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Arranging tax for 401k/IRA

Arranging tax for 401k/IRA

Old Sep 7th 2022, 3:17 pm
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Default Arranging tax for 401k/IRA

I'm a UK citizen and I would like to avoid the complications of paying the tax in the US, and believe that normally
401k/IRA's are taxed in the country of residence.
There is an exception in the case of lump-sums, and the suggestion I've read is to take substantially
equal periodic payments so that the IRS do not interpret the distributions as lump-sums.
Does this mean I would have to take monthly payments, and could not vary the distribution by very much
from year to year?

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Old Sep 8th 2022, 3:07 pm
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Default Re: Arranging tax for 401k/IRA

In my opinion, Partial Distributions, Regular Income, and RMDs are not 'Lump-Sum Distributions'. The IRS definition is here:
Topic No. 412 Lump-Sum Distributions | Internal Revenue Service (irs.gov)
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Old Sep 8th 2022, 4:12 pm
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Default Re: Arranging tax for 401k/IRA

If you have not already done so you file form W8-BEN with the institution holding your IRA/401k account and set the withholding to whatever you want, including zero, otherwise as an overseas resident there will be a mandatory tax withholding. I am a US/UK citizen living in the UK and cannot avoid that mandatory withholding but I believe you should be able to make withdrawals and not have any money withheld.

I'm not sure how the filing of taxes works in your case since the institution will send you and the IRS a form 1099-R showing the distribution. Even if no taxes are withheld I would expect you would have to file an IRS tax return. With the return showing you with an overseas address and a UK citizen then they should know that no taxes are due on that withdrawal. I have similar with the UK OAP and US SS, both of which are only taxable in the UK. I don't even mention the OAP but do show the SS received, as per the SSA-1099 I receive, on line 6a, with the taxable amount as zero on line 6b. (I think line 4 is where IRA/401k distributions are listed and you would put the full amount received in 4a, and the taxable amount of zero in 4b)
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Old Sep 8th 2022, 4:52 pm
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Default Re: Arranging tax for 401k/IRA

This is my understanding assuming you are UK resident and not a U.S. person:
  • It’s safer to submit form W8-BEN with every distribution request than hope that they search the file for a W8-BEN submitted earlier.
  • No federal tax should be withheld if it is not a ‘Lump-sum’.
  • After the end of the year you should receive form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding).
  • There is no need to submit an IRS Tax return if no Federal tax has been withheld and no Federal tax is owing.
  • Income should be reported on your UK tax return. HMRC will receive the information reported on the 1042-S.
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Old Sep 8th 2022, 8:58 pm
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Default Re: Arranging tax for 401k/IRA

Originally Posted by Aoi
In my opinion, Partial Distributions, Regular Income, and RMDs are not 'Lump-Sum Distributions'. The IRS definition is here:
Topic No. 412 Lump-Sum Distributions | Internal Revenue Service (irs.gov)
Thanks for the link from which I can see:
A lump-sum distribution is the distribution or payment within a single tax year of a plan participant's
entire balance from all of the employer's qualified plans of one kind


Though this seems quite clear, in doing online searches in the last couple of years, I've found
tax matters horribly complicated particularly with exceptions changing the situation dramatically.
For example it says:
If you do a rollover, the regular IRA distribution rules will apply to any later distributions,
and you can't use the special tax treatment rules for lump-sums.


A couple of years ago, I did some preliminary searches, and found the advice about taking
equal periodic distributions. I cannot now find that article/forum but remember that there was great
concern about what could be called a lump-sum distribution, and that you had to tread very carefully.
I think, but can't be sure, that there was controversy over what was considered a
"periodic payment".

I would like to take maybe one or more distributions of different values each year as needed.
Have you done something like this and had it accepted by the IRS?
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Old Sep 8th 2022, 9:02 pm
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Default Re: Arranging tax for 401k/IRA

Originally Posted by durham_lad
If you have not already done so you file form W8-BEN with the institution holding your IRA/401k account and set the withholding to whatever you want, including zero, otherwise as an overseas resident there will be a mandatory tax withholding. I am a US/UK citizen living in the UK and cannot avoid that mandatory withholding but I believe you should be able to make withdrawals and not have any money withheld.

I'm not sure how the filing of taxes works in your case since the institution will send you and the IRS a form 1099-R showing the distribution. Even if no taxes are withheld I would expect you would have to file an IRS tax return. With the return showing you with an overseas address and a UK citizen then they should know that no taxes are due on that withdrawal. I have similar with the UK OAP and US SS, both of which are only taxable in the UK. I don't even mention the OAP but do show the SS received, as per the SSA-1099 I receive, on line 6a, with the taxable amount as zero on line 6b. (I think line 4 is where IRA/401k distributions are listed and you would put the full amount received in 4a, and the taxable amount of zero in 4b)
I have seen a couple of complaints from people who have filed the W8-BEN and then finding the company
holding their funds not following the rules, and witholding funds.

Thanks for the details of reporting the distribution to the IRS.
I presume you were talking about form 1040NR.
Is it as simple as that? Is there not a specific form for 401k/IRA rollovers?
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Old Sep 8th 2022, 9:08 pm
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Default Re: Arranging tax for 401k/IRA

Originally Posted by Aoi
This is my understanding assuming you are UK resident and not a U.S. person:
  • It’s safer to submit form W8-BEN with every distribution request than hope that they search the file for a W8-BEN submitted earlier.
  • No federal tax should be withheld if it is not a ‘Lump-sum’.
  • After the end of the year you should receive form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding).
  • There is no need to submit an IRS Tax return if no Federal tax has been withheld and no Federal tax is owing.
  • Income should be reported on your UK tax return. HMRC will receive the information reported on the 1042-S.
Thanks, this is all useful to know.
However, as I said above, some people have not been happy with brokerage firms not following the rules for the W8-BEN.
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Old Sep 8th 2022, 9:40 pm
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Default Re: Arranging tax for 401k/IRA

Originally Posted by formfill1
I have seen a couple of complaints from people who have filed the W8-BEN and then finding the company
holding their funds not following the rules, and witholding funds.

Thanks for the details of reporting the distribution to the IRS.
I presume you were talking about form 1040NR.
Is it as simple as that? Is there not a specific form for 401k/IRA rollovers?
Yes, it is line 4 on the 1040NR.

I have done rollovers from 401ks to IRAs and they are a non-taxable event and not reported at all on a tax return.

I have also done IRA to Roth conversions which are taxable events and also reported on line 4
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Old Sep 8th 2022, 9:43 pm
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Default Re: Arranging tax for 401k/IRA

Originally Posted by formfill1
Thanks, this is all useful to know.
However, as I said above, some people have not been happy with brokerage firms not following the rules for the W8-BEN.
When that happens you will be stuck with claiming the withholding back as a refund on a tax return. I have to do this because as a USC living in the UK I still have to make a withholding even from a Roth IRA which is tax free to me. Very annoying.
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Old Sep 9th 2022, 9:41 am
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Default Re: Arranging tax for 401k/IRA

Originally Posted by formfill1
Thanks for the link from which I can see:
A lump-sum distribution is the distribution or payment within a single tax year of a plan participant's
entire balance from all of the employer's qualified plans of one kind


Though this seems quite clear, in doing online searches in the last couple of years, I've found
tax matters horribly complicated particularly with exceptions changing the situation dramatically.
For example it says:
If you do a rollover, the regular IRA distribution rules will apply to any later distributions,
and you can't use the special tax treatment rules for lump-sums.


A couple of years ago, I did some preliminary searches, and found the advice about taking
equal periodic distributions. I cannot now find that article/forum but remember that there was great
concern about what could be called a lump-sum distribution, and that you had to tread very carefully.
I think, but can't be sure, that there was controversy over what was considered a
"periodic payment".

I would like to take maybe one or more distributions of different values each year as needed.
Have you done something like this and had it accepted by the IRS?
About 6 years ago I wrote to HMRC and received a reply which is quoted here:

‘A partial distribution is not considered to be a lump sum payment it would be treated as a pension payment for UK tax purposes. As such any partial distributions need to be reported on your Self Assessment Tax return for the relevant year as per Paragraph 1, Article 17 of the UK/USA Double Taxation Convention.’

I took partial distributions from my 401(k) that were paid with no Federal tax withheld. I did not submit tax returns to the IRS for the partial distributions.
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Old Sep 9th 2022, 2:02 pm
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Default Re: Arranging tax for 401k/IRA

I have also done IRA to Roth conversions which are taxable events and also reported on line 4
I would have liked to have done this, but my account was frozen when they found I no longer had a US address.
I wasn't too unhappy about this, as others had their accounts closed.
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Old Sep 9th 2022, 2:09 pm
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Default Re: Arranging tax for 401k/IRA

I took partial distributions from my 401(k) that were paid with no Federal tax withheld. I did not submit tax returns to the IRS for the partial distributions.
If you didn't submit IRS returns, can you be sure they consider that you don't owe taxes?
In earlier searches, I was concerned about something that was called the "Saving Clause" (I think).
I never saw a definition for this, but it appeared that the IRS could ignore the rules when they wanted (I don't know under what circumstances).
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Old Sep 9th 2022, 2:26 pm
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Default Re: Arranging tax for 401k/IRA

Originally Posted by formfill1
If you didn't submit IRS returns, can you be sure they consider that you don't owe taxes?
In earlier searches, I was concerned about something that was called the "Saving Clause" (I think).
I never saw a definition for this, but it appeared that the IRS could ignore the rules when they wanted (I don't know under what circumstances).
I assist my son (US/UK resident in UK) in filing his US tax return each year and we use TurboTax for both of us. He excludes his salary with FEIE and the tax comes to zero so TT says there is no need to file a return since he has no taxable income, but to get the recent stimulus payments of the last couple of years he needs to file a return so he has been inventing an interest payment of $5 so it allows him to file even though he owes zero taxes.
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Old Sep 10th 2022, 3:50 pm
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Default Re: Arranging tax for 401k/IRA

Originally Posted by durham_lad
I assist my son (US/UK resident in UK) in filing his US tax return each year and we use TurboTax for both of us. He excludes his salary with FEIE and the tax comes to zero so TT says there is no need to file a return since he has no taxable income, but to get the recent stimulus payments of the last couple of years he needs to file a return so he has been inventing an interest payment of $5 so it allows him to file even though he owes zero taxes.
I've not had to file (US) for a UK salary and so haven't come across the FEIE.
My concern about not filing, was that I've seen a number of posts of people finding out years later that they should have been filing.
In fact, it was two years after I left the States that I found out I needed to file a form to prove that I didn't have to pay the "exit tax" for well-payed long term residents.
The system seems to be full of pot-holes where one rule is contradicted by another rule elsewhere.
Have you come across the "Savings Clause" (if that is the correct name).
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Old Sep 10th 2022, 6:48 pm
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Default Re: Arranging tax for 401k/IRA

Originally Posted by formfill1
I've not had to file (US) for a UK salary and so haven't come across the FEIE.
My concern about not filing, was that I've seen a number of posts of people finding out years later that they should have been filing.
In fact, it was two years after I left the States that I found out I needed to file a form to prove that I didn't have to pay the "exit tax" for well-payed long term residents.
The system seems to be full of pot-holes where one rule is contradicted by another rule elsewhere.
Have you come across the "Savings Clause" (if that is the correct name).
The Savings Clause is in article 1 of the tax treaty.


https://assets.publishing.service.go...orce.pdf#page3
Notwithstanding any provision of this Convention except paragraph 5 of

this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.
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