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R. Klein, EA
R. Klein, EA, Enrolled Agent
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I worked in the US for 5 years. Then I moved back to Mexico

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I worked in the US for 5 years. Then I moved back to Mexico but I still have money in my 401K. My question is about taking that money out and the tax implications.
I know Mexico and the US have a Tax Treaty that I could benefit from. Also I haven't had a job or income for 1.5 years, right now I'm a student, will that help getting a lower tax rate when I take the money out?.

Randalltax : Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.
Randalltax : i cannot help you with the Mexico side, but if you take the money out of the plan, it will be subject to US tax. In addition, if you are younger than 59-1/2, it will be subject to a 10% penalty.
Randalltax : since there are no "qualified plans" in Mexico and the earnings have never been taxed in the US, this is taxed like regular wages from the US and is not subject to treaty, say like Social Security benefits.
Randalltax : The 401k is a tax deferred, not tax free plan.
Randalltax : if you take out just a small amount per year, not including any penalty, you may be in a very low or no tax rate. Think of any money you take out as though you were paid a wage from a US company in the year of distribution.

Ok, thanks. So, since I don't have any other income, and I have 21,000 in the 401k, what would be the tax bracket I would fall into?

Randalltax :

If you are a Non-Resident alien, and you are single, about half of that amount is taxed at 10% and the rest at 15%. The tax bracket changes at $8700 of taxable income from 10% to 15%.

Randalltax :

If you take about half out in one year and the rest in the following year, you will stay in the 10% bracket.


Awesome! Just one more thing, reading the United States - Mexico Income Tax Convention (Found here: it has some parts that caught my attention: Article 15 is about Dependable Personal Services and it says in part 2: "

Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in a 12 month period" And also Article 17: Limitation of Benefits: "

1. A person that is a resident of a Contracting State and derives income from the other Contracting State shall be entitled under this Convention to relief from taxation in that other Contracting State only if such person is:

a) an individual;" Do you think I can use any of these articles in the W8BEN form for a reduced rate? Thanks and that would be all.

Randalltax :

You may be eligible for relief from double taxation in Mexico, but you would owe the US tax first. There is no reduced rate on the US side.

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