Fidelity IRA distribution to UK-periodic No-no!

Unless I've missed something, there have been no comments on this thus far.

I'm a UK citizen, now given up my Green Card so no longer a US person: I worked in the US for 15 years........

And,

The problem is that a 30% withholding can't be claimed back by a 1040NR submission: this would simply result in a refund of whatever amount 30% was in excess of normal US income tax on the amount distributed

You did complete form 8854 when you gave up your green card?

The problem is that a 30% withholding can't be claimed back by a 1040NR submission: this would simply result in a refund of whatever amount 30% was in excess of normal US income tax on the amount distributed. For a largish distribution you might get only 9 or 10% refunded, and then HMRC might tax it all again!

I'm feeling confused by all this I must say, and have no idea how to proceed wisely...

Why can't you get the 30% withholding back? You simply file a 1040NR and use the 1099 that Fidelity will issue to show the tax withheld. As an NRA you use the treaty to show zero US tax due and get a full refund from the IRS.

So here's what I'd do.

1) Make sure you file a W-8BEN with Fidelity and get Fidelity to confirm that they have it.
2) If Fidelity withhold 30% write to tell them you think there should be 0% withholding citing Article 17.1 of the treaty and how it modifies the IRS code.
3) Do an HMRC self assessment and pay tax on 90% of the gross distribution (ie before withholding).
4) File a 1040NR and claim back the withholding tax from the IRS......this is money that you've already declared for self assessment and paid tax on to HMRC so you are now done.....until next year when you can do it all over again.

Why can't you get the 30% withholding back? You simply file a 1040NR and use the 1099 that Fidelity will issue to show the tax withheld. As an NRA you use the treaty to show zero US tax due and get a full refund from the IRS.

So here's what I'd do.

1) Make sure you file a W-8BEN with Fidelity and get Fidelity to confirm that they have it.
2) If Fidelity withhold 30% write to tell them you think there should be 0% withholding citing Article 17.1 of the treaty and how it modifies the IRS code.
3) Do an HMRC self assessment and pay tax on 90% of the gross distribution (ie before withholding).
4) File a 1040NR and claim back the withholding tax from the IRS......this is money that you've already declared for self assessment and paid tax on to HMRC so you are now done.....until next year when you can do it all over again.

Thank you -you are completely correct of course! I think I had realised this previously but my head was spinning so much by the end of yesterday that I temporarily blanked on the fact that you can invoke the tax treaty in the 1040NR!

Your suggested strategy is good, and is certainly the most sensible one to pursue even though it is going to involve massive inevitable delays and a period where I have (possibly) paid double tax on a single sum, without 100% certainty of a full refund from the IRS.

However all my reading around this has convinced me that the correct and uncontroversial position Fidelity should adopt under the circumstances of a UK resident NRA making a partial distribution of a Traditional IRA is to apply the Treaty mandated 0% withholding.

It's not just the IRS definition of a lump sum being a complete distribution of an entire account in a single year, or the clear indication from table 1 in IRS pub. 515 that pensions and annuities are subject to 0% withholding under the treaty 17.1, but US IRA providers also say this.

The fullest account outside an IRS publication that I have found is in a 2015 tax guide from broker and IRA provider Pershing LLC.

https://www.pershing.com/_global-assets/pdf/tax-guide-2015.pdf

They seem used to dealing with non-residents, they give an example of a completed 1042S form, they mention on pages 72 -75 nearly all the possible circumstances of IRA distributions overseas and how they would treat them ( non-resident US person with W9 filed,non resident US person no W9 on file, non US person NRA with W8BEN on file, non US person NRA without W8BEN on file, and so on).

They clearly state that IRA distributions are income coded as "pensions and annuities " on the 1042S form (code 14 in 2015), and give a helpful grid of tax treaty countries that have treaty based 0% and 15% withholding on pensions and annuities, that they will apply to the distribution with a correctly filed W8BEN.

So it seems to me the 0% withholding should be routine, rather than esoteric, and Fidelity have no good reason to ignore it.

So the first thing I will do next is contact Fidelity directly, with my account details, describe the distribution I plan to make, and the forms I will file, and the treaty paragraph I will cite, and ask them directly if they will apply 0%, in order to decide what my next steps should be. Thanks again for the help.

Pershing in the UK threw out of their US citizen customers several years back. Fidelity in the UK do not accept US citizen customers at all. These are not great examples of financial institutions to be discussing...

In practice it is frequently impossible to stop US withholding agents from sending 30% to the IRS.  Doing so minimises risk for the withholding agent.  If it is withheld as withholding tax, it is never a final tax, you'd simply claim the tax as tax withheld on the Federal return (that you'd have to file under all circumstances) and attach a copy of Form 1042-S.

Pershing in the UK threw out of their US citizen customers several years back. Fidelity in the UK do not accept US citizen customers at all. These are not great examples of financial institutions to be discussing...

In practice it is frequently impossible to stop US withholding agents from sending 30% to the IRS.  Doing so minimises risk for the withholding agent.  If it is withheld as withholding tax, it is never a final tax, you'd simply claim the tax as tax withheld on the Federal return (that you'd have to file under all circumstances) and attach a copy of Form 1042-S.

 I'm sure you are right, but my situation is that I'm not a US citizen and never have been, and so I am really talking about how US agents should handle IRA distributions to non-US persons. I am not saying they will do this, merely that it is clear that they should do this.

Also I was under the impression that Fidelity in the UK wasn't a subsidiary of Fidelity in the US but under different ownership, although I'm frankly not clear about this. Nevertheless how Fidelity UK handle US citizens is probably less relevant to me than some other posters here.  Thanks for the info though.

Fidelity are basically applying a CYA strategy. They have nothing to lose by withholding 30% as it is the default position that the IRS requires for overseas pension payments. They are not taxing you just holding back some of the pension and you will be eventually be taxed when you file the 1040NR.

If you are taking a series of payments over more than a year I would forget about LSDs entirely and just use Article 17.1. I bet no one at the IRS or HMRC will question your stance.

Fidelity are basically applying a CYA strategy. They have nothing to lose by withholding 30% as it is the default position that the IRS requires for overseas pension payments. They are not taxing you just holding back some of the pension and you will be eventually be taxed when you file the 1040NR.

If you are taking a series of payments over more than a year I would forget about LSDs entirely and just use Article 17.1. I bet no one at the IRS or HMRC will question your stance.

Yes, agreed. I am ignoring the whole lump sum issue now as being irrelevant.

I still intend to ask Fidelity US what they will do before I make my distribution application, just out of curiosity. They may either ignore my question completely, or say that they can't give any indication until the application is received and processed, but I'll try anyway.

They might even do what Pershing do, and state up front that they will apply the treaty mandated withholding, if all the paperwork is in order...ah well.

I must say if I had to advise a UK person intending to work long term in the US but return to the UK  eventually, I would tell them to ignore 401k plans altogether, even with attractive matching, and just save and invest spare salary cash privately for retirement. It seems much better than all this...

I must say if I had to advise a UK person intending to work long term in the US but return to the UK  eventually, I would tell them to ignore 401k plans altogether, even with attractive matching, and just save and invest spare salary cash privately for retirement. It seems much better than all this...

I do not agree with this advise. The trouble of getting the distributions correctly taxed when in the UK is worth the tax deferred growth and employer contributions of a 401k. However, if you have access to a ROTH 401k that might be preferable to a traditional 401k as there is no tax on withdrawals in the US or the UK.

The trouble of getting the distributions correctly taxed when in the UK is worth the tax deferred growth and employer contributions of a 401k. However, if you have access to a ROTH 401k that might be preferable to a traditional 401k as there is no tax on withdrawals in the US or the UK.

I agree. 

Since retiring and before moving back to the UK I have converted most of my 401k to a ROTH IRA which is tax free in both countries.

I agree. 

Since retiring and before moving back to the UK I have converted most of my 401k to a ROTH IRA which is tax free in both countries.

I agree too -fair enough if the ROTH route is available.

 It wasn't to me as the 401k was employer based and no ROTH option was offered. 

The sum built up would have incurred prohibitive taxing to convert to a ROTH IRA at one go before I left and the conversion rules were, I believe, a little stricter then.

To be honest I haven't worked out the finances for someone who only has a 401k option available, but I would  adjust my advice to at least encourage anyone  in my situation to work it out very very carefully first before embarking on the 401k route.

ADDED EDIT:  for example no-one raised the possibility that while the account was growing  NRAs would be forbidden from buying mutual funds and so being able to change their fixed interest to equities fund balance, together with the possibility being raised by the provider that other transactions might also be frozen in future. This removes a large part of the flexibility and control of such accounts.

I usually paid about 17-18% tax on my income during my work years in the US, and capital gains tax was 15% for most of my time there.

I'm going to be paying about 20-24% tax in the UK, more if I take larger sums, with the (vanishingly small certainly) possibility to pay 30% if the US regard my withdrawal as lump sum.

I reckon it's touch and go whether doing the private route and just repatriating the money and letting it grow since 2010 would leave me a huge amount worse off, and psychologically I like to be in control of my own cash and not have to jump hoops to be allowed to have it back.

However this is may just be frustration talking!

I agree too -fair enough if the ROTH route is available.

 It wasn't to me as the 401k was employer based and no ROTH option was offered. 

The sum built up would have incurred prohibitive taxing to convert to a ROTH IRA at one go before I left and the conversion rules were, I believe, a little stricter then.

To be honest I haven't worked out the finances for someone who only has a 401k option available, but I would  adjust my advice to at least encourage anyone  in my situation to work it out very very carefully first before embarking on the 401k route.
I usually paid about 17-18% tax on my income during my work years in the US, and capital gains tax was 15% for most of my time there.

I'm going to be paying about 20-24% tax in the UK, more if I take larger sums, with the (vanishingly small certainly) possibility to pay 30% if the US regard my withdrawal as lump sum.

I reckon it's touch and go whether doing the private route and just repatriating the money and letting it grow since 2010 would leave me a huge amount worse off, and psychologically I like to be in control of my own cash and not have to jump hoops to be allowed to have it back.

However this is may just be frustration talking!

If time allows then someone re-patriating to the UK could:

1. open an IRA with a brokerage such as Vanguard well before leaving.
2. on leaving the job roll over the 401k to the IRA, which is a non-taxable event
3. convert some or all of the IRA to a ROTH and pay US taxes.
4. complete the move back to the UK

With an IRA already set up then delaying the move back to the UK by as little as a month or 2 should be enough to complete the rollover and conversion.  Even if the brokerage insists that the ROTH has to be withdrawn in total there is no UK tax implication.

If time allows then someone re-patriating to the UK could:

1. open an IRA with a brokerage such as Vanguard well before leaving.
2. on leaving the job roll over the 401k to the IRA, which is a non-taxable event
3. convert some or all of the IRA to a ROTH and pay US taxes.
4. complete the move back to the UK

With an IRA already set up then delaying the move back to the UK by as little as a month or 2 should be enough to complete the rollover and conversion.  Even if the brokerage insists that the ROTH has to be withdrawn in total there is no UK tax implication.

 A 401k that is not converted to a ROTH is definitely not worth it to an NRA in my opinion. However you'd have to do the sums for every particular situation, even with a conversion.

For example, conversion of a large sum, say $250,000, accumulated in a 401k over ten years, to a Roth IRA in a single year, would eliminate the tax deferral of say ~18% tax rate and depending on your other income that year, would push more of this into the 28% tax bracket, as the entire sum of the ROTH conversion is taxed as ordinary income.

So your entire account would be taxed at a higher than 18% tax rate, resulting in you starting at at a lower point than just having saved the money over the 10 years post-tax at a regime of say 18%.

Agreed with a ROTH then you still get a huge tax free growth advantage, albeit starting from a lower point, and not until five years have elapsed.

Then would you be better off than just repatriating the money to the UK, investing it, and taking advantage of the £11,000 tax free capital gains allowance each year, and the £15,000 you can invest in tax-free growth ISA accounts each year?

I don't know. It's not likely, but at least you would be able to decide on your investments, and not be worried that the provider could suddenly close accounts to NRAs altogether with little warning.

I spent some sleepless nights over the past few years once the announcements that many US providers were closing non-residents' IRAs came out, raising the possibility my IRA would be closed before 59 and a half, presenting me with a tax bill for 40% that would definitely destroy any tax deferral advantage of the account!

A 401k that is not converted to a ROTH is definitely not worth it to an NRA in my opinion. However you'd have to do the sums for every particular situation, even with a conversion.

For example, conversion of a large sum, say $250,000, accumulated in a 401k over ten years, to a Roth IRA in a single year, would eliminate the tax deferral of say ~18% tax rate and depending on your other income that year, would push more of this into the 28% tax bracket, as the entire sum of the ROTH conversion is taxed as ordinary income.

So your entire account would be taxed at a higher than 18% tax rate, resulting in you starting at at a lower point than just having saved the money over the 10 years post-tax at a regime of say 18%.

To accumulate $250k over 10 years probably means that the taxpayer, like me, was in the 25% marginal tax bracket, if not higher.  This means that the contribution each year was at a regime of 25%. As long as the eventual withdrawal of those funds was at a lower tax rate then it is worth it.  e.g. If the person has moved back to the UK and is in the 20% bracket then withdrawing enough to stay within that limit is worth it, but if he is in the 40% bracket then he is losing out.

I agree it is very hard to make that prediction decades out, so it is a gamble on personal future tax rates.

Agreed with a ROTH then you still get a huge tax free growth advantage, albeit starting from a lower point, and not until five years have elapsed.

The tax free advantage starts on day 1, not after 5 years.  One has to wait 5 years, or age 59.5, before penalty free withdrawals can be made, and then it is the 5 year old contributions than can be withdrawn, the growth $'s cannot be withdrawn until 59.5.

Then would you be better off than just repatriating the money to the UK, investing it, and taking advantage of the £11,000 tax free capital gains allowance each year, and the £15,000 you can invest in tax-free growth ISA accounts each year?

I don't know. It's not likely, but at least you would be able to decide on your investments, and not be worried that the provider could suddenly close accounts to NRAs altogether with little warning.

Not a good idea to repatriate and invest the money in UK funds (other than cash) while still working in the USA because the IRS treats such funds as PFIC's and has punitive taxation, I believe

I spent some sleepless nights over the past few years once the announcements that many US providers were closing non-residents' IRAs came out, raising the possibility my IRA would be closed before 59 and a half, presenting me with a tax bill for 40% that would definitely destroy any tax deferral advantage of the account!

Agreed. 

But with full awareness of how to plan for repatriation I would still recommend that someone would utilize the IRA and system to good effect.

I and my wife always contributed first to an after-tax IRA, then to our 401k.  Back then there was no way to convert IRA money to a Roth otherwise we'd have done conversions every single year. (known as a backdoor Roth).

All good points, and I agree.

I just wish someone had pointed out to me at the time that since the idea of 401k plans is to defer tax until a point in your life (retirement) where your tax burden is likely to be lower than during your working years, this is great for US persons.

However it represents a very dubious advantage for a non citizen who is going to go back to a country with a higher tax burden than the US, even for low incomes, and who moreover is living in the US at a point where the tax burden is at historically low levels, even for substantial earners. The tax advantage if any needs to be worked out very carefully.

I'm not trying to argue for the sake of it, I suppose I'm just trying to raise points I wish I had been alert enough to think of myself, twenty years ago. I think then I would have chosen to try to fund my own ROTH  rather than join my company's 401k ( if ROTHs even existed then, which I don't know!)

Investing for retirement is complex and when you throw in a couple of different tax regimes it becomes mind blowing. So you'd have to go over the maths, but giving up the employer contribution, reduced taxable income and tax deferred growth over what might be 10 or 20 years is a courageous move. Personally I have taken advantage of all the tax deferral I can and have had IRA, ROTH, 401k, 403b, 457, and 401a accounts. I have now rationalized those to IRA, ROTH, 457 and a final salary pension. As a US/UK dual citizen I expect to have 30% US withholding on withdrawals from all those accounts if I move to the UK.

Any strategy of IRA to ROTH conversion should be done over a number of years to minimize the tax paid.