What Each US Account Becomes in Foreign Hands

The same million dollars arrives very differently depending on the wrapper it sat in the day you died.

Traditional 401(k), IRA, or annuity.

Pre-tax money is income in respect of a decedent: no step-up, income tax as it comes out (section “The Deduction Almost Nobody Claims: §691(c)”), and the same ten-year clock that binds a US heir (section “Tax Planning for Inherited IRA”). For a nonresident alien heir the US collects at the source. IRC §1441, “Withholding of tax on nonresident aliens” has the custodian withhold a flat 30% of every distribution, on the gross amount, with no brackets and no deductions. The pension article of an income tax treaty can cut that rate, sometimes to zero with the heir’s country taxing instead, but only once the heir files a Form W-8BEN the custodian accepts. With no treaty, or a suspended one—Russia’s, since August 2024—the 30% stands, and the heir’s own country may tax the same withdrawal again. Two practical traps make it worse: many US custodians will not open an inherited IRA for a nonresident, and a 401(k) that cannot roll the money into one may pay it out in a single taxable lump.

Roth IRA or Roth 401(k).

Once the account is past its five-year mark, a distribution is tax-free in the United States to anyone, nonresident included (IRC §408A(d)(1), “Roth IRAs”), so nothing is withheld. The Roth label, however, is a US invention. Canada’s treaty honors it for a Roth owner who moves there; most countries see a foreign account paying out years of growth and tax it like one. Assume the heir’s country taxes at least the earnings unless a treaty says otherwise.

Taxable brokerage account.

Have the executor sell it inside the estate and send cash. The step-up under IRC §1014 applies whatever the heir’s citizenship, so the US forgets your gain and the sale costs almost nothing. Hand over the shares instead and the heir’s country may not forget it. India values an inherited asset at the cost to the previous owner, and Germany puts the heir in the decedent’s shoes for capital gains (EStG §20(4)); either way the heir pays tax at home on the gain you built and the US just forgave. US funds add a second problem. Many countries penalize their residents for holding US-domiciled funds the way the PFIC rules penalize you for holding foreign ones (section “Foreign Mutual Funds and the PFIC Tax Minefield”). The UK taxes the gain on a fund without UK reporting status as income rather than capital gain, Italy taxes US ETFs at income-tax rates up to 43% instead of its 26% rate on investments, and EU rules stop retail investors from buying more of them. Individual stocks escape the fund rules. They do not escape the basis rules, or the heir’s own US estate tax described below.

Bank deposits and Treasuries.

For a nonresident alien, interest on US bank deposits and portfolio interest on Treasuries are exempt from US income tax (IRC §871, “Tax on nonresident alien individuals”), and neither counts toward the heir’s own US taxable estate (IRC §2105(b), “Property without the United States”). A money market fund is not on this list: it is a US fund, so it counts as US stock. Check the sweep: a brokerage that parks idle cash in a money market fund rather than a bank deposit holds exactly the wrong cash.

US real estate.

The worst asset to hand a foreign heir. Rent is taxed in the US; on a sale FIRPTA withholding takes 15% of the gross price at closing (section “Buying Real Estate from Foreign Persons: FIRPTA Withholding and Exceptions”); and the property sits in the heir’s own US taxable estate for as long as they own it. Unless the heir plans to live in it, have the estate sell it.

Life insurance.

The death benefit is income-tax-free to any beneficiary under IRC §101(a). It arrives as cash, carries no basis question, and nothing is withheld. It is in your US estate unless an ILIT owns the policy (section “Irrevocable Life Insurance Trusts (ILITs)”), and the heir’s country may count it as part of the inheritance (Germany does). As a way to deliver a fixed sum across a border, nothing else on this list comes close.

So who gets the IRA? Run the numbers per heir instead of assuming. A California nephew earning $250,000 who draws a $1 million inherited IRA over ten years pays 35% federal plus 9.3% state on each draw, about 44%. A niece abroad pays the 30% withheld at source plus whatever her own country adds after crediting the US tax: nothing more where her home rate is below 30% and the credit works, a second full layer where it does not. Give the pre-tax account to whichever heir’s number is lower. Give the Roth to a US heir, the only one guaranteed to receive it tax-free. Then equalize after tax. Beneficiary forms that give one heir $1 million of IRA and another $1 million of cash have not treated them equally. The IRA passes outside your will, so the fix lives in the will or trust: a clause directing the executor to divide the rest of the estate so that every heir ends up with the same after-tax value.