IRS Publication 590-B: A Guide for Australians with US IRAs

IRS Publication 590-B is an official document from the US Internal Revenue Service (IRS) that explains the rules for taking distributions (withdrawals) from IRAs. It covers several types of IRAs, including:

• Traditional IRAs
• Roth IRAs
• Simplified Employee Pension (SEP) IRAs
• Savings Incentive Match Plan for Employees (SIMPLE) IRAs

The publication is updated annually and provides guidance on when and how you must take money out of your IRA, how those withdrawals are taxed, and what penalties may apply for early or missed distributions. While these are US regulations, Australians with US-based IRAs—whether from previous work in the US or through inheritance—need to comply with these rules and also consider how they interact with Australian tax obligations.

The rules around IRA distributions have evolved in recent years. A key change is the increase in the age at which Required Minimum Distributions (RMDs) must begin. Starting from 2026, the age at which you must start taking RMDs has increased, giving account holders more flexibility in managing their retirement savings.

• RMD Start Age: If you turn 75 after 2024, your first RMD is due by April 1 of the year following your 75th birthday.
• Penalty Reductions: The penalty for failing to take an RMD has been reduced. If you miss an RMD, the penalty is now lower than in previous years, and it may be further reduced if you correct the mistake promptly.

These changes can benefit Australians with US IRAs by allowing more time for investments to grow before mandatory withdrawals begin. However, the longer window also means more time for factors like currency fluctuations and potential US estate tax exposure to affect your account.

If you are an Australian resident with a US IRA, you need to consider both US and Australian tax rules. The US generally taxes distributions from IRAs, and the Australian Taxation Office (ATO) may also assess tax on these amounts, depending on your residency status and the terms of the US-Australia tax treaty.

Example Scenarios

1. Former US Resident, Now Australian Tax Resident

Suppose you worked in the US, contributed to an IRA, and have since returned to Australia. When you take a distribution from your US IRA:

• The US may withhold tax from your distribution, often at a reduced rate under the tax treaty.
• You must declare the distribution as foreign income on your Australian tax return.
• You may be able to claim a foreign tax offset for any US tax paid, reducing your Australian tax liability.
• If you withdraw before reaching the minimum age (usually 59½), early withdrawal penalties may apply in the US unless you qualify for an exception.

2. Inheriting a US IRA as an Australian Resident

If you inherit a US IRA from a relative, you may be subject to rules requiring the account to be distributed within a certain period, such as the 10-year rule for non-spouse beneficiaries. Each distribution may be taxed in both countries, and you’ll need to report the income to both the IRS and the ATO.

Double Taxation and the Tax Treaty

The US-Australia tax treaty aims to prevent double taxation, but you still need to report income in both countries and claim any available offsets. The details can be complex, and the way each country treats IRA distributions may differ.

Managing a US IRA from Australia requires careful planning and attention to detail. Here are some practical tips:

1. Coordinate Withdrawals

Plan your IRA distributions in years when your overall income is lower. This can help reduce your tax liability in both the US and Australia.

2. Monitor Currency Movements

Exchange rates can significantly affect the value of your withdrawals and the amount you report to the ATO. Consider timing your transfers to take advantage of favourable rates, but remember that currency markets can be unpredictable.

3. Stay on Top of Reporting Requirements

• The IRS requires you to file US tax returns (Form 1040 or 1040-NR for non-residents) if you have US-sourced income.
• The ATO requires you to report all foreign income, including IRA distributions.
• Missing or incorrect paperwork can lead to audits or penalties in either country.

4. Keep Detailed Records

Maintain copies of all account statements, US tax forms (such as Form 1099-R), and evidence of any US taxes paid. These documents are essential for claiming foreign tax offsets and for your own records.

5. Understand Penalty Exceptions

IRS Publication 590-B outlines exceptions to early withdrawal penalties, such as for disability, certain first-home purchases, or substantial medical expenses. However, these exceptions may not always align with Australian rules, so check both sets of regulations before making a withdrawal.

Both US and Australian tax rules can change, and governments may update policies to address cross-border retirement accounts. It’s important to stay informed about new developments that could affect your obligations or opportunities. If you’re unsure about your situation, consider seeking advice from a professional with experience in cross-border taxation.

What is IRS Publication 590-B?

IRS Publication 590-B is a US government document that explains the rules for taking distributions from IRAs, including when and how much you must withdraw and how those withdrawals are taxed.

Do I have to pay tax in both the US and Australia on my IRA withdrawals?

You may be subject to tax in both countries, but the US-Australia tax treaty generally allows you to claim a foreign tax offset in Australia for US tax paid on the same income.

What happens if I inherit a US IRA as an Australian resident?

If you inherit a US IRA, you may be required to withdraw the entire balance within a set period, such as 10 years. Each withdrawal may be taxed in both countries, and you must report the income to both the IRS and the ATO.

How can I avoid penalties on my US IRA distributions?

Make sure you understand the rules for Required Minimum Distributions and early withdrawals. If you miss an RMD or withdraw early without qualifying for an exception, penalties may apply. Keeping up to date with both US and Australian requirements is essential.