A recent Internal Revenue Service ruling now allows certain individuals to move after tax contributions from a 401(k) or IRA to a Roth IRA on a tax free basis. Fatca has caused local banks to document which of its clients are US citizens or residents and who are not. And Fatca has caused US citizens who have not filed US tax returns for a number of years to reconsider or to contemplate relinquishing their US citizenship.

401(k)’s, IRA’s and Roth IRA’s

In a recently published Notice the Internal Revenue Service has now given a road map for rolling after-tax money from a 401(k) to a Roth IRA. Employees who have put after-tax money into a 401(k) can take a complete distribution and direct the plan administrator to send the pretax dollars tax-free to a regular IRA and then roll the after-tax contributions into a Roth IRA tax-free.

The earnings on the after-tax contributions have to be rolled over to the regular IRA. So if you have made after-tax contributions for a number of years before your retirement, you can send the total contributions to a Roth tax-free.

The transfers to separate accounts must be completed at the same time and the taxpayer must expressly tell the administrator of the retirement plan that the after-tax money is to be sent to a different account. After-tax contributions are not the same as contributions to a Roth 401(k).

After-tax contributions generally make sense once you’ve hit the 401(k) contribution ceiling; $17,500, or $23,000 if age 50 or older. In 2015 the contribution ceiling is $18,000 and $24,000, respectively. The amount of after-tax contributions is subject to limits.

There is a $52,000 ceiling ($57,500 if 50 or older) on the amount of contributions that can be made to a retirement plan on a worker’s behalf. Employer and employee contributions count toward the cap. So if an employee age 50 or older puts in the $23,000 maximum and the company contributes another $7,000, the employee can make up to $27,500 of after-tax contributions.

This strategy doesn’t apply to after-tax funds in a regular IRA. You aren’t able to segregate just the nondeductible contributions and roll them tax-free into a Roth. In this situation, only a portion of the amount rolled over to the Roth will be tax-free, based on the ratio of your nondeductible contributions to the total in all your regular IRAs.

Fatca and Foreign Banks and Financial Institutions

It has come to our attention that both HSBC and Butterfield Bank have sent letters to customers that they have identified as possibly being US citizens or resident aliens requesting that they confirm and document their tax status as either a US person or Non US person for US Federal income tax purposes. HSBC and Butterfield require a signed certification as well as a completed Form W-9 from US persons.

Banque Internationale a Luxembourg (Suisse) SA also requires clients to sign an “authorisation to disclose customer and account data to the IRS” or any other competent authority, to waive any protection or right under Swiss bank-client confidentiality law. Failure to sign the authorisation results in termination of the banking relationship.

Renunciation of United States Citizenship

In addition to the “exit tax” that certain US citizens and resident aliens are subject to on renunciation the State Department recently announced that the “fee” associated with renunciation will increase from $450 to $2,350.

If You Renounce Your US Citizenship Where Do You Go?

For those that have dual citizenship that is not a problem? But what if you do not? One solution is to buy citizenship in another country. Malta recently announced a citizenship by investment programme. In November 2013 the Maltese Citizenship Act of the laws of Malta were amended to provide the framework for the Legal Notice 47 of 2014 that creates Malta citizenship subject to 5 requirements. The applicant must pass the “fit and proper test”, that is have a clean criminal record and be in good health, contribute a non-refundable 650,000 euros to a Malta government fund, invest 150,000 euros in government bonds for five years, commit to retaining a residence in Malta for five years by either buying a property worth at least 350,000 euros or renting a property with a minimum annual rent of 16,000 euros and demonstrate a genuine link with Malta for one year. The period starts to run from the first visit of the applicant who will be issued a one-year residence permit in what was stated “as a impressively short time frame”.

Where else? In 2013 CNN did a report on where to buy citizenship and books such as Tax Havens and Second Citizenship can readily be found on the internet.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (I) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of ETS Ltd, PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com