Tax on 401k lump sum distribution for UK citizen/resident?

Actually I should have been more specific as Schwab will not give me a % withholding figure for the IRS and so I am left to try and understand what my tax implication should be on my own...not easy from what I can see and read. Irregardless of the amount I am to receive from my dad my understanding is that as an NRA the US tax charge is 30% automatically. Hence the reason for me thinking I should withhold 30% to the IRS. I find nowhere online in IRS documentation and equally from the US/UK tax treaty that provides me with any deduction to that 30% figure. I guess my question is if you know any differently and in fact feel my Tax burden might very well be less. Also from the treaty my understanding is that I will not be taxed from the UK (I think it's under Article 17:2) but only by the US as my dad was an American citizen and the funds are located there. Also the IRS has said that if I give them the correct amount then I do not need to fill out any tax forms...True?

The withholding will be at a fixed/flat rate, rather than graduated rates. You are required to file a US return if your income if above the applicable filing threshold.

The 30% you mention is not actually the tax that you will pay. It's an amount withheld in lieu of tax. It would surprise me if Schwab failed to withhold the 30% on an overseas payment as it's the IRS default....but with a W-8BEN they might take the liberal interpretation of the rules and withhold nothing at all.

The 1040NR is the way to work out the tax that you must pay to the IRS and it will be a simple enough thing to do.

Hi Folks, long time no see. As a result of health issues I no longer spend time on internet forums, but thought I'd come on here just to update my situation with TIAA-CREF. This thread popped up while I was searching for information, which prompted me to pop back in.

I see a couple of recent posts that describe a similar situation as the one I described in this thread 18 months ago - financial institutions simply ignoring or misunderstanding W-8BEN and nonresident, non-citizen status.

After telling me I needed to submit a W-8BEN and an ORP-3 form (which they have never said anything about previously ...), parts of their latest missive are pasted below:

"In reviewing your account, I see we received your W8-BEN form on XXXX.  We have updated your residential and mailing address on our records to:  XXX, United Kingdom.   Additionally, we have noted you are a citizen of the United Kingdom.

Also we received your employment end date and notification that you are 100% vested in the accumulations in your UNC ORP plan. 

Since you are not a U.S. citizen and are not residing in the United States the IRS 10% early withdrawal penalty does not apply to you regardless of your age. 

Please note according to the tax treaty between the United States and the United Kingdom, we are required to withhold 30% from your gross distribution from your retirement account for lump sum cash withdrawals.  For periodic payments we are required to withhold zero percent from the gross distributions. 

Although we received a W8-BEN tax form you will still need to complete a W8-BEN tax form when you submit your completed paperwork for a withdrawal."

- I added some underline for sections that stumped me a bit.

First, this is the first time they have ever pointed out that no 10% penalty applies if I am non-citizen, nonresident, and I've never read that anywhere else ... is that correct?

Second, I have never read that the tax treaty is interpreted differently for lump sums than for periodic payments. Is that correct, and if so, what is the difference between the two? (Sorry, I used to understand this difference, but times have changed).

Third, if I have recently submitted a completed W-8BEN, why do I need to submit another within days/weeks, when I submit my withdrawal form? They have already said that once I do that, I don't need to do it every time I make a withdrawal.

It seems that after all this ongoing baloney, TIAA-CRAP will withdraw 30% and at some point in the future I will submit a 1040NR and (hopefully) get the 30% tax back. This state of affairs really makes financial planning difficult. Would I have to wait until the end of the tax year to submit a 1040-NR and/or will I have to do this every time I make a withdrawal? I plan to make two withdrawals between now and next April - one for about $12k and another of similar, or smaller amount in early 2017. I don't want to have to wait until 2018 to submit a US tax return for the latter withdrawal...

Thanks for any help you kind people can provide. This is once again doing my head in and these days I can do without it.

[ETA: I meant to say that in another message they said that under the UK-US treaty, the tax rules applying to lump sums from an IRA and 401(k)-type plans are different. For someone like me (nonresident, non-citizen), lump sum withdrawals from an IRA would not have tax withheld at source while lump sums from a 401(k), 403(b), etc., would have 30% tax withheld at source. They definitely meant regular IRAs, too, not Roth IRAs]

No 10% early withdrawal penalty for NRAs?? That strikes me as very weird and the first I've ever hear on it. You can get at 401k money penalty free after age 55 in some circumstances or if you take withdrawals according to the 72t rules.

If you take periodic payments there is no US tax on those amounts as you are an NRA living in the UK so I can see why TIAA-CREF would not withhold ant tax. For the lump-sum distribution only US tax would be due and hence the 30% withholding.

Thanks, nun.  I have asked them to clarify exactly the difference between a lump sum withdrawal and a periodic payment. I just want to withdraw from my two 403b plans without having to deal with US tax.

It seems every time I get close to understanding TIAA-CRAP'S code of practice, they throw me another curve ball.

Thanks, nun.  I have asked them to clarify exactly the difference between a lump sum withdrawal and a periodic payment. I just want to withdraw from my two 403b plans without having to deal with US tax.

It seems every time I get close to understanding TIAA-CRAP'S code of practice, they throw me another curve ball.

The lump sum and periodic payment difference comes from the treaty. In your case the lump sum is only taxable in the US and the periodic payments are only taxable in the UK.
If you take a number of withdrawals over a few years from the 403b then they will be seen as periodic and there will be no US tax. If TIAA-CREF withholds no tax as per the treaty and then W-8BEN then there's no need to file the 1040NR.

I downloaded the 6 documents on the irs.gov page dedicated to the UK-US tax treaty, and have been searching for various key terms ("zero", "lump", "periodic", etc.) to try to find the necessary key information (as the 6 documents together add up to 291 pp.).

In the meantime, the various definitions I keep finding via Google (on reputable sites such as the IRS site: https://www.irs.gov/taxtopics/tc412.html and tax firms sites), all seem to imply that a lump sum distribution involves taking the entire balance within a single tax year, which I a clearly not intending to do (I have made this clear in all messages to TIAA-CRAP).

I guess I just need to make sure that all my communications with them regarding any withdrawals avoid the term lump sum and repeat incessantly the term periodic payment ... and cross my fingers very tightly that they are paying attention.

Th term "lump sum" is not defined in the treaty and means different things to the IRS and HMRC....For the IRS it means the withdrawal of the entire balance of an account within a calendar year and often comes into play when rolling over accounts or when a pension plan is distributed.

I agree with Nun that the 10% penalty would apply unless the age requirement is met.

I recognize that the definition of lump sum under the treaty is not perfectly clear, but I believe that the IRS would apply the HMRC definition of “lump sum.”  The purpose of adding this provision to the treaty was to prevent double NON-taxation.  If periodic, the U.K. will tax (and so the U.S. is willing to not tax the income).  If lump sum (under U.K. law), the U.K. will exempt the income, so the U.S. will tax it.  This prevents the pension income from being tax-free in both countries (something the U.S didn’t like).

Thanks, Both.

Yes, I absolutely think they are wrong on the 10% thing (other than the "exception" situation, but that's not what they meant), but it just reflects how out of touch (and inconsistent!) they are.

Interestingly, other than asking what % of investments you wish to withdraw, the form they provided for requesting a cash withdrawal doesn't appear to have any reference to lump sum vs periodic withdrawal, either. If "lump sum" has such a clear meaning in the US, I don't know why in the past 18th months of communicating with me, they haven't really made any reference to this. It's clear from my messages to them that I want to take multiple withdrawals over a period of years ... which would seem to imply "periodic withdrawals"

A search of the TIAA-CREF site for the term "lump sum withdrawals" yields multiple documents that talk about the rules and methods applying to lump sum withdrawals, but (so far) without really clarifying what a lump sum withdrawal "is"!

Anyway, will keep you updated when I get to the point of making a withdrawal or when they come back to me on my questions. Hopefully, once I navigate the waters for my first "periodic withdrawal", subsequent withdrawals will be more straightforward.

So, the interim update is that TIAA-CREF defines any payment that is not part of a lifetime annuity or a 10-year Transfer Payout annuity as a lump sum withdrawal, and they are insistent that a lump sum withdrawal is subject to 30% withholding (from a 401k; not from an IRA).

I have cited them chapter and verse from IRS publications, including the IRS factsheet on lump sum withdrawals, where it states:

"What is a Lump-Sum Distribution?
A lump-sum distribution is the distribution or payment within a single tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans). Additionally, a lump-sum distribution is a distribution that is paid:

Because of the plan participant's death,
After the participant reaches age 59,
Because the participant, if an employee, separates from service, or
After the participant, if a self-employed individual, becomes totally and permanently disabled"

TIAA-CREF simply chooses to effectively ignore any such information I provide them and they refuse to justify their decisions by providing the section of IRS code or the Tax Treaty that supports their viewpoint. They have contradicted themselves so many
times over the past 18 months and simply adjust their rationale every time they are presented with documentation that what they are saying is not correct.

I just tried calling the IRS international helpline and it has a recording that says they are too overloaded, call back later, at which point it hangs up.

I really am beginning to hate that company.