Lump Sum 401-k withdrawal

Old Dec 2nd 2017, 2:33 pm
  #16  
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Default Re: Lump Sum 401-k withdrawal

This page was updated 25th May 2017 and looks to me like distributions from an IRA to a UK resident are taxable in the UK if they are taxable in the US, so that Roth IRA distributions are tax free in both countries but regular IRAs are taxable in the UK and one would use FTCs to claim against the US tax paid on the distributions.

The lump sum is taxable only in the US for a UK resident but it does not clarify if the lump sum has to be the entire amount of the IRA.

I really don’t know the definitive answer as it seems open to interpretation on lump sum taxation or what constitutes a lump sum payment.

IRAs

However, the residence state, under paragraph 1(b), must exempt from tax any amount of such pensions or other similar remuneration that would be exempt from tax in the State in which the pension scheme is established if the recipient were a resident of that State. Thus, for example, a distribution from a US “IRA” to a UK resident will be exempt from tax in the UK to the same extent the distribution would be exempt from tax in the US.
Lump Sums

Under the old Agreement, a lump-sum payment from a pension scheme was taxable only in the country of residence. So if an individual moved from the US to the UK before receiving a lump sum from a US pension scheme, they would be taxable on the lump sum neither in the US (because of the treaty) nor in the UK (which does not tax lump sums anyway).

The new provision prevents this occurring by providing that a lump-sum payment derived by a resident of one State from a pension scheme established in the other State shall be taxable only in that other State.

https://www.gov.uk/hmrc-internal-man...elief/dt19876a
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Old Dec 2nd 2017, 2:43 pm
  #17  
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Default Re: Lump Sum 401-k withdrawal

The “lump sum” payment I made last year went directly from my IRA retirement account to my Roth retirement account so is this a different treatment than for a normal IRA distribution?

In the years leading up to us moving back to the UK I have been converting sums from my IRA to my Roth IRA ensuring that I only pay US taxes on the conversions. I was hoping to continue doing so while in the UK as I still have another 2 or 3 years of conversions planned.
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Old Dec 2nd 2017, 3:07 pm
  #18  
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Default Re: Lump Sum 401-k withdrawal

As I understand it, as far as the IRS is concerned, a lump sum is a withdrawal of the entire amount, and the language in the DTA closed what the IRS considered a loophole in prior treaties.

Whether the UK taxes it or not doesn't mean diddly to the IRS. You can claim a credit for tax paid here, but that's it. Further, the IRS doesn't give a monkey's how the UK defines a 'lump sum'.

My 2 withdrawals were made prior to the changes (part of Osborne's last budget as I remember). In each case, I reported to the IRS, but our taxable income was so low that no tax was due. What I am now trying to figure out is whether I can do some partial large withdrawals that somehow meet the UK definition of a lump sum, and pay no tax here. Unless something changes, DH and I could still be just under the taxable income threshold in the US as well, so I/we would be golden. Just haven't researched sufficiently or done the math at this point. NOTE: - will be grateful for any pointers/suggestions etc.
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Old Dec 2nd 2017, 4:01 pm
  #19  
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Default Re: Lump Sum 401-k withdrawal

Originally Posted by Vadio
As I understand it, as far as the IRS is concerned, a lump sum is a withdrawal of the entire amount, and the language in the DTA closed what the IRS considered a loophole in prior treaties.
Correct.

There is no definition of what a "lump sum" means in the US/UK tax treaty, either US definition, UK definition (more later), or something different. Also, the treaty must be read with the understanding that the 'saving clause' covers part of Article 17, so the part not covered by the savings clause must be read in isolation.

Originally Posted by Vadio
Whether the UK taxes it or not doesn't mean diddly to the IRS. You can claim a credit for tax paid here, but that's it. Further, the IRS doesn't give a monkey's how the UK defines a 'lump sum'.
Correct.

Generally, in the UK, the tax free portion of any pension 'lump sum' is 25% of the total amount, not 100%. To alter slightly your above: "Further, HMRC doesn't give a monkey's how the US defines a 'lump sum'."

https://www.gov.uk/tax-on-pension

UK residence, US residence, UK only citizen, US only citizen, and US/UK dual citizen can all have varying effects where cross boarder taxation of pensions are concerned.
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Old Dec 2nd 2017, 4:13 pm
  #20  
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Default Re: Lump Sum 401-k withdrawal

Totally agree with all of the above. I've read somewhere that the UK only allows the 25% lump sum to be withdrawn every other year. I am considering taking a 25% 'lump' in tax year 2018/19 from one smallish pot as we would just scrape under the US taxable income threshold after exemptions etc. Oh wait - silly me - the Senate passed a bill under dark of night earlier this week that may change all that.....we middle folk may no longer get any exemptions, deductions, whatever.....
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Old Dec 2nd 2017, 5:17 pm
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Default Re: Lump Sum 401-k withdrawal

Originally Posted by Vadio
Totally agree with all of the above. I've read somewhere that the UK only allows the 25% lump sum to be withdrawn every other year. I am considering taking a 25% 'lump' in tax year 2018/19 from one smallish pot as we would just scrape under the US taxable income threshold after exemptions etc. Oh wait - silly me - the Senate passed a bill under dark of night earlier this week that may change all that.....we middle folk may no longer get any exemptions, deductions, whatever.....
Does that mean if you have an IRA of $100k you could take a lump sum of $25k leaving $75k then in 2 years take a lump sum of $18,750 both sums tax free in the UK?

If so then I can simply do this for me and my wife so every year one of us will be converting 25% of our IRAs to our Roth. I can live with that.
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Old Dec 2nd 2017, 7:17 pm
  #22  
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Default Re: Lump Sum 401-k withdrawal

That's what I am not sure about - whether a one-off, or a series of 'lump sums'. Would love to get someone to point me in the right direction on that.
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Old Dec 2nd 2017, 9:05 pm
  #23  
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Default Re: Lump Sum 401-k withdrawal

I'll start with my standard disclaimer: I know nothing about how US pensions of any type work.

(my understanding) Funds in an IRA have been placed there with no tax paid at that point. When the IRA is ultimately distributed as a normal monthly pension, tax is paid on the distribution(s) (or a lump sum).

(my understanding) When an IRA is "transitioned" into a ROTH, the deferred tax is paid on the separate, limited amount transitioned, resulting in the ROTH distributions being tax free. Amounts transitioned to a ROTH are limited yearly by IRS rules.

My question: is this IRA to Roth "transition" viewed as a separate taxable event by the IRS, or is the deferred tax paid seen by the IRS as a necessary part of the "transition", but not a stand alone taxable event? Is it part and parcel of the same pension rights, but transitioned to a new "place"; or is it a close out of one 'amount' of pension and the purchase of an equal amount in an all new pension?

If it is part of the transition, and not a separate event, does HMRC view this as a tax free transition in the US, and therefore a tax free event for HMRC purposes (a tax free distribution, which according to the treaty would be tax free in the UK to the amount that is tax free in the US)?

(IMHO) In a different scenario, if a partial lump sum is taken from the US IRA and placed into the taxpayers bank account which is not part of any pension scheme, tax will be due and none is tax free in the US (even if it ultimately goes into a new, separate pension fund). HMRC would see this as a taxable event in the US, and also a taxable event for the UK resident. The taxpayer would then take a stance that in the UK 25% of that amount [lump sum?] is tax free (which is in keeping with HMRC rules for partial UK lump sums).

(IMHO) Lump sums in the UK are not solely a 100% distribution of the pension. There can be partial lump sums, and 25% of each partial lump sum is tax free. It is not a case of taking 25% tax free on 100% of the entire pot on the first withdrawal, and then taking 25% tax free on 100% of the entire remaining funds on the second withdrawal, and on and on.

(IMHO) Generally, if the UK has imposed tax on the US taxable (event) pension distribution, the taxpayer will pay tax to HMRC first, and then claim FTCs for the UK tax on a US return (including 1040NR) via Form 1116, under the 'resourced by treaty' basket. An 8833 may also be filed.

In the past, there have been discussions both here and the other place regards grey areas/black holes in both IRS rules and the Treaty. Vadio may remember discussions on the inclusion of the UK State Pension for a UK resident on a US tax return. The spirit of the treaty can be interpreted one way, but the literal text of the treaty says the opposite. It's down to the individuals interpretation, and I've yet to hear of any problems for a taxpayer no matter which of the two ways they interpreted it.

Since lump sum is not defined in the treaty, it is a matter of interpretation. Doesn't matter if you're the IRS, a professional, or an individual (although the IRS interpretation, if there is one, usually wins).

Again, only my amateur opinion.
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Old Dec 3rd 2017, 10:13 am
  #24  
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Default Re: Lump Sum 401-k withdrawal

Originally Posted by theOAP
(IMHO) Lump sums in the UK are not solely a 100% distribution of the pension. There can be partial lump sums, and 25% of each partial lump sum is tax free. It is not a case of taking 25% tax free on 100% of the entire pot on the first withdrawal, and then taking 25% tax free on 100% of the entire remaining funds on the second withdrawal, and on and on.
The one thing of which I am certain, is that a plain old withdrawal of any amount from a traditional IRA or SEP-IRA is a taxable event in the US. By that I mean it's not transitioned or moved from one tax-deferred vehicle to another, but just goes into a checking or other account like income from any other source. So, no matter what, I report on my 1040. No way around it.

I know RMDs are income as far as the UK and the US are concerned. So, in another year, when I have to take them, I will report on both returns, resource using the applicable IRS form(s), and take a credit for UK tax paid.

The lump sum withdrawals I took were 100% of puny pots which were earning no interest. Again, reported on the 1040 and noted on the SA as an (assumed) non-taxable lump sum withdrawal. Didn't resource as no tax credits were generated, and the puny amounts didn't attract tax in the US given the other income reported on our joint return.

I am pretty sure I can take 25% of the slightly larger SEP-IRA next year, report on the 1040 and the SA, but attract no UK tax. After that? Still a lot of time to figure it out, or just make a decision and live with the consequences, whatever they may be.

Sometimes DH moans that we would be better off if we didn't have any money to worry about. We don't have a lot, but we have what we have, and I would prefer to keep as large a share as possible.
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Old Dec 4th 2017, 10:27 am
  #25  
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Default Re: Lump Sum 401-k withdrawal

Originally Posted by Vadio
I am pretty sure I can take 25% of the slightly larger SEP-IRA next year, report on the 1040 and the SA, but attract no UK tax.
I agree. Under UK PCLS flexibility rules, if this is a defined contribution pension and this is the first/initial draw down, 25% of the pension pot may be taken, on its own, as the 25% tax free segment of the pension for UK reporting, with all future draw downs being fully taxable (no part of a future draw down is tax free).

https://www.fidelity.co.uk/static/pd...om-pension.pdf
Page 3 of 6

https://www.pensionsadvisoryservice....-cash-lump-sum
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Old Dec 4th 2017, 11:54 am
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Default Re: Lump Sum 401-k withdrawal

Originally Posted by theOAP
I agree. Under UK PCLS flexibility rules, if this is a defined contribution pension and this is the first/initial draw down, 25% of the pension pot may be taken, on its own, as the 25% tax free segment of the pension for UK reporting, with all future draw downs being fully taxable (no part of a future draw down is tax free).

https://www.fidelity.co.uk/static/pd...om-pension.pdf
Page 3 of 6

https://www.pensionsadvisoryservice....-cash-lump-sum
I suppose with a smallish pot like the one Vadio mentioned half of it could be rolled tax free into another IRA at a different brokerage then each pot could be withdrawn completely as lump sums tax free in the UK.

Until recently we had our IRAs and 401ks spread over 4 different brokerages and did tax free rollovers, IRA to IRA in 2 instances and 401k to IRA on the other 2 occasions.
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Old Dec 20th 2017, 5:30 pm
  #27  
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Default Re: Lump Sum 401-k withdrawal

I am a Brit who will be taking my USC wife back to the UK next year. My research into the 401k issues led me to IRS form W-8BEN. (I am new here so can't yet post a link to it)

If my understanding is correct (usual disclaimer - I am not an expert) this means when resident in the UK a NON-USC can withdraw from the 401k without the IRS withholding 30%.

If you are a USC this does not apply. If you are still resident in the USA this does not apply.
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Old Dec 20th 2017, 7:42 pm
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Default Re: Lump Sum 401-k withdrawal

Originally Posted by britgoinghome
If my understanding is correct (usual disclaimer - I am not an expert) this means when resident in the UK a NON-USC can withdraw from the 401k without the IRS withholding 30%.
That's what can be expected from filing a W8-BEN, but sadly, some are finding it difficult. It all depends on who is issuing the pension. Some will send the amount to the UK without a US withholding, others insist on the withholding. Check with the issuer, but if they say they will not be withholding 30%, be sure to obtain that stance in writing.

Originally Posted by britgoinghome
If you are a USC this does not apply. If you are still resident in the USA this does not apply.
All USCs, no matter where they live in the universe, are deemed to be resident in the US for tax purposes as long as they remain USCs. NON-USCs will be considered resident in the US if they file a MFJ return with a US Person. But non-US Persons, filing MFS with a USC spouse who files MFS, are not considered resident for tax purposes.

You don't say how long you've been in the US, and under what conditions, but be sure you check out of the US tax system properly!
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