Can a Non-U.S. Citizen Be a Beneficiary of an IRA?

Individual Retirement Arrangements (IRAs) are common savings vehicles for retirement, offering potential tax advantages. A frequent question concerns the eligibility of non-U.S. citizens as beneficiaries. It is permissible to designate a non-U.S. citizen as an IRA beneficiary, but specific considerations arise, particularly regarding U.S. tax laws and asset distribution.

Naming a Non-U.S. Citizen as an IRA Beneficiary

Naming an IRA beneficiary ensures assets transfer according to the owner’s wishes. U.S. citizenship or residency is not a prerequisite; individuals of any nationality can be named.

This applies universally across various types of IRAs, including Traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs. Designating a non-U.S. citizen is similar to naming any other individual. IRA owners complete a beneficiary designation form from their custodian, specifying primary and contingent beneficiaries.

A primary beneficiary is the first in line to inherit the IRA assets, while contingent beneficiaries receive the assets if the primary beneficiary is no longer living or declines the inheritance. Reviewing these designations periodically ensures they align with current wishes. The main eligibility criterion for an IRA beneficiary is that they are an identifiable individual or entity.

U.S. Tax Considerations for Non-U.S. Citizen Beneficiaries

Inheriting an IRA as a non-U.S. citizen involves distinct U.S. tax implications that differ from those applicable to U.S. citizen beneficiaries. These considerations primarily revolve around U.S. estate and income tax, with tax treaties often playing a significant mitigating role.

U.S. estate tax may apply to IRA assets when a U.S. citizen or resident IRA owner passes away and a non-U.S. citizen inherits the account. Unlike U.S. citizens who have a substantial federal estate tax exemption, non-resident aliens face a much lower exemption of $60,000 for U.S.-situated assets, including IRAs. Any value exceeding this $60,000 threshold may be subject to U.S. estate tax at rates that can reach up to 40%. These rules are outlined in Internal Revenue Code Section 2101.

Distributions from an inherited IRA to a non-resident alien are subject to U.S. income tax. These distributions are classified as Fixed or Determinable Annual or Periodical (FDAP) income, which is subject to a flat 30% U.S. income tax rate. This 30% tax is withheld at the source by the IRA custodian, as mandated by Section 1441. This income is not considered Effectively Connected Income (ECI) unless the beneficiary is actively engaged in a U.S. trade or business, meaning deductions are not allowed against these distributions.

Bilateral tax treaties between the United States and the beneficiary’s country of residence can significantly alter the U.S. tax treatment of inherited IRA distributions. These treaties often provide for a reduced U.S. income tax withholding rate, or even an exemption, on pension and annuity payments. For example, some treaties may reduce the 30% rate to 15% or 0%, depending on the specific treaty provisions. Claiming these treaty benefits requires the non-resident alien beneficiary to submit IRS Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals),” to the IRA custodian.

Distributing IRA Assets to Non-U.S. Citizen Beneficiaries

Receiving distributions from an inherited IRA involves specific procedural steps and documentation. Upon the IRA owner’s death, the beneficiary must contact the IRA custodian to initiate the transfer.

Beneficiaries need to provide several documents to the IRA custodian, including a certified copy of the IRA owner’s death certificate and the custodian’s beneficiary claim forms. A U.S. tax identification number is a requirement for tax reporting, which could be a Social Security Number (SSN) if the beneficiary has one, or an Individual Taxpayer Identification Number (ITIN).

Inherited IRA distributions are subject to specific rules established by the SECURE Act, particularly for non-spouse beneficiaries. If the original IRA owner died in 2020 or later, most non-spouse beneficiaries, including non-U.S. citizens, are subject to the “10-year rule.” This rule requires the entire inherited IRA balance to be distributed by December 31st of the year containing the 10th anniversary of the original owner’s death.

If the original owner died on or after their Required Beginning Date (RBD), annual Required Minimum Distributions (RMDs) may also be required during the 10-year period, with the full account depleted by the end of the tenth year. Funds are transferred internationally via wire transfers or checks, depending on the custodian’s capabilities and the beneficiary’s banking arrangements.

Proactive Steps for IRA Owners

IRA owners planning to name a non-U.S. citizen as a beneficiary can take proactive steps to streamline the inheritance process and mitigate potential tax burdens. Integrating IRA beneficiary designations into an overall estate plan ensures retirement assets align with broader wealth transfer goals outlined in wills and trusts.

Establishing a trust can manage inherited IRA assets for non-U.S. citizen beneficiaries. For a non-citizen spouse, a Qualified Domestic Trust (QDOT) may allow the estate to claim the unlimited marital deduction for U.S. estate tax purposes, which is otherwise not available for transfers to non-citizen spouses. For other non-citizen beneficiaries, a discretionary trust can control the timing and amount of distributions, potentially mitigating income tax impacts and protecting assets.

Researching applicable tax treaties between the United States and the beneficiary’s country of residence helps anticipate and plan for reduced U.S. income tax withholding rates on future distributions. Given the complexities of international tax laws and estate planning, seeking professional advice is recommended. Consulting with a financial advisor, estate planning attorney, or tax professional specializing in international tax law provides tailored guidance and ensures compliance.