Fidelity IRA distribution to UK-periodic No-no!

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!)?

I don't know the answers but am interested as I am a Fidelity IRA Account holder living in the UK.  Currently we still have a US address but in the next 2 or 3 of years will move out completely. 

I am a UK/US citizen, and have been living in the UK for the last 3 months and have had no problem logging on from a non-US ip address so Fidelity must be denying access only to account holders with foreign addresses who are attempting to log on from outside the US.

I may be slightly exaggerating the problem with access to Fidelity from non-US locations.

I was very apprehensive about getting locked out of my account back in 2014 or thereabouts, when these restrictions to operating accounts online for non-US persons began to be communicated by Fidelity. At the same time I also read on another forum that a person in a similar position  got this message when trying to access his account from overseas:

"You are visiting Fidelity.com from outside of the United States and you must accept the International Usage Agreement before you can proceed.
This web site is intended to be made available only to individuals in the United States. Nothing on this site shall be considered a solicitation to buy or an offer to sell a security, or any other product or service, to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the laws of such jurisdiction and none of the securities, products or services described herein have been authorized to be solicited, offered, purchased or sold outside of the United States of America. By using this site, you consent to the use of cookies which collect information about site visitors. To continue to this site, you must acknowledge that you understand and agree to these terms of use by clicking "I Accept" below."

From then on  I only logged on using a VPN that gives me an apparent US IP address, to avoid drawing attention to my non-US status.  So I agree it may be perfectly possible to log in from abroad, I just didn't want to risk evoking any sort of punitive or awkward response.

I may be slightly exaggerating the problem with access to Fidelity from non-US locations.

I was very apprehensive about getting locked out of my account back in 2014 or thereabouts, when these restrictions to operating accounts online for non-US persons began to be communicated by Fidelity. At the same time I also read on another forum that a person in a similar position  got this message when trying to access his account from overseas:

"You are visiting Fidelity.com from outside of the United States and you must accept the International Usage Agreement before you can proceed.
This web site is intended to be made available only to individuals in the United States. Nothing on this site shall be considered a solicitation to buy or an offer to sell a security, or any other product or service, to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the laws of such jurisdiction and none of the securities, products or services described herein have been authorized to be solicited, offered, purchased or sold outside of the United States of America. By using this site, you consent to the use of cookies which collect information about site visitors. To continue to this site, you must acknowledge that you understand and agree to these terms of use by clicking "I Accept" below."

From then on  I only logged on using a VPN that gives me an apparent US IP address, to avoid drawing attention to my non-US status.  So I agree it may be perfectly possible to log in from abroad, I just didn't want to risk evoking any sort of punitive or awkward response.

I seem to recall and agreeing to that international agreement when first logging on from abroad. (last year we spent 5 months in Canada, and the year before 5 months in Australia).

As a non-US citizen I can understand your concern.

I use a VPN for other situations but as far as I'm concerned with this I'd rather be honest and not pretend to be in the country when using financial accounts.  I also log onto my Vanguard brokerage and bank account from abroad without using a VPN.

Going by the rubric of the W4-P your payments would be classified as periodic if they are taken over a period longer than one year

Periodic payments. Withholding from periodic payments of a
pension or annuity is figured in the same manner as withholding
from wages. Periodic payments are made in installments at
regular intervals over a period of more than 1 year. They may be
paid annually, quarterly, monthly, etc.

So we should apply Article 17.1 and you would file a W-8BEN with Fidelity claiming zero withholding and then declare 90% of the pension payment for UK taxation. Unfortunately US administrators often simply withhold 30% as it's an overseas payment and don't apply the treaty modification to the withholding rate for an NRA living in the UK. In that case you'd still have to pay the UK tax on 90% of the gross payment and then claim the 30% withholding back by filing a 1040NR

No-one knows what "lump sum" means. You can take any reasonable position but do assume it may be challenged, because the treaty is so badly drafted and HMRC refuse to provide guidelines on their interpretation.

Going by the rubric of the W4-P your payments would be classified as periodic if they are taken over a period longer than one year

So we should apply Article 17.1 and you would file a W-8BEN with Fidelity claiming zero withholding and then declare 90% of the pension payment for UK taxation. Unfortunately US administrators often simply withhold 30% as it's an overseas payment and don't apply the treaty modification to the withholding rate for an NRA living in the UK. In that case you'd still have to pay the UK tax on 90% of the gross payment and then claim the 30% withholding back by filing a 1040NR

Thanks!  I do understand that you are using the instructions in the W4-P form to define what the IRS considers as periodic payments, even though the W4-P form can't be used by non-resident aliens.

 I suppose this will come down in the end to totally subjective interpretation.  In the W4-P it says that "Distributions from an IRA that are payable on demand are treated as nonperiodic payments" so the fact that I would have to fill out a new one time distribution form each year, to get each payment could render them arguably non-periodic, (and making them at  at slightly different , irregular, intervals for slightly different amounts would almost guarantee this definition applied.)

It's a bit complicated by the fact that in the UK tax treaty the difference between a lump sum and a pension isn't clearly defined, and the difference between them is not actually based on any definition of periodicity, or even a mention of it.

Article 17.1 just says "Pensions and other similar remuneration beneficially owned by a resident of a
Contracting State shall be taxable only in that State."

And article 17.2, specifically designed to avoid lump sum payments from US plans being paid tax free to people who just move to the UK, doesn't define "lump sum" at all.

"Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment
derived from a pension scheme established in a Contracting State and beneficially owned by a
resident of the other Contracting State shall be taxable only in the first-mentioned State."

EDIT:  I'm wrong here. In the technical explanation of the treaty it says "While the term "pension" generally would include both periodic and lump-sum payments, paragraph 2 of the Article provides specific rules to deal with lump-sum payments" . This suggests as a rule of thumb anything non-periodic could validly be argued to be a "lump sum".

But ultimately if US administrators generally, or even often, ignore genuinely applicable tax-treaty based requests for 0% withholding, then I suppose I should just not even request it.

In any case I would be trying really hard to avoid any possibility of incurring the situation you've just suggested I might trigger, that having to pay tax in the US and the UK, and then having to claim a refund from the IRS, which to me represents the worst of all possible worlds!

I should probably then just not even try to claim tax treaty based 0%  wittholding, take the hit of 30% from the IRS, and reclaim it .

I would definitely not pay HMRC, as I would call these lump sum payments on my UK self assessment, and mention that they were taxed already.

The fact they bothered to write article 17.2  does suggest to me that  significant sums taken from US retirement plans as a bulk single payment do fall under the UK tax-free lump sum definition, or they wouldn't have added this clause to prevent a tax-free windfall to US persons moving to the UK.

I seem to recall and agreeing to that international agreement when first logging on from abroad. (last year we spent 5 months in Canada, and the year before 5 months in Australia).

As a non-US citizen I can understand your concern.

I use a VPN for other situations but as far as I'm concerned with this I'd rather be honest and not pretend to be in the country when using financial accounts.  I also log onto my Vanguard brokerage and bank account from abroad without using a VPN.

 I agree about honesty. I'm not pretending to be a US person: Fidelity have my UK address and know I'm abroad. I just didn't want to rub it in by flagging some automated system!

I should probably then just not even try to claim tax treaty based 0%  wittholding, take the hit of 30% from the IRS, and reclaim it .

I would definitely not pay HMRC, as I would call these lump sum payments on my UK self assessment, and mention that they were taxed already.

Remember that Article 17.2 is not in the exceptions to the Savings Clause and so HMRC can tax your foreign pensions payments according to domestic law without regard to the treaty.

Thanks!  I do understand that you are using the instructions in the W4-P form to define what the IRS considers as periodic payments, even though the W4-P form can't be used by non-resident aliens.

 I suppose this will come down in the end to totally subjective interpretation.  In the W4-P it says that "Distributions from an IRA that are payable on demand are treated as nonperiodic payments" so the fact that I would have to fill out a new one time distribution form each year, to get each payment could render them arguably non-periodic, (and making them at  at slightly different , irregular, intervals for slightly different amounts would almost guarantee this definition applied.)

It's a bit complicated by the fact that in the UK tax treaty the difference between a lump sum and a pension isn't clearly defined, and the difference between them is not actually based on any definition of periodicity, or even a mention of it.

Article 17.1 just says "Pensions and other similar remuneration beneficially owned by a resident of a
Contracting State shall be taxable only in that State."

And article 17.2, specifically designed to avoid lump sum payments from US plans being paid tax free to people who just move to the UK, doesn't define "lump sum" at all.

"Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment
derived from a pension scheme established in a Contracting State and beneficially owned by a
resident of the other Contracting State shall be taxable only in the first-mentioned State."
But ultimately if US administrators generally, or even often, ignore genuinely applicable tax-treaty based requests for 0% withholding, then I suppose I should just not even request it.

In any case I would be trying really hard to avoid any possibility of incurring the situation you've just suggested I might trigger, that having to pay tax in the US and the UK, and then having to claim a refund from the IRS, which to me represents the worst of all possible worlds!

I should probably then just not even try to claim tax treaty based 0%  wittholding, take the hit of 30% from the IRS, and reclaim it .

I would definitely not pay HMRC, as I would call these lump sum payments on my UK self assessment, and mention that they were taxed already.

The fact they bothered to write article 17.2  does suggest to me that  significant sums taken from US retirement plans as a bulk single payment do fall under the UK tax-free lump sum definition, or they wouldn't have added this clause to prevent a tax-free windfall to US persons moving to the UK.

You are assuming too much on UK tax. HMRC do not agree to the US Treasury Technical Explanation (as the UK did not write it) & the UK rules on pension payments changed substantially in 2015; so you will want to decide if the payments are more similar to flexi-access drawdown or an UFLPS.

How relevant are UK pension rules to a distribution from an IRA?.........Obviously the US has distribution rules that have to be followed, but once the money is distributed wouldn't it just be treated as foreign income and 90% of it taxed because it comes from a pension and in this context an IRA is a pension account.

As far as a lump sum is concerned I tend to use the US definition of it being a single distribution of the entire account value. If there is a plan to spread the distributions out over more than a year and they are of similar sizes then it's a periodic distribution.

You can use any definition of a lump-sum distribution (LSD) you like; but HMRC may not agree. I think there is agreement that a complete distribution during lifetime is an LSD; there is no certainty about any other payment at all. What HMRC argue is that you look at the nature of the payment under both local (US) and UK law to decide whether the payment is an LSD. Any such position requires a legal analysis; and HMRC and courts in the UK may ultimately disagree.

Your view, nun, was valid historically but is not HMRCs current position.  We don't have to agree with HMRC but need to think about their reaction.

How relevant are UK pension rules to a distribution from an IRA?.........Obviously the US has distribution rules that have to be followed, but once the money is distributed wouldn't it just be treated as foreign income and 90% of it taxed because it comes from a pension and in this context an IRA is a pension account.

As far as a lump sum is concerned I tend to use the US definition of it being a single distribution of the entire account value. If there is a plan to spread the distributions out over more than a year and they are of similar sizes then it's a periodic distribution.

I was just writing a reply that in part concerned this issue .

In the current HMRC double taxation manual there is a page on pensions, which specifically talks about IRA distributions, and on the  same page it describes the the tax treaty provisions on the treatment of lump sums from both US and UK pension schemes, which it clearly defines an IRA as.

This strongly suggests to me that HMRC have a specific view that a lump sum payment can exist from a US scheme, as well as a UK scheme, and it has a view that they should be treated in a certain way.  I do understand the manuals are not binding though.

It also suggests that the saving clause is mostly to help the US exert its citizenship based taxation regime rather than to permit the HMRC to decide to ignore the tax treaty whenever they feel like it, (but I wouldn't stake my life on that!)

https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19876a

"Under the old Agreement, a lump-sum payment from a pension scheme was taxable only in the country of residence. So if an individual moved from the US to the UK before receiving a lump sum from a US pension scheme, they would be taxable on the lump sum neither in the US (because of the treaty) nor in the UK (which does not tax lump sums anyway).

The new provision prevents this occurring by providing that a lump-sum payment derived by a resident of one State from a pension scheme established in the other State shall be taxable only in that other State."

The provision preserves the exemption from income tax of a lump sum relevant benefit where it is paid by a UK approved pension scheme to a beneficial owner who is a US resident. However, Article 1(4) will apply in respect of US citizens as the provisions of Article 17(2) are not amongst those listed at Article 1(5). So the US are able to tax lump sums received by US citizens from UK schemes."

I think there is agreement that a complete distribution during lifetime is an LSD; there is no certainty about any other payment at all. What HMRC argue is that you look at the nature of the payment under both local (US) and UK law to decide whether the payment is an LSD. Any such position requires a legal analysis; and HMRC and courts in the UK may ultimately disagree.

Your view, nun, was valid historically but is not HMRCs current position.  We don't have to agree with HMRC but need to think about their reaction.

So a 72t type arrangement that takes substantially equal payments over an expected lifetime assuming an interest rate which should make the account value zero at the expected mortality date would be considered a LSD by HMRC?  That's really weird

I think we all have to agree that "lump sum" has no agreed definition that applies on both sides of the Atlantic, and that outcomes of any strategy are uncertain.

I actually wish I wasn't with Fidelity, as the complexity arises solely from their arbitrary refusal to allow periodic distributions to NRAs.

If I were able to ask for, say, equal distributions annually over a five or ten years period, this would clearly be a pension, taxable in the UK, to which tax-treaty defined 0% withholding would apply, and which I could simply deal with on my HMRC self-assessment.

The fact that Fidelity could just decide not to apply the 0% withholding, even if completely justified under the treaty, does add a bit of complexity to even this scenario though. My limited dealings with Fidelity, and their stated refusal to allow periodic distribution forms to apply to NRAs for no necessary reason,does make me think they wouldn't be responsive to or knowledgeable about tax treaty obligations.

The problem is that a 30% withholding can't be claimed back by a 1040NR submission: this would simply result in a refund of whatever amount 30% was in excess of normal US income tax on the amount distributed. For a largish distribution you might get only 9 or 10% refunded, and then HMRC might tax it all again!

I'm feeling confused by all this I must say, and have no idea how to proceed wisely...