W8-BEN Form and US Tax

I just made the minimum required withdrawal from my US Traditional IRA and Fidelity
is taking 30% off the total for US tax even though they have a W8-BEN form from me.
I have had so many arguments with them but have given up now.  What is the point of
this form if they still take the tax out before sending me the rest!   They say I will have
to file US tax form at year end to get it back.  What a mess.  Has anyone else made a
withdrawal from their US IRA this year and been charged this 30% tax?

I just made the minimum required withdrawal from my US Traditional IRA and Fidelity
is taking 30% off the total for US tax even though they have a W8-BEN form from me.
I have had so many arguments with them but have given up now.  What is the point of
this form if they still take the tax out before sending me the rest!   They say I will have
to file US tax form at year end to get it back.  What a mess.  Has anyone else made a
withdrawal from their US IRA this year and been charged this 30% tax?

Why does this matter if you can file a US return in the next few months?

I think it's the hassle of filing the 1040NR and waiting for the deposit/check from the IRS. Also, having made the effort to file the W-8BEN, claimed zero withholding under the treaty and then to have that ignored makes you think that Fidelity are just taking the P!ss.

It seems that the W-8BEN  now simply acts as an authorisation for US financial companies to withhold 30% from your distribution and serves little other purpose.

Filling in and submitting a 1040NR, waiting 6 months for the refund to arrive (the IRS themselves tell you these refunds take this long), and then coping with the hassle of submitting a dollar cheque to a UK bank, and waiting the six to nine weeks they say this takes to collect, and doing this year after year, is just too onerous and costly when you think this money could be working and earning through investments during the time it is kept by the IRS.

I myself now plan to take the entire lump sum from my IRA at once.  That way the 30% withholding will closely approximate the actual tax owed in the US on the graduated tax system (much lower rate than UK equivalent) , and I will be free to invest the entire amount in the UK from here on as I desire.

Over five years plus investing I will likely recoup much of the extra tax incurred by the single step withdrawal, as opposed to annual withdrawals over five-plus years; the money will be completely under my control, and I only have to do this once!

But if you die soon after the lump sum, you will have paid the graduated US tax and your estate will then pay UK IHT on the net sum. 

If I die I don't care  (whether they pay IHT or not).

 I'll be bloody dead 25 years before my actuarial date, so sod it! 

The favourable exchange rate for dollars now means I'll get 16-20% more than three months ago, almost entirely eliminating the excess tax right there.  It would be foolish not to take advantage of this in my opinion.

FYI, I'm asking Vanguard about it's policy.

FYI here is the Q&A I got from Vanguard

Q

Dear Vanguard,
Can you please tell me Vanguard's tax withholding policy in the following
situation:

A UK resident NRA over age 59.5 has a Vanguard IRA from time spend living
and working in the US. They submit a W-8BEN claiming the 0% tax withholding
rate under Article 17.1 of the US UK tax treaty. Does Vanguard still
withhold 30% on any periodic payments from the IRA sent to the UK or do you
apply the tax treaty 0%  withholding rate?

Answer from Vanguard.

Thank you for taking the time to contact us.

As long as we have a valid electronic W-8 BEN completed and on file, per
the treaty, retirement distributions would be subject to a rate of zero
percent rate.

Nun,

Thanks for doing this research, very good of you.

Yes thanks for this - very interesting. 

It's rather irritating for those of us with Fidelity. For those who have not seen the other thread, I called Fidelity and asked them specifically about making partial periodic withdrawals from my traditional IRA (UK resident and citizen, worked in the US for 12 years, all US connections now severed).

They stated unambiguously that all distributions will be subject to the 30% withholding even with a W-8BEN on file, and that's their "new policy".

Here is my recent experience with Fidelity.

As a non-resident alien I was informed by telephone that since the required W8-BEN form was correctly on file, any withdrawals would be free from tax.

I requested a withdrawal from my 401A account. The form I approved stated that no tax would be deducted and that the entire amount would be deposited in my bank account.

I then received further written confirmation that this would be carried out as stated within three business days. 

However, without consulting me, or even informing me, Fidelity violated both written and verbal confirmations by withholding  30% tax.

When I asked why I was not consulted, I was told they were under no obligation to inform me because the amount quoted on the form was only an ''estimate'', but their webpage (as it was then, see below) made clear that the word ''estimate'' refers to market fluctuations not to 30% tax withholding.

When I asked why they did it, I was told that this was a Federal requirement that anyone can look up on the IRS website. (So why was I told otherwise you might ask). But I could not find any justification in the US/UK tax treaty or elsewhere. 

When I explained this, I was told it was not a Federal requirement at all but a Plan requirement! This was later contradicted

Every representative I spoke to fobbed me off by saying ``I am  not a tax expert''  but were unable or unwilling to let me speak to someone who is.

I was told that if I submitted a written complaint  Fidelity would rapidly provide a written explanation but it took two months and still the Customer Care Escalation Case Manager, began by saying ``I am not tax expert'' .  All she could tell me was that my problem was still being ''researched'' and could give no time frame for its completion.

Eventually I was told that a lower withholding rate in accordance with a Tax Treaty ``is not available''.
 
The same Fidelity webpage that told me no tax would be deducted continues to do so. However, a new clause was recently added.

``Regardless of the tax withholding information provided, based on the type of withdrawal and your status as a U.S. citizen, resident alien or nonresident alien, Fidelity may be required to withhold or increase the amount of federal taxes withheld based on applicable regulations and IRS guidance.''

As per my comments on a couple of other threads, TIAA-CREF is following a similar vein. The advisor I spoke with last night put it that if TIAA-CREF don't withhold 30% and the IRS deems you owe tax, they will "come after us for the money". He and the manager admitted that the W8BEN and provisions of the treaty Articles 17 and 19 indicate I should be zero withholding but essentially they can ignore this.

Other things they are getting wrong:

They are defining any cash withdrawal that is not part of an annuity arrangement as being a "lump sum", despite me sending them the IRS fact sheet 412 and the name and number of the IRS tax law section employee who also confirmed that a lump sum is a withdrawal of 100% of the total plan balance in one tax year.

They said I would not owe a 10% penalty for early withdrawal before 59.55 yrs, under the tax treaty.

They said the treaty requires them to withhold 30% "especially if you live in England" - huh? (ironically, I live in Scotland, anyway).

I have all this crap in writing from TIAA-CREF. Is there not some external regulatory agency to whom consumers can send written complaints about these financial companies?

I spoke to Schwab in London this week (who handle US-domiciled IRAs etc. for UK residents etc.) and asked them specifically how they would treat a withdrawal from an IRA from a non-American, UK-resident with a W8-BEN form on file.  They stated they WOULD NOT withhold any US taxes.  "That this is what the customers would expect" etc.  I pushed them on this and they repeated it.  Does anyone have any experience with them in this regard?

Which other (US) brokers handle US IRAs for those of us with UK addresses?  Need to move my IRA to a no-nonsense brokerage.

I know that Etrade and ScottTrade do not.

I spoke to Schwab in London this week (who handle US-domiciled IRAs etc. for UK residents etc.) and asked them specifically how they would treat a withdrawal from an IRA from a non-American, UK-resident with a W8-BEN form on file.  They stated they WOULD NOT withhold any US taxes.  "That this is what the customers would expect" etc.  I pushed them on this and they repeated it.  Does anyone have any experience with them in this regard?

Which other (US) brokers handle US IRAs for those of us with UK addresses?  Need to move my IRA to a no-nonsense brokerage.

I know that Etrade and ScottTrade do not.

When you move money from one IRA trustee to another IRA trustee;  you need to know if this transaction becomes taxable in the UK. HMRCs view is that this transaction would fall within 18(1); so would be taxable.

When you move money from one IRA trustee to another IRA trustee;  you need to know if this transaction becomes taxable in the UK. HMRCs view is that this transaction would fall within 18(1); so would be taxable.

So HMRC just ignores the "(and not transferred to another pension scheme)" wording in 18(1)?

The IRS will tax an IRA withdrawal if it is not rolled over to another IRA within 60 days and the method is usually to do a direct trustee to trustee transfer so the IRA owner never touches the money. If those rules are followed and the IRA (pension) is directly transferred to another IRA (pension) it seems deliberately obtuse of HMRC to consider that a UK taxable event if a treaty exemption is claimed.