UN PENSION TAX IMPLICATIONS - US CITIZENS/RESIDENTS

MUST HAVE BEEN A US CITIZEN OR US RESIDENT UN STAFF MEMBER

For many UN retirees income adequacy is more important than saving on taxes. Nevertheless, you cannot ignore tax implications.

When a G4 visa retiree takes a lump sum, that lump sum is exempt from taxation, but the reduced pension annuity is subject to taxation. Thus taking a full pension would mean that the tax burden is obviously higher. Nevertheless, before giving up at this point, the UN retiree may want to work out the tax scenarios, full pension vs. reduced pension. Remember, as stated in Why is the UN Pension tax-exempt, the “cost basis” of the pension qualifies for exclusion from taxation.

For US residents and US citizens, the tax exclusion also applies to the pension fund annuity, but the exclusion limits to their own contributions. On the other hand, as the UN Pension is a Qualified Pension Plan, it seems obvious to me, that the lump sum can directly roll over to an IRA account, in which case taxes defer until withdrawals take place, usually starting not less than 70 ½ years old. If the US national takes the lump sum without rolling it over, then there will be tax implications to the extent that the lump sum exceeds the cost basis. For instance, if the lump sum is $100,000, and the cost basis equals $33,000, then only $67,000 is taxable. A participant may not want a lump sum if it taxes at higher brackets. However, US nationals/US residents may qualify for 10-year averaging. What this means is that the lump sum portion of the pension for tax purposes assumes payable over ten years, so that for the next 10 years, 1/10th of the lump sum adds to annual pension income each year.

A good calculation for US taxpayers to work out is which the better of three scenarios is:

(1) Take the lump sum/reduced pension and pay taxes on the lump sum with 10-year averaging;

(2) Take the full pension and pay taxes on a higher pension; or

(3) Take the lump sum and roll it over to an IRA and pay taxes on a reduced pension.

As you know, with an IRA, taxes are deferred on earnings in the account until the money is withdrawn. When withdrawals take place from the IRA account it taxes as if were” regular income”, the question of “basis” and partial tax-exemption is not an issue anymore. Under current US law, IRA withdrawals must commence no later than 70 ½ years of age in equal annual installments over your remaining life expectancy (as determined by US tax laws). There is no penalty for you taking larger periodic sums out of the IRA but I think there are stiff penalties if withdrawals happen before age 55, which will not be applicable to UN staff anyway.

I am no tax expert, and the laws keep changing from time to time. Therefore, you can take what I say, but always consult with a tax adviser. As an educator and writer, I just use implicit logic and not rules and regulations. You can take my writings to a tax expert and just find out whether there is some merit in what I say or I am just another nut. Which brings me to I think a not so nutty question? US citizens and residents should be able to open IRA accounts, contribute the maximum each year, and invest it for tax-deferred income. I trust they are doing it.

And a second not so nutty thought is that if you name your child/children or grandchild/grandchildren as beneficiaries they may take the IRA over their life-span starting at 70 ½ also tax deferred; sounds a great idea if the laws allow it.

Comments

[Eric Schwartz]

I'm no tax lawyer, but I think the following statement, which appeared on the blog, is wrong: "As you know, with an IRA, taxes are deferred on earnings in the account until the money is withdrawn. When withdrawals take place from the IRA account it taxes as if were” regular income”, the question of “basis” and partial tax-exemption is not an issue anymore." My reaction: I believe that basis matters when you withdraw -- that you calculate basis on distributions through form 8606 -- and that such calculations will reduce your tax liability. I'd be interested in hearing reactions to this.

[Eric Schwartz]

Clarification on my prior entry: I BELIEVE THAT THE SECOND OF THE TWO EXCERPTED SENTENCES IS INCORRECT. In short, I believe that basis matters when you begin to take withdrawals.

[Merrill]

I think basis does not matter because you already took a tax deduction when you made contributions to the IRA.