SIPP withdrawals and US taxes, WEP

Hey guys,

First time here. I am UK citizen but US green card holder, physically resident in US now. File US taxes every year. I always reported all UK salary and dividend income to US, and just caught up on 6 years FBARs, 5471s and other forms I can't remember (which I had no knowledge of, despite having a US accountant do my taxes). What a nightmare. Anyway that's behind me.

I am 57 - old enough to take UK SIPP withdrawals, but unable to take US IRA withdrawals without penalty because I am not yet 59.5. At least that's my understanding.

So my question is this - I understand by filing certain paperwork with UK HMRC I can become a 0 rated tax payer in the UK, and after that my SIPP withdrawals will be tax free in the UK, but how are they treated in the US? Is it just normal income? What about the issue that a withdrawal from a US pension fund would incur, I believe, a 10% penalty before age 59.5? Would this still be the case with the withdrawal being from a UK SIPP?

If I don't file the aforementioned form, I believe I can withdraw c11k pounds per year in 12 equal chunks (I will have no other UK income) and have this not be subject to UK tax, but presumably declared on US tax return. UK pension provider told me this:

<<
Income payments and ad hoc withdrawals from pension funds are taxable via PAYE (Pay As You Earn). When you access your pension for the first time, in the absence of an existing tax code or valid P45, HMRC require us to deduct tax using the Emergency Tax Code. In 2016/17 this is 1100L/M1 and this effectively translates to a personal allowance of £11,000 but broken down into 12 equal chunks. Where this is the case, the first £917 of any taxable payment will reflect the personal allowance and be paid tax free; the next £2,667 will be taxed at 20% and the next £9,833 taxed at 40%. Any amount in excess of £13,417 would be taxed at 45%.>>

On another note - what I have found hard to deal with is different "experts" have different opinions RE tax treatments of SIPPs, ISAs, whether they need PFIC reporting, 8893, etc. etc. My third advisor took a position I liked, quoted the tax treaty, and said he would defend his decision f the IRS came knocking. So I went with him...(and paid him a pretty penny but he was worth it). 

While I'm at it - and I may be pushing my luck here - I've heard about this Windfall Elimination program (WEP) for people, such as myself, who qualify for both a UK state pension and a US social security pension. Does it make sense to defer taking a US state pension until 70, thereby I believe also increasing the US pension by c8% a year? Would this eliminate WEP penalties until I take the US pension?

Thanks in advance for any response,

Art

Even if you have not reached the age of 59.5 you can utilize IRS rule 72t.  This allows you to tap into the IRA penalty free so long as you take the same amount for 5 consecutive years. IRS has a calculation for this based off your age/account balance.   

Although you aren't required to take distributions until 70.5, if you do use rule 72t you can't stop until 5 years have been taken consecutively even if you have reached age 59.5. You would have to continue until the 5th distribution was taken.

IRA rules and regs are not applicable to SIPP withdrawals. So file a US-Individual 2002 to eliminate any UK tax and then include the SIPP withdrawal amount as US taxable income on line 16 of the 1040.

You could also avoid UK tax if you claim your personal allowance and keep all UK source income under that.....look at form R43

Guru,

That makes sense, thanks. I will keep my withdrawals under the taxable amount in the UK for the time being then file 2002 later - I am in the process of closing down a UK company which will happen this month - and that's one of the questions asked on the 2002 - after that is all done and the company dissolved I can use the 2002.  And stop filing 5471s...

Thanks

A

Hi Guru.

Sorry to bother you but my US accountant has indicated that I would indeed be subject to the 10% penalty - is there anything in the treaty I can use to show her?

Thanks

Art

The IRS has no jurisdiction over SIPPS. They don't care about the withdrawal rules at all. They just want to tax the withdrawals as income from a foreign pension. You do obviously have to comply with HMRC withdrawal rules. I would find another accountant as this is pretty basic stuff.


Sent from my iPhone using Tapatalk

The 10% penalty only applies to annuity contracts (Code §72(q)) and qualified retirment plans (Code §72(t)).  The SIPP is not an annuity contract or a qualified retirment plan.  Therefore, the 10% penalty would not apply.

The 10% penalty only applies to annuity contracts (Code §72(q)) and qualified retirment plans (Code §72(t)).  The SIPP is not an annuity contract or a qualified retirment plan.  Therefore, the 10% penalty would not apply.

Exactly, and if the OP's accountant thinks that US early withdrawal rules and penalties can be applied to a SIPP then I really question their competence and basic understanding of the OP's situation. The fact that the OP had a US accountant that missed foreign reporting rules is also worrying.

Hey - the people who missed the reporting requirements are different people from the one who says my SIPP withdrawals would incur the 10% penalty! I'm sure my third guy will know but he's expensive so I try and research myself first…

Thanks

A

<<The 10% penalty only applies to annuity contracts (Code §72(q)) and qualified retirment plans (Code §72(t)).  The SIPP is not an annuity contract or a qualified retirment plan.  Therefore, the 10% penalty would not apply.>>
Very clear. However, if I have been filing 8833s so as not to pay tax on the undistributed profits in the SIPP, doesn't that mean I have taken the position that the SIPP is indeed a qualified retirement plan?

A

<<The 10% penalty only applies to annuity contracts (Code §72(q)) and qualified retirment plans (Code §72(t)).  The SIPP is not an annuity contract or a qualified retirment plan.  Therefore, the 10% penalty would not apply.>>
Very clear. However, if I have been filing 8833s so as not to pay tax on the undistributed profits in the SIPP, doesn't that mean I have taken the position that the SIPP is indeed a qualified retirement plan?

A

Have you filed 3520s for the SIPP?

Is the SIPP really, really a US qualified plan? If so, it must be quite new to the market because no-one has shown me one before. I do not believe that a UK registered pension plan could ever legally be a US qualified pension plan, because of the huge differences in domestic law governing plan design.

I'm not saying it is or isn't a qualified retirement plan - I don't know. My tax attorney took the position via the treaty that profits etc. within the SIPP were not taxable and we quoted the treaty on 8833. Does that mean that by inference we have taken the position that the SIPP is indeed a qualified retirement plan?

I've seen lots of threads RE this and there seems to be no clear answer and lots of disagreements; here's one:

http://talk.uk-yankee.com/index.php?topic=73909.0

Others mention employer contributions versus employee contributions (mine were mostly employer contributions).

It seems to me that if I take the position that the SIPP is not a qualified retirement plan then I can start taking withdrawals now - and avoid the 10%. But if I have (maybe by inference) taken the position that is is a qualified retirement plan and have deferred the income with 8833 (as I have) then I pay the 10%. Can't have my cake and eat it can I? If that's the case Id rather not take any distributions yet.

I haven't PFIC reported either. I believe the argument was that employer contributions were more than 50% so it's not a "Foreign grantor trust" - is that the right term? I don't remember all the legal arguments - just what I was advised to do by a specialist (and very expensive) tax attorney with a very good understanding of the UK/US treaty. And he will stand by his decisions if the IRS come knocking...

A

A pension plan outside the US cannot ever be a "qualified plan". The treaty just allows you to defer US tax on contributions and gains within UK pension plans until you take income.....do not over think this stuff.

Yes, don't over-think it. If you start thinking too much about the 3520 and 3520-A, you might realize (realise) you need to file them for a SIPP.

If I think much more about it my girlfriend will leave me - it's my sole topic of conversation! What I have done is FBAR, 8938 & 8833. I've seen others recommend this, and I've seen respected advisors saying to do this not to PFIC. Expensive tax attorney confirmed this and he filed on my behalf, and will answer to IRS if they come knocking. Next time I can afford to talk to him (!) I'll ask this and report what he says.

On the 8833 he always has me distinguish between interest, dividends and profits from stock sales for some reason.

As I've said before this seems to tangled that I think one needs to do some research, pay for some opinions, take a position and file and see what happens. I think the important thing is I'm not hiding anything and doing my best to abide by the tax laws. I have always declared all UK income on US returns - disclosed all my accounts etc. I saw a very interesting thread on here where someone went to the embassy in London and that's more or less what they said as well.

Thanks everyone for your input.

A