Tiler2

Hi - I am a UK citizen living in the UK but I still have an IRA in the USA (I worked there a number of years ago) and I am currently considering a withdraw of around £100k for a house purchase (NB I do not meet the 59.5 age requirement to start withdrawals and I do not hold a green card).

The company that holds my IRA have confirmed that there will be a 30% withholding for doing this. I would be interested if anyone else has taken this route to make a withdrawal and in particular with regards to the tax position on both sides.

If I take the withdrawal will I need to file US income taxes for the current year and if so will the 30% tax cover my liability in the USA or will the withdrawal just be treated as US income and be adjusted.

Any advice on this (including the tax forms needed in the USA) would be gratefully received.

In the UK will the transfer be considered as income and if so I assume any USA tax paid will be taken from my tax liability under the US / UK tax treaty.

Tiler2

A further question I have relates to US tax filing after the withdrawal - is it optional to file a 1040NR for the year in which the withdrawal was made given that there has been a mandatory withholding or is this required.

Also can the full amount of the withholding (the tax part and the penalty part) be offset against UK income taxes for the distribution, or does a 1040NR need to be filed to confirm the calculated level of US income taxes that can be offset against the UK taxes due.

Owen778

You probably won't find anyone here who has done this before. This is because it's a very bad idea. Paying 30% of your retirement account in order to put it towards a house represents a very bad return.

If you did go through with it, you would definitely want to file a US tax return. The 30% withholding is set that high so that it's almost always higher than what you'd actually owe. Not filling a return makes it even more of a bad idea than otherwise.

Russet

In addition to the 30% withheld for tax, as you are under 59.5, there will also be a 10% penalty for early withdrawal from your IRA. You may get some refund of the 30% that is withheld for taxes once you file your return (depends on your other income) but taking $100k in a single tax year effectively increases your annual income by $100k putting you into a higher tax bracket. So overall probably not a good return on your investment.

Rete

Not 100% sure but I don't believe the 10% penalty applies if the funds were used to buy a principal residence.

durham_lad

Tiler2

Thank you for all replies, NB the low value of the £ currently does go some way to offset the penalty.

I do have a further question - when I do the filing 1040NR, do I just enter the withdrawal amount from the IRA as the income during the year, ie. I’m assuming I do not also have to include UK income on the 1040NR as I am domiciled in the UK and will be taxed here for UK taxes (higher than the USA) and given that there is a tax treaty between UK and USA which prevents double taxation.

Also is there software I can use with the 1040NR to calculate any refund after the 30% taxes have been deducted?