ricko

I posted the message below in the Moving Back to UK board, but thought it might be of use as a forewarning in the US board.

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After moving back to the UK, the custodian of a Roth IRA I have, wrote to me. They say that IRA's and qualified plans have tax withheld at 30% for non-resident aliens.
My understanding is that no tax is payable on a Roth as the contribution had already been taxed.
Is there anyone who has returned and recently started receiving their IRA or 401k pension? I would be glad to hear from them about their experiences in getting their pension, both good and bad.

paddingtongreen

The income earned by the IRA would be taxable, I don't know why the contributions would be..

Bluegrass Lass

Someone please correct me if I'm wrong as I'm not an extremely knowledgeable at IRA's. That being said, I believe that since the contributions you make to a Roth IRA have already been taxed, you aren't supposed to pay taxes when you actually start receiving the IRA. Whereas, traditional IRA's are contributed pre-tax, therefore you pay taxes once you start receiving your retirement. Look here: http://www.bankrate.com/brm/itax/tips/20010328a.asp. In the first paragraph it states "If you opt for a Roth account, you won't get an immediate tax break, but you won't pay any tax on your money when you eventually take it out."

But I have no clue how the non-resident alien thing works into this scenario.

paddingtongreen

True, but I assumed they were withdrawing it early to repat to the UK, so the money earned by the contributions would be taxable.

Bluegrass Lass

Ahh, I assumed the OP wasn't withdrawing it early. I figured he was of retirement age, and was finding out that the earnings are taxable due to him being a non-resident alien.

ricko

I am NOT withdrawing it early!!
If you do that I believe that you will get a 20% penalty.
The 30% withholding would be for distributions after retirement age.

Giantaxe

For a Roth IRA that would be odd given that withdrawals are normally tax-free and the Roth IRA is specifically mentioned in the UK-US tax treaty as a "qualified pension scheme". I would certainly try and cross-check this information as it really seems strange.

Remember there are some circumstances where a Roth IRA distribution is taxable:- the two I can think of are when you're under 59 1/2 and when you are withdrawing contributions that were recharacterized from a regular IRA less than five (?) years earlier. Maybe this is the basis for the "justification"?

meauxna

I'm curious too.. can you get more information?

robin1234

Publication 515, Withholding of Tax on Non-Resident Aliens, talks about 30% withholding for all sorts of income. I assume the reason is, if you don't live in the jurisdiction, you'd be tempted not to file your tax return, and the 30% withheld would encourage you to do so.

This applies to IRAs and qualified plans, but shouldn't apply to Roths. Maybe the plan person was writing about the general situation, not knowing the OP was thinking primarily about a Roth?

Robin

fatbrit

So the tax is withheld but can be refunded by filing a tax return?

robin1234

Exactly right. But, withholding should be from taxable income only, not non-taxable income. I'm just a tax payer, not someone who's studied these matters deeply, but (as others have stated) I believe a distribution from a Roth IRA account should be non-taxable since the money went into the account after tax.

Robin