Tax free US retirement income??????

we could all get on with enjoying our hard earned pay.

Let's all remember that without a safe and civil society, there would be no enjoyment....only the sight of a band of marauders coming over the hilltop to wreak unspeakable horrors, starvation when the blight or hail destroyed the crops, or mass death from when cholera infects the local stream. A short and brutal existence.

I've written some pretty dump stuff over the years, but it's all a learning process. However, the rollover of tax deferred funds from an IRA to a ROTH will be taxed by the IRS whether it is made by a US tax resident, US citizen or NRA. There is no UK tax on the rollover.

The key is that the rollover is not a distribution for tax treaty purposes. So you can't apply Article 17. This has some useful comments of rollovers and the DTA.

https://www.irs.gov/pub/irs-wd/1231010.pdf [nofollow]

The UK will not tax the rollover because of Article 18.1. So when you do an IRA to ROTH rollover you have to file a 1040NR or 1040 and pay the tax.

Hi Nun,

Not to belabour the topic but I've spoken to another top advisor who specializes in US tax law to discuss the subject and she too believes that it would not be unthinkable to use the treaty to achieve IRA to ROTH IRA rollover free of US withholding.
I paraphrased this blog to her and sent her the memo you found that makes you (and me, although I don't really understand it) believe that such a transaction would render treaty ineffectual in preventing US withholding.
This is her interpretation after reading said memo:-

"The PDF you note below is entirely based on whether or not you can roll a US retirement plan into a UK retirement plan (not whether a UK resident can rollover a US plan to another US plan). It is clear that you cannot move a US plan into a UK plan. The transaction you describe does not apply to what is written in the below IRS memo from the Chief Counsel. So, this doesn’t support or detract from the possibility achieving of the said results discussed on the forum."

https://www.irs.gov/pub/irs-wd/1231010.pdf [nofollow]


Would appreciate your comments Nun.

 

Let's all remember that without a safe and civil society, there would be no enjoyment....only the sight of a band of marauders coming over the hilltop to wreak unspeakable horrors, starvation when the blight or hail destroyed the crops, or mass death from when cholera infects the local stream. A short and brutal existence.

I agree with you. I have no problem with there being a tax system or the IRS. But the time and expense involved with the challenge of compliance makes the thought of filing a tax return on a postcard appealing.

No, I try not to stir socialist fervour in these tax threads....it is undeniably a mess.

Hi Nun,

Not to belabour the topic but I've spoken to another top advisor who specializes in US tax law to discuss the subject and she too believes that it would not be unthinkable to use the treaty to achieve IRA to ROTH IRA rollover free of US withholding.
I paraphrased this blog to her and sent her the memo you found that makes you (and me, although I don't really understand it) believe that such a transaction would render treaty ineffectual in preventing US withholding.
This is her interpretation after reading said memo:-

"The PDF you note below is entirely based on whether or not you can roll a US retirement plan into a UK retirement plan (not whether a UK resident can rollover a US plan to another US plan). It is clear that you cannot move a US plan into a UK plan. The transaction you describe does not apply to what is written in the below IRS memo from the Chief Counsel. So, this doesn’t support or detract from the possibility achieving of the said results discussed on the forum."

https://www.irs.gov/pub/irs-wd/1231010.pdf


Would appreciate your comments Nun.

Your advisor is correct that the pdf is not entirely applicable to the IRA to ROTH rollover, however, the important part of the memo is the statement that

The proposed treaty provides that neither country may tax residents on pension income earned through a pension scheme in the other country until such income is distributed. For purposes of this provision, roll-overs [sic] to other pension plans are not treated as distributions.

So rollovers are not distributions and Article 17 does not apply. Article 18.1 does apply and the UK will not tax a rollover from on US qualified plan to another. However, the treaty does not come into play on the US side of things at all. The IRS taxes an IRA to ROTH rollover and there is no provision in the treaty to avoid that....so you just apply US domestic rules. If you are a US citizen or resident you file a 1040 and pay the tax. If you are an NRA you file a 1040NR. For the NRA there will be 30% withholding that you will use to defray the US tax bill, so you'll probably get a US tax refund.

The one way to get a US tax advantage out of pensions is if you contribute to a UK plan and build up a US tax free basis by using FTCs, or excluding your contributions from US taxation with the FEIE. If you then move back to the US you can use the treaty to avoid UK tax on the distributions and you will have a large US tax free basis as you paid the US tax going in, although using the FEIE sounds a bit fishy to me and I wonder if there's something somewhere that says you can't build up a US tax free basis in a foreign pension if you use the FEIE?