outofwater

I lived in the US for almost 10 years until 2016 and paid into a pension via an employer for the last four of those years. I am now living in the UK and would like to withdraw a lump sum from my pension. I understand that under the US/UK double taxation agreement I would owe taxes on this in the USA rather than the UK as this is specifically a lump sum rather than standard pension distributions (Article 17.2). I believe that as I don’t qualify for an exemption this would include a 10% early withdrawal penalty as I’m under 59.5 as well as standard federal withholding. My pension provider will withhold 20% as standard but I can adjust this. My questions are:

1. How do I calculate what tax I will owe - is it 30% (10% early withdrawal penalty + the standard 20% federal tax my provider appears to be applying) or will the amount of federal tax depend on my UK earnings? I assume I would not be eligible for any personal exemptions?
2. When it comes to time to file what forms do I need to complete for the USA?

I realise this is a fairly niche question as I haven’t managed to find a straightforward answer online or identify a tax expert that can help me, but hoped someone here might have relevant experience. It’s not a huge sum so I’m not keen to spend a fortune on expensive tax preparation experts but will do so if anyone can recommend a reliable preparer that has the expertise to help in this situation.

durham_lad

I think we need more information about you to suggest any answers. I have done what what you are suggesting without the 10% penalty as I was in my 60's but I am a USC living in the UK so file US taxes every year making it easy to estimate the extra taxes on the lump sum withdrawal as I do an estimate using the previous year's return.

The default 20% amount withholding is not dependent at all on what you will actually pay and you can adjust that amount once you have an idea of what you will actually owe.

So, first question is are you a "US person"?

If not, you can file form W8-BEN with the institution holding your account and set the withholding to whatever you want, including zero.
https://www.irs.gov/forms-pubs/about-form-w-8-ben

If you a US person, for example a US Citizen, then all worldwide income is taxable and you should have been filing US taxes each year anyway.

To estimate your taxes you could Google Estimate Federal Taxes and there are several to choose from including
https://www.nerdwallet.com/taxes/tax-calculator and
https://smartasset.com/taxes/income-taxes#BqlHuXulqR

The lump sum will be taxed as regular income so simply add that to your income. You could then add 10% tax on the lump sum to give the final tax estimate. For example, for a $30,000 withdrawal you will be paying an extra $3,000 tax. Using the calculator above if your total income was $40,000 then you will owe $3,095 tax (plus an extra penalty of $3,000).

outofwater

Thank you for taking the time to reply. I’m not a US person, just a UK citizen now back to living in the UK. So the last time I filed US taxes would have been for 2016/17 when I filed as a part year resident for the portion of 2016 that I was still living, working, and earning in the USA.

In terms of calculating my income for US tax filing purposes, would I be right to assume this would only be the lump sum as this is the only portion of my income from a US source? Is this then taxes as regular taxable income using the usual tier tables or is there some other rate that applies to lump sums that I need to be aware of? I keep seeing 30% mentioned, but this seems to be a standard withholding the pension companies may be required to apply as opposed to the final tax rate, but I may be completely misunderstanding.

durham_lad

I’m afraid I don’t know the answer for sure but am certain that you can forget about the 30% mentioned as being the actual tax owed. As I said above, the lump sum withdrawal from your retirement account is simply counted as regular income plus the 10% penalty for early withdrawal.

As a non-resident alien I think you are only subject to taxes on your US income.

https://www.irs.gov/businesses/taxat...ident-aliens-1

Aoi

I am not an expert. This is my understanding:

• Article 17.2 will apply if you tick the box on the Retirement Distribution Request form for ‘’Lump sum distribution of total vested balance’.
• Federal tax might not be withheld if you submit form W-8BEN with the Retirement Distribution Request, unless the retirement plan provider is aware of Article 17.2. If you do not submit form W-8BEN 30% federal tax should be withheld.
• Federal taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If your retirement plan provider does not withhold federal tax you may want to pay estimated taxes when the income is received.
• https://www.irs.gov/businesses/small...stimated-taxes
• The retirement plan provider will issue form 1042-S showing the Gross Income and Federal Tax withheld.
• You need to submit form 1040-NR to the IRS. For non-resident tax returns I recommend using:
• https://www.sprintax.com/
• I do not know about reporting the 10% early withdrawal penalty. Considering the state of the British economy, I would be inclined to keep the US pension as a safety net in case the £ collapses.
• The FATCA will result in HMRC receiving the information on form 1042-S. To reduce the risk of being the target of a so called ‘one to many campaign’ inspired by 'No Safe Havens 2019 - HMRC’s strategy for offshore tax compliance', I suggest that you report the distribution in the ‘Any other information’ section of your UK tax return with a reference to Article 17(2) and HMRC Manual DT19853 (Formerly DT19876A).

kfbell

It's a question for which I took expensive advice from US/UK tax advisors in London. Their advice was summarized as follows
For the purposes of Article 17.2, "A lump-sum payment is defined in these circumstances as the full balance of a pension plan" so,
- If you took the full balance in a lump sum payment, it would be fully taxed in the US and exempt from taxation in the UK.
- If you took the monies in more than one payment (a periodic payment) it would be fully taxed in the UK and exempt from taxation in the US
I suppose it's possible that other people could interpret the treaty wording in other ways but this guided my actions.

outofwater

Thank you, that's helpful. There's actually a portion that I can't take out at all at the moment due to the way it's been set up and I could just as well take what's there in instalments rather than a single lump sum so that might sort it. Do you have any recollection how you completed the W8-BEN?

I did try to work out what the US taxes would be if I had to pay them and got stuck trying to work out whether it would count as Effectively connected income (ECI) or Fixed, Determinable, Annual, or Periodical (FDAP). The best I could work out was that the % attributable to the contributions themselves might count as ECI and the interest accrued as FDAP but I'd really prefer not to get caught up in that quagmire if I don't have to. Plus if I'm not withdrawing it all how would I even know whether I'm withdrawing ECI or FDAP?!

minhan

Hi, I came across this post and found that my family is in the same situation. We keep debating whether we should just close the 401K account, pay the penalty, pay the US tax and then pay UK tax, put that money in ISA and then done with the US taxes. Reading your response, we don't have to pay UK tax if we pay US tax at closing the account (taking out the lum sump). Do we report foreign income when we file our UK tax? We're still have along way before reaching 59 ½ and we're not USC.

kfbell

"Do we report foreign income when we file our UK tax?" I was advised to do so I did. Added a note in the Any other information section of the return to HMRC to the effect that a lump sum payment of $XXX from IRA (in my case) taxable in the US under Article 17(2) of the US-UK Double Taxation Treaty.

minhan

Thank you! I am going to try to digest that Treaty Article. It's not as direct / easy to understand.

kateg60

The issue I am having is that I am required to declare the money will not transferred overseas. So if I transfer to WISE US account then to UK account am I crossing a legal boundary??

durham_lad

I've never heard of that. Which brokerage has this rule covering IRA distributions?

kateg60

Schwab, ugh.

"That you represent and warrant that you will not use this enrollment to send money outside the domestic United States."

kfbell

That's new or I didn't notice it in 2021. I had Schwab send the entire balance of my IRA to Wise and I then sent it on to my UK bank with no issues. I subsequently reported the transaction to the IRS in my 1040NR and got a tax refund.

durham_lad

I still don’t understand the reasons why, since they advertise themselves as being good for overseas customers. Where do you see this statement?



Exactly. I can’t see why Schwab would say that you can’t withdraw your own money unless you promise to never send it overseas.