Starf

Hi all, I couldn't quite find the answers to my question by searching other threads.

I previously worked in the US (am a UK citizen) and built up a small 403b fund. I am now permanently back in the UK (and have been the whole of this tax year).
I want to just do an early withdrawal since there isn't that much in the fund (I know I will have to pay the 10% penalty). TIAA-CREF will withhold 30% fed tax, which I was expecting anyway, since they say it is not exempt under the tax treaty.

So my question is, is this 30% flat rate the actual rate of tax I would have to pay on it, or do they just withold that much with the possibility of me claiming some of it back later?

1. If so, could I get a partial refund by filing a 1040-NR next April? I don't have any other US-related income other than this.

2. Alternatively, could I claim some of the tax paid as a kind of tax credit on my UK taxes for this year?

(I don't have any idea how to go about doing either of these options!)


I'm well aware that I will have to pay some tax on it - I'm just trying to figure out if I have to pay a flat 30% rate, or if I pay a graduated rate based on the rest of my US or UK income.

Thanks in advance for any advice!

Michael

This would be my best guess. Since you claim it is not covered under a tax treaty, I don't believe that you can file a 1040NR since if you could, the 1040NR doesn't consider worldwide income and therefore for low income you would likely not pay any taxes in the US due to exemptions and deductions or pay taxes in the 10% bracket if the income was higher.

Foreign tax credits can only be applied against similar income from foreign sources. Therefore only if you claim the 403(b) income as income on your UK tax return, then taxes paid in the US can be applied against that income.

However nun claims there is a tax loophole (tax treaty) under certain conditions by rolling it over into a Roth IRA to get around the penalty and then not paying taxes in either country if you meet the distribution requirements. No one is sure if that is correct.

http://britishexpats.com/forum/showthread.php?t=807919

nun

It all depends on your residency, citizenship and how you withdraw the money.

If you are a US NRA resident in the UK you need to file a W-8BEN with TIAA-CREF and claim tax treaty exemption from the withholding tax. You will have to pay the 10% penalty but zero US tax if you take periodic payments, no need to file a 1040NR. However you must pay UK tax on any 403b distribution. If you take the money as a lump sum then it is only taxable in the US and as an NRA 30% tax would be withheld and you'd have to file a 1040NR declaring the lump sum payment as income. You'd probably get a lot of the 30% tax back depending on your US source income, and tax bracket.

Now to the loophole Michael mentioned. FYI it's just academic for now and you should get professional advice before you try it because it could well be wrong!!!!!! So I am in no way advocating this approach.

If, instead of taking the money from the 403b, you were to roll it over into a ROTH IRA, in several periodic payments and claim zero US tax withholding there would be no US tax due. The next bit is what surprises me. Apparently HMRC does not tax 403b, IRA, 401k etc rollovers to ROTH IRAs because it's a rollover from one qualified pension plan to another and exempt under Article 18.1 of the tax treaty.

Starf

Thanks for the replies!

I think I am a bit too risk-averse to try using that loophole for a relatively small amount.

For clarity, I am a UK citizen and UK resident - I would take the money as an early withdrawal (?non-periodic payment, not technically a lump-sum?), as I am under 59.5yrs.

So it looks like my best option would be to file the 1040NR.....is this correct for my residency status? I have been looking into this in more detail and just want to double check a few things on the form -

1. Would I declare the gross amount as a Pension&annuity payment on line 17a (and I hope TIAA-CREF will send me a 1099-R with the taxable amount to put on line 17b)?

2. I assume I can only claim the personal exemption ($3800), but no deductions. With this, I would likely fall into the 10% tax bracket, and I would take the value from the tax table to put on line 42.

3. Include the 10% tax penalty on the gross total amount on line 56?

Finally, does anyone know if/how I have to declare any of this to HMRC too?

Thanks again!

nun

If you take the entire amount of the account out in a single payment it will be a lump sum and as such only taxable in the US. TIAA-CREF will impose a 10% penalty and withhold 30% and send you a 1099R. Then you need to file the 1040NR to reclaim any excess tax.

There is no UK tax on a lump sum distribution in your situation.

edit.

Now that I think about it I think that the 403b distribution isn't a lump-sum because you made it before 59.5. So in that case you would file the W-8BEN and ask TIAA-CREF to withhold zero tax under Article 17.1 and just declare the distribution to the UK for tax. No 1040NR would be required.

Starf

After reading several threads on here, I did try to submit a W-8BEN and asked TIAA-CREF to withold 0%. They still insist on witholding the 30% since it is an early withdrawal (I specifically asked them about my W8-BEN).

So I think I will just have to claim it back on the 1040NR then.