ricko

After receiving a Social Security Administration letter earlier this year, I am trying to tie up loose ends following my return to the UK.
One piece of advice I have seen in this forum is to rollover a 401ik to a Roth IRA.
I am a UK citizen and resident, but NOT a dual citizen, and hope someone could answer the following queries about a rollover.

Firstly, will the financial institution doing the rollover automatically deduct the tax that becomes liable from the rollover, or will I have to file a tax form and pay the money myself?

Secondly, if I do a partial rollover, and only convert the equivalent of the annual personal tax allowance, am I correct in saying that no tax is liable?

kodokan

I think your first problem will be finding a financial institution that will open a Roth IRA account for a non-US resident, unless you already have one?

nun

Yes that's the practical question. Without a US address you will find it almost impossible to open a new account.

The tax implications for an NRA of doing a 401k or IRA to ROTH rollover are quite interesting. There is no tax due in the UK as it's a rollover to another retirement plan in the US. There is tax due in the US though, but as your US income might only include the rollover you should end up paying at a fairly low rate. Make sure you file a W-8BEN with the account administrator before you take any income, although that should be moot for a ROTH but the company might still do withholding as it's a foreign payment.

However, there is still the issue of how you'll open a new ROTH account without a US address. This underlines that finances should be dealt with before any move. Capital gains should be realized, funds should be checked for US and UK tax efficiency and filing ease and retirement accounts should be organized and potentially consolidated with a company like Fidelity or Vanguard.

ricko

I already have a Roth account. This is with one of the institutions that previous posts have said would be ok with this transaction for a foreign address.

Do I need to file the W-8BEN before doing the rollover, or just do it before I take any distributions?

Will I need to fill in a tax form for the rollover, or does the financial institution automatically withhold the tax that is due?

I agree it would have been best to make these arrangements before leaving, but my return to the UK was unexpected, and so I didn't have the luxury to do any planning.

nun

OK you should be able to do it then.

There's no harm in filing a W-8BEN so I'd file one with the 401k and the ROTH administrator to let them know you are an NRA and will be claiming US/UK treaty rights.

You will fill out forms to do the conversion and they generally ask you if you want tax to be withheld or not. If you can pay the tax from funds other than inside the 401k that's obviously better as you end up with more in the ROTH. As you 401k provider about the details and if you being an NRA is an issue.

The critical thing is that a conversion is not considered a distribution for treaty purposes. That's a pretty easy idea to accept for a 401k to IRA rollover as no tax is paid, but it's not as obvious for the IRA/401k to ROTH as you have to include the rollover amount as income on your US tax return and pay tax on it, but still when applying the treaty the rollover is not treated as a distribution and so Article 17 isn't applicable. Article 18.1 is applicable as the money is being transferred from one qualifying plan to another and so the UK does not tax the rollover. So the owner of the IRA/ROTH now just applies US domestic law and pays US tax on the rollover.

I'm not sure if you will be liable to state tax.

ricko

Many thanks for your help.

After getting my UK state pension, I was considering the idea of going to Spain for a year or so and learning the language. It would likely be during this period that I would first take any money from the US retirement funds. So, I would like to delay sending in a W-8BEN until just before taking the first distribution, to avoid any confusion.

If I ask for tax to be withheld, does that mean that I will not have to fill in any tax forms?

nun

No you'll still have to file a 1040NR to make sure you've paid the right amount of tax.

ricko

Thanks for all your help.