I received a message from a member on this site asking a couple of questions which I think are useful to the wider community here.

To answer the first question:
1. Create a USD based Wise account. This will give you a US bank routing number and your personal bank account number. Wise use the COMMUNITY FEDERAL SAVINGS BANK, Routing number 026073150

2. Login to your Vanguard account and select Profile - Bank Information and from here you can add a new bank account where you would put your routing number and account details.

3. Vanguard will verify the new account details by making a number of micro deposits and you have to monitor your Wise bank account and once those deposits arrive, log back into Vanguard and report the amounts you received. Vanguard then do more background checks before validating the account. This process will probably take over 7 business days, but you can understand why the security is strong on this.

4. Once the account is validated then log into Vanguard and add it to your Roth account. You can then transfer money from your Roth to your COMMUNITY FEDERAL SAVINGS BANK account, free if you use ACH which takes 1 or 2 business days. You can also transfer it by wire but the bank will charge for an incoming wire so I always use ACH. As soon as the money hits the COMMUNITY FEDERAL SAVINGS BANK then you will get a notification from your Wise app, and assuming you already have your UK bank set up as a receiving bank in Wise then it only takes seconds to move the money into GBP in the UK bank. Yesterday morning I requested a transfer from a Vanguard taxable account, it arrived this morning and I then transferred it to my UK bank.

To answer your 2nd question then we may need some input from the good folks here. I am a dual UK/US citizen as is my daughter and she maintains a US forwarding address which she lets me use. Although Vanguard have my street address as my UK address they also have the forwarding address as my correspondence address. That allows me to have no tax withholding on Roth IRA withdrawals.
I believe there may be an IRS form you can file with Vanguard stating that you are an overseas resident not liable to US tax on Roth IRAs but I don't know what form that is.

Thank you, this is very helpful.

OP originally asked about "how you avoid tax penalties" and as far as I know these cannot be avoided through any treaty e.g. if IRS was going to levy a 10% penalty on Roth withdrawal because of the 5-year rule then that is what it is, there is no treaty provision preventing this. But absent any penalties, the withdrawal itself should be tax-free in both the US and the UK, though a belts-and-braces approach might be to file a W8-BEN with Vanguard. Caveat - I've no direct experience of this yet, my response is based on my (often imperfect) reading of the treaty.

Thanks for this, I did indeed answer the wrong question, and thanks for pointing out that W8-BEN is the form to file with Vanguard to avoid a mandatory 30%(?) withholding. I'm pretty sure Vanguard will insist on a withholding without being in receipt of that form.
https://www.irs.gov/individuals/inte...ty-withholding

Quote:

Mandatory withholding on payments to be delivered outside the United States

I'm also thinking that the OP will need to file a return with the IRS for the year he makes his withdrawal showing the money going out and paying any taxes or penalties due. (He will receive a 1099-R from Vanguard in due course.)

Thanks for the additional information. I've already paid IRS tax on all the contributions (401a, 403b) and I had understood that withdrawing contributions did not incur further tax.
I was also advised that the investment income would grow tax free in the Roth providing I did not withdraw within 5 years of the start of the Roth, but this seems contrary to EHM's advice here ?

Here is a nice flowchart to see whether or not distributions are taxable. I kept it simple and waited until I was over 59.5 years old.

https://www.irs.gov/publications/p590b

Apologies if what I originally said seemed contradictory. The IRS flowchart is your best guide to the US treatment; and the UK-US treaty states that qualified withdrawals that are tax free in one country are also tax free in the other. For non-qualified withdrawals, the treaty would also cover which country should have primary taxing rights so the key is really to follow Roth rules to make sure withdrawals are qualified and carry no penalties (your original question was how to avoid penalties.)
When you tell Vanguard you are a non-resident alien you might want to check whether they need a W8-BEN on file to make sure they don't withhold from future qualified withdrawals. I'm not saying they will, as I have no experience wtih Vanguard, but it may be worth having that conversation. My own experience has been with Fidelity and when they changed my status to NRA I had to jump through more paperwork hoops than seemed necessary based on what was said on IRS website or blogs, but that's what Fidelity's systems needed in order to apply correct withholding rates for me (non-Roth accounts.)