that will put you on the hook for US taxes for the rest of your life.

But, as for the questions you asked:

Referring to the tax treaty, those deferred tax retirement plans are considered to be "national" pension plans. Withdrawals from those planned are taxed by the US under their tax law. If you are not a US citizen, then all withdrawals (and actually most forms of income that is US sourced) are withheld at the NRA rate of 30%. (But the good news is that you don't have to file an NR return.) On the French side, these sorts of pension payments are reported (on form 2047 - for foreign source income - as well as on the regular main tax form) and credited at French tax rates so that in essence you only pay US taxes on your pension income.

The reason that you are withdrawing (i.e. to convert to Roth) doesn't count for anything. It's the withdrawal that is taxed at its full amount as income in the year you withdraw it. (So if you are back in France without having taken US citizenship, they'll take 30% on withdrawal.)

Capital gains and dividends are reported (also on form 2047 as well as the main form) but are subject to a specific calculation that allows for taxes paid in the US on the transactions. It might make more sense to you if you take a look at the instructions for the 2047 form on the Fisc website Recherche

If you are looking into how to invest/save your nest egg after your return to France, just be aware that if you are a US citizen on your return, your US tax returns may be seriously complicated by any sort of investments made outside the US (such as assurance vie, OPCVM, PEA or other common investment vehicles).

Thank you for your reply, this is the most detailed and helpful reply I've gotten so far, appreciate the help!

On the citizenship decision, this will mainly depend on the situation for our kids at that time, they'll be around age 10 and we want them to have the option to come back here in the future if they want to, does that sound reasonable to you? My understanding of being a citizen abroad for tax purposes is mainly that I'd be taxed on income made abroad, but my plan would actually to stop working, does it make sense to you?

Your explanation on 401k/IRA makes sense to me and is super helpful! So likely taxes will be withheld at 30% and I'll get reimbursed the following year? (because my tax bracket will most likely be under 30% on this income). My understanding if I don't leave as a citizen is that I will not pay state taxes because this will not be generated in/by the state I lived last, is this correct?

After consulting form 2047 I understand that those cap gains and dividends need to appear on tax return in France but won't be double taxed, I'll benefit from tax credit in France, is that correct?

Thank you for the extra advice on investments made outside of the US when a citizen, this is very helpful and important to take into consideration.

Really appreciate the help, thanks again!

 

[255]

Baptoa -- Of course Bev's caution concerning becoming a U.S. citizen should be examined -- but the 30% withholding tax is real. Personally, in your situation, I postulate that it would be advantageous to take U.S. citizenship to eliminate the 30% tax (which would affect dividends received within your Roth IRA wrapper.)

The trade off, in your situation, is lifetime U.S. income tax and FBAR filing requirements. If you become a citizen -- you'll be able to take advantage of favorable tax treatment for U.S. retirement arrangements versus being free of U.S. filing requirements and not having to worry about potential FATCA restrictions in France (although if you are French born, you should be able to mitigate that.) Of course for the main part, the U.S. tax filings would just be a paper work drill -- depending on your overall financial situation, you won't owe any tax.

Assuming you take U.S. citizenship, answers to your first two questions:

"-how are 401K/IRA withdrawals/conversions to ROTH taxed when living in France?" As Bev said, the conversions are irrelevant. Once the money is in the Roth IRA, it is in the Roth IRA -- it doesn't matter whether it was a direct contribution , a rollover, or a conversion.

Your second question is more nuanced: "-how are capital gains and dividends from US source taxed when in France?" Assuming, you are talking about your "regular brokerage account," First, for capital gains, it depends on the type. Real property capital gains are taxed in the country where the property is located. "Movable property" (e.g. gains from the sale of stock) is taxed in the country of residence with allowances for an adjustment in the other country.

If you avoid group investments (like mutual funds, ETFs, etc.) after you return to France, your U.S. returns shouldn't be that complicated. Just read up on the Controlled Foreign Corporation (CFC) rules and Passive Foreign Investment Company (PFIC) rules and avoid them.

The last question, in your post: "Anyone else in a similar situation? How would you go about planning for this?"

a. I would take U.S. citizenship, for the reasons mentioned above (and for a "Plan B.") 30% withholding tax can take a big bite out of your investments!

b. Secondly, I would max out my Roth IRA with direct contributions, rollovers, or conversions, possibly using the "Back Door Roth" and "Mega Back Door Roth" strategies, you mentioned. I would do this utilizing a "Roth Conversion Ladder," to mitigate my U.S. taxes. I am not familiar with your specific 401k plan, but there are means to "goose" your contributions with a solo 401k (you'd need to start your own business, even a "side hustle.") In 10 years, you'd potentially have a sizable nest egg!

c. I would close any personally owned "regular brokerage accounts," prior to moving, to mitigate any complex reporting/tax requirements between the two countries. Assuming you still have a lot of capital to deploy from closing your personal brokerage accounts -- you could consider investing in real estate or form an off-shore company (making sure to mitigate both U.S. and French CFC restrictions) to trade/invest. I would stay away from any PFICs'

With the above strategy you'll have zero U.S. taxes, if you are retired (your U.S. Social Security will be under the standard deduction limit and of course, you would have already paid all taxes owed on the Roth IRA.) Also, the tax treaty would eliminate any taxes to France. If you are not retired, but continue to work in France, you'll owe income tax to France, but will be able to exclude U.S. tax via the FEIE or FTC. Cheers, 255

 

[Baptou]

Baptoa -- Of course Bev's caution concerning becoming a U.S. citizen should be examined -- but the 30% withholding tax is real. Personally, in your situation, I postulate that it would be advantageous to take U.S. citizenship to eliminate the 30% tax (which would affect dividends received within your Roth IRA wrapper.)

The trade off, in your situation, is lifetime U.S. income tax and FBAR filing requirements. If you become a citizen -- you'll be able to take advantage of favorable tax treatment for U.S. retirement arrangements versus being free of U.S. filing requirements and not having to worry about potential FATCA restrictions in France (although if you are French born, you should be able to mitigate that.) Of course for the main part, the U.S. tax filings would just be a paper work drill -- depending on your overall financial situation, you won't owe any tax.

Assuming you take U.S. citizenship, answers to your first two questions:

"-how are 401K/IRA withdrawals/conversions to ROTH taxed when living in France?" As Bev said, the conversions are irrelevant. Once the money is in the Roth IRA, it is in the Roth IRA -- it doesn't matter whether it was a direct contribution , a rollover, or a conversion.

Your second question is more nuanced: "-how are capital gains and dividends from US source taxed when in France?" Assuming, you are talking about your "regular brokerage account," First, for capital gains, it depends on the type. Real property capital gains are taxed in the country where the property is located. "Movable property" (e.g. gains from the sale of stock) is taxed in the country of residence with allowances for an adjustment in the other country.

If you avoid group investments (like mutual funds, ETFs, etc.) after you return to France, your U.S. returns shouldn't be that complicated. Just read up on the Controlled Foreign Corporation (CFC) rules and Passive Foreign Investment Company (PFIC) rules and avoid them.

The last question, in your post: "Anyone else in a similar situation? How would you go about planning for this?"

a. I would take U.S. citizenship, for the reasons mentioned above (and for a "Plan B.") 30% withholding tax can take a big bite out of your investments!

b. Secondly, I would max out my Roth IRA with direct contributions, rollovers, or conversions, possibly using the "Back Door Roth" and "Mega Back Door Roth" strategies, you mentioned. I would do this utilizing a "Roth Conversion Ladder," to mitigate my U.S. taxes. I am not familiar with your specific 401k plan, but there are means to "goose" your contributions with a solo 401k (you'd need to start your own business, even a "side hustle.") In 10 years, you'd potentially have a sizable nest egg!

c. I would close any personally owned "regular brokerage accounts," prior to moving, to mitigate any complex reporting/tax requirements between the two countries. Assuming you still have a lot of capital to deploy from closing your personal brokerage accounts -- you could consider investing in real estate or form an off-shore company (making sure to mitigate both U.S. and French CFC restrictions) to trade/invest. I would stay away from any PFICs'

With the above strategy you'll have zero U.S. taxes, if you are retired (your U.S. Social Security will be under the standard deduction limit and of course, you would have already paid all taxes owed on the Roth IRA.) Also, the tax treaty would eliminate any taxes to France. If you are not retired, but continue to work in France, you'll owe income tax to France, but will be able to exclude U.S. tax via the FEIE or FTC. Cheers, 255

Wow thanks this is super helpful,
but the 30% withholding is a withholding right? It's not actual taxes due and will be potentially reimbursed when filing tax return if tax bracket is under 30% right?

When you say to avoid group investment fund when returning to France, you mean in France right? Because it'll complicate my US tax return? I can keep my ETF in the US and sell them over time right?

Your POV on citizenship is interesting, another reason why I'd like it is for my kids so that they can come back anytime to the US.

Closing all my brokerage before leaving will likely create a big tax bill on cap gains, ideally I'd like to live in France of those investments, is this reasonable?

 

[Baptou]

edited

 

[255]

Baptoa -- Your questions, in turn:

"but the 30% withholding is a withholding right? It's not actual taxes due and will be potentially reimbursed when filing tax return if tax bracket is under 30% right?" Not really, if you are a NRA, you would not normally have a filing requirement (there are some exceptions, but they don't appear to include your potential future situation.) About Form 1040-NR, U.S. Nonresident Alien Income Tax Return | Internal Revenue Service (irs.gov) So no tax return filed, no reimbursement -- the 30% withholding essentially becomes your settled tax.

"When you say to avoid group investment fund when returning to France, you mean in France right? Because it'll complicate my US tax return? I can keep my ETF in the US and sell them over time right?" Yes x3. However, as was mentioned earlier, if you are not a U.S. citizen, you'll take a 30% hit on withdrawals vice the favorable U.S. tax rates for long term capital gains and dividends. You'll also have a French reporting requirement, if this is a personal brokerage account.

Your statement -- "Your POV on citizenship is interesting, another reason why I'd like it is for my kids so that they can come back anytime to the US." I do not know where your kids were born, but personally, I would ensure that they had both U.S. & French citizenships.

"Closing all my brokerage before leaving will likely create a big tax bill on cap gains, ideally I'd like to live in France of those investments, is this reasonable?" Of course it is reasonable -- just a few more tax forms to file, but once you've done it once, it should become rote. (I think, if you did not take U.S. citizenship, the 30% withholding tax might be very unfavorable, especially in retirement.) Another thing to consider, down the road, is whether your current brokerages will continue to accept you as a client, when you return to France (whether you are a U.S. citizen, or not.) You can always transfer your positions, in-kind, to a broker that will accept your residency, in France.) Research now, so you are not surprised later! Cheers, 255

 

[Baptou]

Baptoa -- Your questions, in turn:

"but the 30% withholding is a withholding right? It's not actual taxes due and will be potentially reimbursed when filing tax return if tax bracket is under 30% right?" Not really, if you are a NRA, you would not normally have a filing requirement (there are some exceptions, but they don't appear to include your potential future situation.) About Form 1040-NR, U.S. Nonresident Alien Income Tax Return | Internal Revenue Service (irs.gov) So no tax return filed, no reimbursement -- the 30% withholding essentially becomes your settled tax.

"When you say to avoid group investment fund when returning to France, you mean in France right? Because it'll complicate my US tax return? I can keep my ETF in the US and sell them over time right?" Yes x3. However, as was mentioned earlier, if you are not a U.S. citizen, you'll take a 30% hit on withdrawals vice the favorable U.S. tax rates for long term capital gains and dividends. You'll also have a French reporting requirement, if this is a personal brokerage account.

Your statement -- "Your POV on citizenship is interesting, another reason why I'd like it is for my kids so that they can come back anytime to the US." I do not know where your kids were born, but personally, I would ensure that they had both U.S. & French citizenships.

"Closing all my brokerage before leaving will likely create a big tax bill on cap gains, ideally I'd like to live in France of those investments, is this reasonable?" Of course it is reasonable -- just a few more tax forms to file, but once you've done it once, it should become rote. (I think, if you did not take U.S. citizenship, the 30% withholding tax might be very unfavorable, especially in retirement.) Another thing to consider, down the road, is whether your current brokerages will continue to accept you as a client, when you return to France (whether you are a U.S. citizen, or not.) You can always transfer your positions, in-kind, to a broker that will accept your residency, in France.) Research now, so you are not surprised later! Cheers, 255

Thanks again, super helpful!
I hear people keep an US address on file for their brokerage and Bank account, would you recommend?

 

[255]

Baptou -- "I hear people keep an US address on file for their brokerage and Bank account, would you recommend?" Absolutely! I have maintained a U.S. address, for mail forwarding and as an address for my bank & brokerage accounts for nearly 30 years, while living in multiple countries. I would recommend using a service that has a street address and not just a private mail box (PMB.) Also, I'd recommend picking a provider, in a no tax state. There are many that cater to RVers and sailors, that would meet your requirements.

I would still pick a brokerage firm that is amenable to you living off-shore. Most send annual "know-your-customer" surveys annually. I have never received one from a bank, but all my brokerage firms routinely send these questionnaires. I would also "test the waters" by changing the address on all my accounts before your move.

You can also use your U.S. address for IRS filings, even if you live overseas. Cheers, 255

 

[Baptou]

Baptou -- "I hear people keep an US address on file for their brokerage and Bank account, would you recommend?" Absolutely! I have maintained a U.S. address, for mail forwarding and as an address for my bank & brokerage accounts for nearly 30 years, while living in multiple countries. I would recommend using a service that has a street address and not just a private mail box (PMB.) Also, I'd recommend picking a provider, in a no tax state. There are many that cater to RVers and sailors, that would meet your requirements.

I would still pick a brokerage firm that is amenable to you living off-shore. Most send annual "know-your-customer" surveys annually. I have never received one from a bank, but all my brokerage firms routinely send these questionnaires. I would also "test the waters" by changing the address on all my accounts before your move.

You can also use your U.S. address for IRS filings, even if you live overseas. Cheers, 255

Really appreciate the help there! The tax-free state would be to avoid state taxes on income earned abroad? Or would this also be relevant to 401k/IRA withdrawals and cap gains/dividends?

 

[255]

Baptoa -- "The tax-free state would be to avoid state taxes on income earned abroad?" Basically to eliminate state taxes overall, in the future. Some states are notorious for trying to claw taxes from former residents -- others not. A good strategy is to fill out a "part-year" resident tax return utilizing your new "no income tax state" address to show that you were changing residence. You should also withdraw any voter registration in the "old" state (you can reregister, in the new state.)

"Or would this also be relevant to 401k/IRA withdrawals and cap gains/dividends?" No effect, though it certainly would be "cleaner" for your brokerage to direct deposit 401K/IRA withdrawals into your U.S. bank account, staying within the U.S. system. Of course if you have already transferred all of your 401k assets into a Roth IRA -- you won't have any required mandatory distributions (RMDs.) Cheers, 255

 

[Bevdeforges]

Let me clarify a bit what I originally said. The 30% withholding is on all income paid out to NRA's (non-resident alien - though I hear Biden has asked that the term "alien" be removed from official use when referring to foreigners). It is the NRA tax rate for most forms of US-sourced income when paid to a non-citizen living outside the US. There is no refund unless you file a 1040 NR and have some other US sources, usually business interests. If you collect your US SS outside the US and you don't have citizenship, they will withhold 30% to pay your taxes. Period. (Well, actually it's 30% of 85% of the benefit because you do get an allowance of 15% on Social Security benefits.)

But, to convert an IRA to a Roth, if you are resident outside the US and you don't have US nationality, they'll take 30% off the top as your NR taxes due.

Now, that raises another issue. Once you are no longer resident in the US, it can become almost impossible to open any form of bank or investment account (including a new IRA) in the US. Some investment institutions will refuse to carry your account once you move outside the US (citizen or not). This used to be a minor issue, but it seems that lately more and more banks and brokers and investment houses are going that route. On the other side of the pond, many banks and brokerages in Europe will make opening an account difficult to impossible if you have US citizenship (or are a "US person" for FATCA purposes).

You mention state taxes. Voter registration cannot be used to determine tax residency in a state. This was a long fought for provision when they were trying to get voting rights for overseas residents. When you move out of the US, you cease being resident in the state you were in - a few states do try to claw back state taxes, but as long as you make a clean break from the state: sell your house, change your address, don't leave any businesses behind and as 255 says, file a part year state return for the state you are leaving, with a NR return if the state has such a thing for any tag end period (if, say, your house doesn't sell until after you have moved). But if you're not a US citizen, the state really can't do much to hang onto you once you move.

As far as your kids are concerned, if they were born in the US, they are US citizens no matter whether or not you and your spouse take citizenship before you leave. Your having citizenship after you leave the US won't help them in any way if they want to return to the US (if they don't have citizenship by the time you leave). To sponsor a family member for a visa or Green card the sponsor has to be resident in the US at the time of the visa application.

I'm a bit rushed with this - so ask away if any of these points are unclear. The issue is mainly one of differences in consideration between the citizenship consideration for a "native born" US citizen vs. taking US citizenship on voluntarily when you have every intention of later moving overseas. As always, needs to be thought through carefully.

 

[Peasant]

My understanding of being a citizen abroad for tax purposes is mainly that I'd be taxed on income made abroad...

As a US citizen you are taxed on your world wide income.
You are, however, eligible for an annual tax credit (currently $106,000 IIRC) on income earned outside the US.

 

[Baptou]

Let me clarify a bit what I originally said. The 30% withholding is on all income paid out to NRA's (non-resident alien - though I hear Biden has asked that the term "alien" be removed from official use when referring to foreigners). It is the NRA tax rate for most forms of US-sourced income when paid to a non-citizen living outside the US. There is no refund unless you file a 1040 NR and have some other US sources, usually business interests. If you collect your US SS outside the US and you don't have citizenship, they will withhold 30% to pay your taxes. Period. (Well, actually it's 30% of 85% of the benefit because you do get an allowance of 15% on Social Security benefits.)

But, to convert an IRA to a Roth, if you are resident outside the US and you don't have US nationality, they'll take 30% off the top as your NR taxes due.

Now, that raises another issue. Once you are no longer resident in the US, it can become almost impossible to open any form of bank or investment account (including a new IRA) in the US. Some investment institutions will refuse to carry your account once you move outside the US (citizen or not). This used to be a minor issue, but it seems that lately more and more banks and brokers and investment houses are going that route. On the other side of the pond, many banks and brokerages in Europe will make opening an account difficult to impossible if you have US citizenship (or are a "US person" for FATCA purposes).

You mention state taxes. Voter registration cannot be used to determine tax residency in a state. This was a long fought for provision when they were trying to get voting rights for overseas residents. When you move out of the US, you cease being resident in the state you were in - a few states do try to claw back state taxes, but as long as you make a clean break from the state: sell your house, change your address, don't leave any businesses behind and as 255 says, file a part year state return for the state you are leaving, with a NR return if the state has such a thing for any tag end period (if, say, your house doesn't sell until after you have moved). But if you're not a US citizen, the state really can't do much to hang onto you once you move.

As far as your kids are concerned, if they were born in the US, they are US citizens no matter whether or not you and your spouse take citizenship before you leave. Your having citizenship after you leave the US won't help them in any way if they want to return to the US (if they don't have citizenship by the time you leave). To sponsor a family member for a visa or Green card the sponsor has to be resident in the US at the time of the visa application.

I'm a bit rushed with this - so ask away if any of these points are unclear. The issue is mainly one of differences in consideration between the citizenship consideration for a "native born" US citizen vs. taking US citizenship on voluntarily when you have every intention of later moving overseas. As always, needs to be thought through carefully.

This is super detailed and helpful, thank you so much!!

 

[Bevdeforges]

As a US citizen you are taxed on your world wide income.
You are, however, eligible for an annual tax credit (currently $106,000 IIRC) on income earned outside the US.

Just to clarify - that $106K is the Foreign Earned Income Exclusion. Means you can "exclude" up to $106K or so (it changes every year) of foreign earned income - by which they mean salary income. It does not apply to "unearned" income, but which they mean investment income, savings account interest, etc.