I'm new here but have been reading avidly, as I'm trying to choose the wisest strategy and simplest technical means to distribute my IRA back to the UK.
I'm a UK citizen, now given up my Green Card so no longer a US person: I worked in the US for 15 years and built up quite a large 401k, (currently worth $400k), and I had the presence of mind to roll it over to a Fidelity IRA before I left for good five years ago.
I'm now at the age for penalty-free distributions, and want to get the cash out and back to the UK as quickly as possible, but also wanting to avoid an unnecessarily huge tax bill from a single year cashout.
Part of the reason I feel I have to hurry is because awkward and costly new changes in the conditions and practical considerations involved in non-US persons holding US IRAs seem to be cropping up every year now!
(Since I opened the IRA, as well as the FATCA introduction of 30% withholding, Fidelity themselves have 1. made the online account inaccessible to non-US IP addresses 2. Banned people with non-US addresses from buying any new mutual funds within the account 3. warned that in future, depending on jurisdiction, non-US account holders may be banned from any transactions or simply have the account closed.)
So I'm considering a four-year distribution period: during this time I won't have any other income in either the US or the UK, and this will avoid having to distribute sums over $100k, for which Fidelity require a medallion signature verification, (something that seems to be nearly impossible to achieve in the UK, or cost nearly as much as flying to the US and filling in the form in a Fidelity office!)
Ideally I'd prefer to be taxed in the UK, even though the rate may be a few percent higher, as this avoids having to apply for a refund from the IRS. But this strategy may not be available. According to the UK-US tax treaty article 17.1, periodic distributions are taxable in the state of residence (UK), but according to article 17.2, lump sum distributions are taxable in the state of origin (US) only.
However it seems that Fidelity will not allow periodic IRA distributions to foreign persons/addresses, on the grounds that 30% withholding doesn't permit it! Here's a link to the distribution form where it says this in the very first paragraph [ https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/automatic-withdrawals-ira.pdf
] Instead I'll have to do at least four annual one-time distribution requests.
This doesn't make sense to me as it surely isn't any more difficult for a computer to take 30% from 12 monthly cheques, than to take 30% from a single cheque, but leaving that aside, this seems to make it impossible to get a 0% withholding by invoking article 17.1 of the UK-US treaty?
Or does it? I know from reading Nun's excellent and informative posts over the last few days that a "lump sum" is defined by the IRS as the distribution of all the money in an IRA account in a single tax year, unlike the UK where it seems to mean simply any significant amount taken out in a single instance.
So if I applied to Fidelity on the grounds of article 17.1 for 0% withholding on a partial distribution of say, $95,000 , might they actually accept it? And if they did, then wouldn't HMRC have to define this as a lump sum (25% of my account at once) and so under UK regulations it wouldn't be taxable in the UK. Is this a loophole?
Or is it safer just to allow Fidelity to take 30% off this sum without invoking any treaty, and then get an IRS refund by filling in a 1040NR?
I am concerned about the six month delay they say these kind of refunds may involve and also about the practicalities of getting a refund (a cheque from the IRS in dollars? I'm still a bit worried about the whole idea of Fidelity sending me a dollar cheque for $90,000+ in the mail, and having to present that to a UK bank for a six week and costly procedure where they re-present the cheque to Fidelity...)
Has anyone any experience of doing this, or any suggestions about which of the above strategies are feasible (or even legal!)?