Roth IRA: Vanguard wants to withhold 10%

Sorry if this has been discussed previously, but I have an inherited Roth IRA at Vanguard in the US.  I'm a US citizen and have lived in the UK for 30+ years.  When I ask Vanguard for a lump sum distribution, it says that it has to withhold 10% federal tax because my registered address is outside the US.  I've come across an IRA publication that says 10% has to withheld from distributions from a traditional IRA that's registered to someone outside the US, but I've seen no such IRS rule that applies to Roth IRAs.  And when I ask Vanguard to substantiate its assertion that 10% must be withheld, it's unable to do so and just says that's the way they do it.

Has anyone come across this before?

That is really annoying because obviously no tax is due.

As a USC you will, I assume, be filing a US tax return each year so the money is not lost, just delayed by many months until you file and get a refund.

I will be making a Roth withdrawal next year from Vanguard as we are buying a car.  I am also a USC living in the UK and that is the only address Vanguard have on file for me so I guess I will know what to expect.  Bummer.

<rant on>I did used to have my mailing address as my daughter in California but even though Vanguard state clearly on that page that the street address (in the UK) is the place I am considered resident for tax purposes, when they produced my 1099-R for a Roth conversion they did mail a hard copy of it to my daughter's address but the 1099 itself had my address in California and they came after me to file a California tax return so I had to fill in some extra forms and send proof that I lived in England.  So I set the Vanguard mailing address to my street address in England.  Should have done this in the first place I guess.

When our son moved back to England in 2017 he quit his job and the small bank he worked for wanted a US mailing address to forward his W2 to the following year.  He gave them his sister's address in California and then this year they have come after him as a California resident so he has had to jump through the same hoops to try and get them off his back.<rant off>

Thanks for the feedback.

The annoying thing about Vanguard is that is hasn't provided me any justification.  I closed a Fidelity Roth IRA a number of years ago and it withheld nothing.  So I'm presuming that Vanguard's withholding 10% is just its policy rather than an IRS rule. 

For my US tax, I suppose I'll just need to add the Roth IRA distribution to my 1040 line 4a, and zero for 4b, and the IRS should return my 10%.

As for addresses, I could in principle use my brothers address in Seattle, WA, but I've always been wary that I'd then be chased for state taxes, and from your experience it sounds like my concern has been justified.

For my US tax, I suppose I'll just need to add the Roth IRA distribution to my 1040 line 4a, and zero for 4b, and the IRS should return my 10%.

That is exactly what to do.

The annoying thing about Vanguard is that is hasn't provided me any justification.  I closed a Fidelity Roth IRA a number of years ago and it withheld nothing.  So I'm presuming that Vanguard's withholding 10% is just its policy rather than an IRS rule. 

As for addresses, I could in principle use my brothers address in Seattle, WA, but I've always been wary that I'd then be chased for state taxes, and from your experience it sounds like my concern has been justified.

It might an IRS rule because Roth withdrawals are not always tax free.  For example withdrawals before age 59.5, or withdrawals before the 5 year year rule is up. (If you have not had a Roth open for at least 5 years before a withdrawal then the gains on the Roth investments are taxable, just the contributions).

Definitely keep clear of using an address in a State with income taxes.  I receive a non-qualified pension from my old employer in Louisiana and the Louisiana IRS insist on taxing it because it is from a company based in Louisiana. I have to file a non-resident Louisiana State tax return every year with that income taxable.  It costs me over $300 every year in State taxes and I have no choice because almost double is withheld at source so I have to file to get a refund.

I've just sent off my 401(k) distribution pack and it states that ANY payment to an account holder overseas will have a mandatory 30% withheld! I attached a W-9 and will keep my fingers crossed come the first annual payment in 2022.

I've found the entire process over burdensome and complex. There are only two Notary Publics in my county and making sure all the paperwork is in order, voided check etc is a headache. Then the expense of the courier, as you can't do this via the online route.

I've just sent off my 401(k) distribution pack and it states that ANY payment to an account holder overseas will have a mandatory 30% withheld! I attached a W-9 and will keep my fingers crossed come the first annual payment in 2022.

My experience with Vanguard was similar.  For my recently inherited Roth IRA, VG initially was going to withhold 30%.  Then I filed my W-9 with them, and after a couple of phone calls, VG changed it to 10%.  I will still need to reclaim the 10% when I file my 2021 tax return, but 10% is better than 30%.

I've found the entire process over burdensome and complex. There are only two Notary Publics in my county and making sure all the paperwork is in order, voided check etc is a headache. Then the expense of the courier, as you can't do this via the online route.

Notaries are few and far between in the UK too, and they're expensive because they're usually lawyers.  Next time I need a Notary I might try the online service of https://www.notarize.com/, although I don't know how broadly accepted that service is.

For a recently inherited annuity from Transamerica, I had to complete some paper-based forms and return them by snail mail or Fax.  Fax, really?  I suppose Fax still carries legal credibility.  Anyway, I couldn't be bother with the post so I ended up using https://www.fax.plus/ which allowed me to send the documents online from my PC; it worked well.

This may be of use to you: the actual IRS rules on mandatory withholding.   https://www.irs.gov/retirement-plans/plan-distributions-to-foreign-persons-require-withholding

Also, something to note - if you're in Scotland your local JP/court officials can sign in place of a Notary. I was able to use a judge's stamp  successfully. There was no charge.

Good luck.

This may be of use to you: the actual IRS rules on mandatory withholding.   https://www.irs.gov/retirement-plans/plan-distributions-to-foreign-persons-require-withholding

Also, something to note - if you're in Scotland your local JP/court officials can sign in place of a Notary. I was able to use a judge's stamp  successfully. There was no charge.

Good luck.

Thanks Nan, very useful indeed.  From that IRS web link, for USC's living abroad there is NO legal requirement to withhold anything.

You must generally withhold 30% from a plan distribution paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes the payee is:

a U.S. person, or
a foreign person entitled to a rate of withholding lower than 30%.
Documentation can include Form W-9, Form W-8BEN, or other appropriate sources.

As for addresses, I could in principle use my brothers address in Seattle, WA, but I've always been wary that I'd then be chased for state taxes, and from your experience it sounds like my concern has been justified.

WA is one of 7 states with no state income tax, relying instead mainly on property and sales taxes. However, starting 2022, they are introducing a capital gains tax of 7% on gains exceeding $250,000. Unlike most taxes, that $250,000 allowance is NOT increased for married couples etc. On the plus side, tangible property outside the state is not covered by this tax, your WA home (if you have one) is also excluded, and WA is not one of the 4 sticky states in terms of severing ties with it.

WA has been trying to institute a capital gains tax for years, but it keeps being voted down by the populace (probably too many Microsoft, Boeing, Google, Amazon, and Nintendo families in the area). This time around, they found a 'emergency need' clause that let's them avoid having to let their constituents vote on it. The new tax is being challenged in the courts and likely to come down to whether the courts decide this is a tax on property, or a tax on exercising a right related to a property. If it's the former, it's incompatible with the state constitution and will be struck down (and surely modified and resubmitted next year). If it's the later, it's completely legal.

Source: I live in WA :-)

So unless you have a lot of capital gains, I think your brother's address is a good one to have.

If you still have concerns and a need for a US address, you might want to look at Virtual Mailing Address services.

I'm leaving the US for the UK end of Feb 2022, and I've gone ahead and signed up with physicaladdress.com* for one of these. This gives me a physical street address in Florida (not a PO Box) at which mail and packages can be received. When mail arrives, I receive a scan of the envelope and the option to have it opened & scanned, forwarded, thrown away, or shredded.

I selected Florida as it has no state income tax, no state capital gains, and a low sales tax (nice for paying fees for online subscriptions services I don't intend to cancel). Texas is also very popular, but I can't say why I picked FL over TX without straying into politics and my opinions on what's happing to women's healthcare in TX at the moment.

Places that won't take a UK address will get my FL mailing address. In case I failed to update someone, I'll use the free USPS change of address forwarding service to direct mail sent to my old WA address to my FL mailing address for 6 months.

Once I surrender my WA state ID and terminate my lease, I'll have nothing tying me to WA state anymore.

* PhysicalAddress.com is just one of many similar services. I haven't actually received any mail there yet (I keep meaning to send a test letter!), so I don't know how good they really are yet. I can say I did a fair amount of research before selecting them, and that sign-up was a breeze (even the bit where you get a on-line notary for the USPS form that lets them open your USPS mail). Google 'virtual mailing address service' and you'll find a bunch of companies offering similar services for similar prices.

I just did an IRA to Roth conversion online with Vanguard and there was no requirement to make any tax withholding. I am a UK/USC  living in the UK and the only address Vanguard has is my UK address, along with my UK mobile phone which is used for verification if I haven’t logged on for 7 days.