I am from Europe and a US tax resident living in MN. In 2024, I withdrew $70,000 from my European 401k. My income was around $60,000. How much will I pay in taxes?

[hafblik]

I already paid taxes on my $60,000 salary, so I only need to know about the 401k withdrawal.

[Opus 17]

You don't have a 401k from Europe.  You might have a similar type of arrangement, but it will be set up under the laws of your home country, and the taxes will be determined by exactly what kind of account it is, what country it is.  Please give us those details.

@pk

At worst, it will be fully taxed in the US just like withdrawals from a US 401k.  However, there may be other possible outcomes, depending on the facts. 

[hafblik]

Thanks for the quick reply. It's "sereignasparnadur" in Icelandic, which means personal retirement savings. In Iceland, it's taxable like any income when you withdraw it after age 60. Since I'm a US tax resident, I didn't pay any taxes there. I assume it will then be taxed like a 401k in the US, which is around 25%. Is that correct?

[Opus 17]

If this is the Icelandic equivalent of US Social Security, and if there is a tax treaty between the US and Iceland, then you may have the option of either, 

1. paying tax to Iceland as if this was Icelandic social security, and not paying tax in the US, or

2. ignoring Iceland and paying tax on the US as if it was income from a private trust (that means as ordinary income, at 12%, 22%, 24%, or higher, depending on your income and tax bracket).  It is likely also taxable in your state, too, since states don't usually have tax treaties with foreign governments.

But I want to wait for the real expert on foreign tax issues to comment, I left him or her a note. 

[hafblik]

OK, thanks! I did find the TAX CONVENTION WITH ICELAND, and here are the key points from the treaty relevant to an Icelandic citizen living in the US, being a US tax resident, and having to pay taxes in the US on income from an Icelandic pension savings account are:

General Rules of Taxation (Article 4): A resident of one Contracting State (the US) may be taxed by the other Contracting State (Iceland) on income from sources within that other Contracting State (Iceland). ​

Relief from Double Taxation (Article 5): To avoid double taxation, the US shall allow a credit against the US tax for the appropriate amount of Icelandic tax paid on the income. ​

Private Pensions and Annuities (Article 24): Pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States (the US) in consideration of past employment shall be taxable only in that Contracting State (the US). ​

Therefore, the income from the Icelandic pension savings account will be taxable only in the US, and the individual can claim a credit for any Icelandic tax paid on that income to avoid double taxation.

[Opus 17]

@hafblik 

Yes, that is the general rule for all overseas income and taxation. If you are required to pay tax on this money to Iceland, and if you also report it as taxable in the US, the US will give you an offsetting credit.

However, if this is the equivalent of government social security, there may be special rules.  Let's wait for the real expert. @pk