Wondering if this is a good idea or not.
Dual US/Canadian citizen, resides in Canada with non-USC spouse.
Commutes to work in US -> employer 401K
If I designate my spouse as beneficiary, I expect 30% withholding on disbursement(s) when she inherits, correct?
She would have to get an EITN and file IRS return, correct?
Would she have option of rolling into IRA or leaving in 401K and taking gradual disbursements?
If I don't designate any beneficiary ( assuming plan allows this ) then it becomes part of my estate ( and presumably taxed somehow ); I could leave everything in my estate to her. It would have to go through Ontario probate, of course, and I have to assume it would be taxed, but I can't figure out *how* it would be taxed.
I would not have enough to hit the current estate tax limits.
Since it's pre-tax money I can't imagine the IRS is going to let an alien spouse walk away with it...
What's the right way to do this?
Designating non-USC spouse as 401K benificiary
Moderator: Mark T Serbinski CA CPA
First off whether or not you name a beneficiary, your 401(k) will go to someone, through your will.401(k) monies cannot escape income tax, and giving it to a specific person allows that person to withdraw the monies at a slow rate, based on their life expectancy. Leaving it in the estate requires it to be collapsed in five years max.
Non-resident inheritors could result in estate tax issues
Non-resident inheritors could result in estate tax issues
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
My non-USC, non resident, spouse will/must get the proceeds either way.
Difference is if no 401k beneficiary, estate inherits and from what I've just read, would pay tax as if it entire amount was withdrawn in lump sum. I would think this could be at a higher rate than 30% since standard income tax rates apply ( so it depends on amount, but beyond $190K the rates become 33%, 35%, 39.6% ).
My spouse would then be left 100% of estate after taxes.
If you had less than 190K, it seems you might be better off, in this case, to have the estate inherit, pay the tax, which would be less than 30%, and then spouse inherits proceeds of estate. But beyond a certain amount, you'd be better off to name her as beneficiary, the 30% she will pay is less than what the estate would have paid. Additionally, you save probate, and she will have option of rolling into IRA or otherwise deferring withdrawls, although since she will always pay the flat 30% this matters less. Allows tax free growth, though.
Is this an accurate summary?
If so I think I'm at the point where she needs to be beneficiary.
Difference is if no 401k beneficiary, estate inherits and from what I've just read, would pay tax as if it entire amount was withdrawn in lump sum. I would think this could be at a higher rate than 30% since standard income tax rates apply ( so it depends on amount, but beyond $190K the rates become 33%, 35%, 39.6% ).
My spouse would then be left 100% of estate after taxes.
If you had less than 190K, it seems you might be better off, in this case, to have the estate inherit, pay the tax, which would be less than 30%, and then spouse inherits proceeds of estate. But beyond a certain amount, you'd be better off to name her as beneficiary, the 30% she will pay is less than what the estate would have paid. Additionally, you save probate, and she will have option of rolling into IRA or otherwise deferring withdrawls, although since she will always pay the flat 30% this matters less. Allows tax free growth, though.
Is this an accurate summary?
If so I think I'm at the point where she needs to be beneficiary.
A non-residenspouse could inherit the 401 nd ten use the treaty to reduce tax to 15% if named and withdrawn over time. This would not be the case if unnamed.
There will be estate tax issues since she is nonresident so Bette to investigate avoiding/mitigating those
There will be estate tax issues since she is nonresident so Bette to investigate avoiding/mitigating those
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing