Can you avoid US withholding on IRA, 401k etc payments

Under the US tax code there is mandatory withholding on payments made to US citizens living outside the USA from US retirement accounts.

Can a US citizen, ordinarily resident in the UK and taxed by the UK on an arising basis avoid the US withholding by using Article 24. p6 of the tax treaty to claim the primary taxation rights of the UK. The UK tax would then be used as a FTC on US return.

If this is the case what form would you use to stop your IRA/401k administrator from withholding tax from your retirement income payments.

When I converted a traditional IRA to a Roth a few years ago, Vanguard told me they would normally have to withhold money on the conversion to customers living outside the US, but if I sent them a W-9 form for their records, that would be sufficient to stop the withholding.

Not sure if this applies to distributions as well as conversions, but you could ask the financial institution where your retirement account is based. In this case you wouldn't need to invoke the treaty.

When I converted a traditional IRA to a Roth a few years ago, Vanguard told me they would normally have to withhold money on the conversion to customers living outside the US, but if I sent them a W-9 form for their records, that would be sufficient to stop the withholding.

Not sure if this applies to distributions as well as conversions, but you could ask the financial institution where your retirement account is based. In this case you wouldn't need to invoke the treaty.

If you have a US address you can avoid the withholding......but you have to choose it on a W-4P. So I don't know why a W-9 would eliminate withholding.

If you have a US address you can avoid the withholding......but you have to choose it on a W-4P. So I don't know why a W-9 would eliminate withholding.

As I understood it, the withholding to non-US residents is primarily targeted at noncitizens, and when you submit the W-9, that tells the institution you're a citizen. I don't know a whole lot about it though so don't take this as gospel.

As I understood it, the withholding to non-US residents is primarily targeted at noncitizens, and when you submit the W-9, that tells the institution you're a citizen. I don't know a whole lot about it though so don't take this as gospel.

The W-9 certifies your SSN, personal details and that you are not subject to backup withholding. But as a US citizen abroad I believe that you are subject to withholding on pension payments. If you go through the W-4P it turns out that you cannot choose no withholding on payments and you plan administrator must withhold either 10% or 20% depending on the type of retirement account.

http://www.irs.gov/pub/irs-pdf/fw4p.pdf

on Page 4 it states:

Payments to Foreign Persons and Payments Outside the United States
Unless you are a nonresident alien, withholding (in the manner described above) is required on any periodic or nonperiodic payments that are delivered to you outside the United States or its possessions. You cannot choose not to have federal income tax withheld on line 1 of Form W-4P. See Pub. 505 for details.

I'm wondering if this can be avoided by using Article 24 of the tax treaty to give the UK first whack at the taxing of any payments.

I prepare decently large numbers of US tax returns each year for retired US citizens in the UK where the payor of pension income insists on US withholding. As you say this is resourced as (pretended to be) foreign source on the US return so the US gives credit for UK tax.

It becomes simply a paper filling annoyance each year.

I prepare decently large numbers of US tax returns each year for retired US citizens in the UK where the payor of pension income insists on US withholding. As you say this is resourced as (pretended to be) foreign source on the US return so the US gives credit for UK tax.

It becomes simply a paper filling annoyance each year.

Would an 8833 convince a US pension administrator to stop the withholding? Vanguard has a nice explanation of withholding as far as it goes and if you are a UK resident, but not a US citizen, you can stop the withholding by filing a W-8BEN and quoting Article 17

http://www.vanguard.com/pdf/wh4p.pdf?2210040984

So does an 8833 and Article 24 ever convince anyone? or do people have withholding taken out in the US, then pay the full amount of UK tax and then get credit for the 10 or 20% withheld......this would seem to put them in a double taxation position until the US refund is received.

I asked Vanguard about withholding on IRA payments made to a US citizen living in the UK. Here is the reply

Thank you for taking the time to contact us.

First, when you list a United Kingdon address as your address of record,
based on IRS rules, we wil consider you a nonresident alien. You will be
asked to complete a W-9 or W8-BEN.

Assuming you complete the W-9, there may or may not be the mandatory 10%
withholding.

If a distribution is made to a US bank, no withholding will apply.  If we
are distributing IRA assets to a foreign bank or a foreign address
directly, Vanguard would be required to withhold the necessary 10% of the
distribution.

The IRS Form 8833 is a form that you would file directly with the IRS; not
to Vanguard. Please consult with a tax professional to determine how the
filing of IRA Form 8833 would affect your tax situation.

If you have additional questions, please call us at 888-285-4563. You can
reach us on business days from 8 a.m. to 10 p.m. and on Saturdays from 9
a.m. to 4 p.m., Eastern time.

So it seems easy to get Vanguard to make the payments with no withholding.........unfortunately I think there are several errors in their reasoning and understanding of this area.


PS. I just looked closely at the W-9 and there is an "Exempt payee" box you can tick if you are exempt from backup withholding. So maybe just tick that box, write in something about Article 24 of the tax treaty and voila, Vanguard won't withhold any tax even if it is delivered outside of the US. Here is the wording on the W-9 that makes me think this might be a possible way to avoid the withholding, it's for a resident alien, but maybe it can apply to a US citizen as well as the Article 24 is exempt from the savings clause.

Nonresident alien who becomes a resident alien. Generally, only a nonresident alien individual may use the terms of a tax treaty to reduce or eliminate U.S. tax on certain types of income. However, most tax treaties contain a provision known as a “saving clause.” Exceptions specified in the saving clause may permit an exemption from tax to continue for certain types of income even after the payee has otherwise become a U.S. resident alien for tax purposes.
If you are a U.S. resident alien who is relying on an exception contained in the saving clause of a tax treaty to claim an exemption from U.S. tax on certain types of income, you must attach a statement to Form W-9 that specifies the following five items:
1. The treaty country. Generally, this must be the same treaty under which you claimed exemption from tax as a nonresident alien.
2. The treaty article addressing the income.
3. The article number (or location) in the tax treaty that contains the saving clause and its exceptions.
4. The type and amount of income that qualifies for the exemption from tax.
5. Sufficient facts to justify the exemption from tax under the terms of the treaty article.
Example. Article 20 of the U.S.-China income tax treaty allows an exemption from tax for scholarship income received by a Chinese student temporarily present in the United States. Under U.S. law, this student will become a resident alien for tax purposes if his or her stay in the United States exceeds 5 calendar years. However, paragraph 2 of the first Protocol to the U.S.-China treaty (dated April 30, 1984) allows the provisions of Article 20 to continue to apply even after the Chinese student becomes a resident alien of the United States. A Chinese student who qualifies for this exception (under paragraph 2 of the first protocol) and is relying on this exception to claim an exemption from tax on his or her scholarship or fellowship income would attach to Form W-9 a statement that includes the information described above to support that exemption.

Problem - nun - you know waaaaay too much about tax - and would be signing the form under penalties of perjury.

If I have a spare bit of time I might start reading the IRS Regulations in the region of Section 1441 and see if they help. Have you looked there yet?

Problem - nun - you know waaaaay too much about tax - and would be signing the form under penalties of perjury.

If I have a spare bit of time I might start reading the IRS Regulations in the region of Section 1441 and see if they help. Have you looked there yet?

No, I only know enough to get me into deep trouble and to question Vanguard saying the 10% withholding from an IRA isn't required if the money goes into a US bank while I have a UK address. I'll have a look at the section you recommend for bedtime reading..........
Just a quick look shows that it is for NRAs, and as a US citizen I'm not sure it applies to me. This is where I think I'm beaten. I think I'll just roll it over into a ROTH during some low income US residency years prior to returning to the UK. I'll be able to take advantage of the lower US income tax brackets and avoid tax on gains and withdrawals in the US and the UK.

This link is pretty definitive on how an IRA is taxed for a US citizen living outside the USA. It's for Switzerland, but looks like it's applicable to the UK with a few changes in Article numbers. But I still wonder if a US citizen can use a W-9 to achieve no-withholding like an NRA can with a W-8BEN.

http://hodgen.com/ira-distribution-to-u-s-citizen-living-in-switzerland-which-country-taxes-it/

I tried to sort this witholding issue out with my 2 US pension companies - Fidelity and TIAA. I'm a USC, UK resident, UK address but the payments are sent to my US bank. (The Fidelity plan is 403b and TIAA is now IRA only, although in the past I also had a 403b and 401k with them. These distinctions turned out not to matter)

TIAA witholds 10%. Fidelity says it reviewed this issue in 2011 and concluded that there was NO witholding for a person in my position. They say that TIAA is wrong. TIAA swears it's right. IRS Philadelphia, from whom I have never previously had a decent answer, didn't fail me - just quoted what some basic publication says. Long discussions with everyone. No answers.

 I've never filled out a Wp-4, nor was I ever asked to. TIAA asked me to fill out a W-8 although it clearly states that USC's should not fill it out. I didn't need to fill out a W-9 because I already had a SSN.

On my return, I use the treaty and take foreign tax credit but these were of no interest or relevance to either Fidelity or TIAA.

So far I've not had any problems working with this regime - witholding from TIAA but none from fidelity

marty - this is exactly what I have seen in practice with TIAA - it just means US tax refunds every time which is annoying but can be coped with ...

I've asked TIAA and Vanguard about this.

I experienced exactly the same response from TIAA as both Guya and Marty: 10% withholding on IRA payments made to US citizens with an overseas address. I can respect that answer as it follows the IRS regulations absent any treaty.

Vanguard told me that there would be 10% withholding on payments sent overseas, but no withholding if they were made to a US bank. This is surely just wrong.

Marty, did Fidelity offer an explanation of their position? It looks like I'll be rolling my IRAs over to Fidelity.

I asked Fidelity about their withholding policy for IRA distributions paid to a US citizen resident in the UK. Here is their email answer and a clear explanation of their reasoning

Assuming that a customer has a TIN or an SSN on file with us and he/she resides in the United Kingdom, we will withhold 0% on IRA distributions, unless a customer elects otherwise. You may review the U.K. withholding rates by accessing Tax Treaty Table 1 in the IRS Publication 515 "Withholding of Tax on Nonresident Aliens and Foreign Entities".

It's refreshing to encounter a company that seems to grasp the question and actually mentions the treaty.

Do set up all your accounts BEFORE you leave the US. Like many others, Fidelity won't open a new account if you have a foreign address, so they won't turn my 403b into an IRA, with the usual blah-blah about security, Patriot Act, etc.
Don't know if it matters but my 403b is (obviously) an employer plan.
Also, not totally on point, but if any of your accounts are 403b or 401k, and you have any taxed contributions in your account, study first the implications of rolling over to an IRA. They rollover as untaxed. And if relevant, any 403b grandfathering is lost.