Fidelity IRA distribution to UK-periodic No-no!

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!)

I've done the math for my situation where I will have income of around $30k a year and the tax in the US and the UK are very similar.

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.

I'd forgotten about the employer match, thanks for the reminder.

Our son is a dual UK/USC and earns a modest salary.  His company 401k isn't too good but the match is decent so he puts enough in to get the company match (otherwise it is just free money being left on the table) and then contributes to a Roth (he is far too disorganised to contribute to a regular IRA and keep the track of the basis over the coming decades). 

No idea whether he will repatriate or not.

Our son is a dual UK/USC and earns a modest salary.  His company 401k isn't too good but the match is decent so he puts enough in to get the company match (otherwise it is just free money being left on the table) and then contributes to a Roth (he is far too disorganised to contribute to a regular IRA and keep the track of the basis over the coming decades). 

No idea whether he will repatriate or not.

Sounds like a good strategy.

I've done the tax maths for my situation where I expect an income of around $30k a year and the US and UK tax are very similar. The situation will be different for different income levels which is part of the difficulty in this sort of retirement planning. Still I would not give up the employer match and the tax deferred growth of a 401k.

Sounds like a good strategy.

I've done the tax maths for my situation where I expect an income of around $30k a year and the US and UK tax are very similar. The situation will be different for different income levels which is part of the difficulty in this sort of retirement planning. Still I would not give up the employer match and the tax deferred growth of a 401k.

The other point I forgot to raise was that if tax on growth is deferred,  and you are eventually going to be taxed on growth as income in a country where the absolute lowest tax on income is 20%, is it always advantageous to defer  growth tax (which is mostly on long term capital gains) when your non-deferred long term capital gains tax in the US is 15%?

Again it's so dependent on the real life amounts involved, it's dauntingly difficult to work out the right thing to do.

Nevertheless I'm just raising this in the hope that it  might encourage people do the sums as far as possible, and not just trust it's automatically a good deal, as I did.

The other point I forgot to raise was that if tax on growth is deferred,  and you are eventually going to be taxed on growth as income in a country where the absolute lowest tax on income is 20%, is it always advantageous to defer  growth tax (which is mostly on long term capital gains) when your non-deferred long term capital gains tax in the US is 15%?

Again it's so dependent on the real life amounts involved, it's dauntingly difficult to work out the right thing to do.

Nevertheless I'm just raising this in the hope that it  might encourage people do the sums as far as possible, and not just trust it's automatically a good deal, as I did.

The level of taxable income, deductions and allowances are important as they determine your actual tax rate. So for someone with £20k income in the UK the actual tax rate is 9% because the first £11k is tax free.

With 401k you get tax free growth and also a reduced tax bill now because of tax deferral. If you take the money and invest it outside a 401k you pay tax on more income now, pay tax on dividends and maybe on capital gains distributions if the fund declares them. Factor in a 3% employer match and the 401k looks pretty good, but I'll run some numbers

Just to follow up on one major question of the thread.

I talked to Fidelity and they say they will definitely NOT follow the UK-US tax treaty calling for 0% withholding on IRA distributions, and will withhold 30% even with W8-BEN on file.

"New policy" according to the customer service guy I spoke to.

Just a brief observation that this thread reflects the same experience I have had with TIAA-CREF with my 401k (I've been long-term NRA since 2006, UK citizen and resident).

They asked me to file W-8BEN then effectively have said for the last 18 months, "We don't really care what you say, we will withhold 30% on all lump sum withdrawals, and we will define define lump sum in any damn way we want".

I suppose the small number of UK citizens affected by this means that HMRC and the UK government wouldn't give a toss, either.

Are there any US citizens on here having the reverse experience, i.e., UK financial institutions choosing to ignore the provisions of the US-UK tax treaty for US citizens who have repatriated?

My recent experience with Fidelity is consistent with  previous posts.  I am a UK citizen and taxpayer and have  a 401(k) I contributed to over 20years ago.  I am near the age when I will be obliged  by the IRS to make minimum annual withdrawals, so I  decided to set up to withdraw close to the minimum annual amount ( less than 5%, so not a lump sum withdrawal as defined by the IRS ).
After reviewing the IRS and  UK-US tax treaty I sent a W8BEN to Fidelity claiming the 0% tax rate for withdrawals.  I had to phone them to confirm they had received it and had noted the fact on my account.
I made a withdrawal and the statement at the time of withdrawal showed 0% tax deducted so the Net amount was the same as the gross...Success ? ...No!
...A few days later my bank account showed a smaller amount had been transferred...
.. The Fidelity account now showed a statement of 30% withholding deducted from the taxable amount.
.. I phoned the Fidelity number  to point out their error, but they gave me the same story that 'non-periodic withdrawals are taxable, and  foreign citizens are subject to 30%withholding'
Thus ignoring the W8BEN..
It has taken me months to set up the bank transfers, wire transfer agreements, foreign exchange etc, so it is very frustrating lose 30% of my savings for at least a year,when I will have to pay tax on it in the UK.

 .. so what now

Early next year, file a Form 1040NR and claim a refund of the tax withheld.

My recent experience with Fidelity is consistent with  previous posts.  I am a UK citizen and taxpayer and have  a 401(k) I contributed to over 20years ago.  I am near the age when I will be obliged  by the IRS to make minimum annual withdrawals, so I  decided to set up to withdraw close to the minimum annual amount ( less than 5%, so not a lump sum withdrawal as defined by the IRS ).
After reviewing the IRS and  UK-US tax treaty I sent a W8BEN to Fidelity claiming the 0% tax rate for withdrawals.  I had to phone them to confirm they had received it and had noted the fact on my account.
I made a withdrawal and the statement at the time of withdrawal showed 0% tax deducted so the Net amount was the same as the gross...Success ? ...No!
...A few days later my bank account showed a smaller amount had been transferred...
.. The Fidelity account now showed a statement of 30% withholding deducted from the taxable amount.
.. I phoned the Fidelity number  to point out their error, but they gave me the same story that 'non-periodic withdrawals are taxable, and  foreign citizens are subject to 30%withholding'
Thus ignoring the W8BEN..
It has taken me months to set up the bank transfers, wire transfer agreements, foreign exchange etc, so it is very frustrating lose 30% of my savings for at least a year,when I will have to pay tax on it in the UK.

 .. so what now

It's coincidental that I got an alert about your post as I had just got off the phone (2 hours) with TIAA-CREF. My efforts are ongoing, but TIAA-CREF still don't know what they are doing - 4 weeks ago I was told they had checked my W8BEN, including the detail about Article 19(b) and "Good news, we can confirm you are subject to zero withholding. We will send you a confirmation letter within 10 working days"

Still waiting for that letter.

The suggestions to file and get a refund are facile. Who has the kind of money they can just forego 30% of money needed for living expenses until the IRS kindly gives them back what a financial company knowingly incorrectly withholds?

I'm struggling with the concept that a US FI is the sole interpreter, authority, and final adjudicator of a negotiated international tax treaty.

So much for tax treaties.

Tapping into my 401(k) places me in a higher UK tax bracket, so I will be paying 40% UK tax on the Gross amount withdrawn, as well as suffering Fidelity's  unwarranted 30% withholding on the Gross.  The double taxation treaty is meant to avoid this.
So I have to file a 1040NR, or can I claim the US tax as a foregn tax credit on my UK tax ?

Tapping into my 401(k) places me in a higher UK tax bracket, so I will be paying 40% UK tax on the Gross amount withdrawn, as well as suffering Fidelity's  unwarranted 30% withholding on the Gross.  The double taxation treaty is meant to avoid this.
So I have to file a 1040NR, or can I claim the US tax as a foregn tax credit on my UK tax ?

No, you file the 1040NR to claim the 0% tax rate for UK NRAs and the IRS will send you a check for the 30% withholding. There is no US tax on the 401k withdrawal (the withholding is in lieu of any US tax) so you can't claim a foreign tax credit on your UK taxes.

Thanks for the clarification; I was assuming the 'withholding'  counted as tax paid if I did not claim it back from the IRS, You have made it clear that  I have to file the US tax forms  with the  IRS to establish the appropriate amount of tax paid / and or get a refund.

Thanks for the clarification; I was assuming the 'withholding'  counted as tax paid if I did not claim it back from the IRS, You have made it clear that  I have to file the US tax forms  with the  IRS to establish the appropriate amount of tax paid / and or get a refund.

Yes, FYI HMRC are under no obligation to give you a tax credit for tax that you paid in error to the IRS.