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US Mutual Funds unfavorably taxed - in IRA?

US Mutual Funds unfavorably taxed - in IRA?

Old Dec 16th 2009, 2:23 am
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Default US Mutual Funds unfavorably taxed - in IRA?

Hello,

What are UKC's experience of holding and taking payments from US IRA's while living in UK.
As a UKC, but long term US resident & naturalised USC I have built a Retirement Fund in Roth IRA and Traditional IRA's.

Now, I'm aware that if I hold Mutual Funds as a regular, non-retirement investment and live in the UK then these are highly taxed by HMRC as Income and not the lesser CGT.

(and here's my question) But if the Mutual Fund is in an IRA , which has special tax priviledges (similar to UK ISA's) then is there still a tax disadvantage ?
-Traditional IRA is treated as Income when I withdraw the funds, so isn't it a wash? Or would I pay a HMRC rate higher than my UK income tax bracket at the time of taking payment?
- Roth IRA is US tax free (and UK also per Tax Treaty) when withdrawn so surely it doesn't matter what the investment is in, it is still Tax free, right ??

Does anyone have experience or knowledge of this IRA / Mutual Fund circumstance?

Thanks,
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Old Dec 17th 2009, 11:52 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Well I discovered something that throws a somewhat different light on this;

- the broker that administers my Roth IRA says they will with-hold 30% tax on it if I withdraw it as a non-resident.
Yes, they say, we know a Roth IRA is tax free upon withdrawal in the US, and they say they have no reason to disbelieve me quoting that the UK/US Tax Treaty would also make the Roth IRA free of UK Tax also - but they have a policy that says they will with-hold and so with-hold they shall.

The with-holding would be passed to the IRS and it would be up to me to try to get it back. Well that would mean waiting until at least tax filing in the following year and then what chance of getting it back.

So note to all with Roth IRA in US, watch for administrators policy of witholding if you are non-resident, even if the money is free of tax in the US.

For me, well I reckon the way forward is to withdraw all the Roth IRA free of tax while still resident in USA and be done with it - I don't relish trying to find an administrator that guarantees forever that they would not apply a non-resident with-holding. Pity, because the Roth IRA monies could have been growing free of tax as long as I left them in the Roth.
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Old Dec 18th 2009, 8:30 am
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Originally Posted by J.J View Post
Well I discovered something that throws a somewhat different light on this;

- the broker that administers my Roth IRA says they will with-hold 30% tax on it if I withdraw it as a non-resident.
Yes, they say, we know a Roth IRA is tax free upon withdrawal in the US, and they say they have no reason to disbelieve me quoting that the UK/US Tax Treaty would also make the Roth IRA free of UK Tax also - but they have a policy that says they will with-hold and so with-hold they shall.

The with-holding would be passed to the IRS and it would be up to me to try to get it back. Well that would mean waiting until at least tax filing in the following year and then what chance of getting it back.

So note to all with Roth IRA in US, watch for administrators policy of witholding if you are non-resident, even if the money is free of tax in the US.

For me, well I reckon the way forward is to withdraw all the Roth IRA free of tax while still resident in USA and be done with it - I don't relish trying to find an administrator that guarantees forever that they would not apply a non-resident with-holding. Pity, because the Roth IRA monies could have been growing free of tax as long as I left them in the Roth.
You can never count on whether there'll be some weird situation arising, or change in government arrangements, etc. (especially considering we've had three major economic crises since 2000).

I've never really seen the sense in a Roth IRA anyway, except for very unusual circumstances.

We're all sitting here planning our retirements in 10, 20, 30 years based on assumptions about current tax agreements, statutory retirement ages, etc. As far as retirement is concerned, I'm firmly in the "I'll believe it when I see it" camp.
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Old Dec 18th 2009, 6:57 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Oh indeed dunrovin, we are all in our own way just trying to make the best of where we are and there are moving parts to the puzzle that we can't influence, can only react to when they happen.
Some just spend it all and to heck with tommorrow - me I'm stuck with this obsessive need to try to figure out every last detail - sounds like I need a few beers before I have a heart attack, eh? - but I'm an engineer so it's the way I look at things unfortunatley - roll on retirement and a home in the UK when I can just read, walk the countryside as I used to and put the craziness behind me.

Anyway, I figured out the USA auto-witholding on my USA IRA withdrawals after I become UK resident. There is a IRS form to sign & submit to the payer i.e. the IRA custodian, which removes their obligation to withhold tax because I am promising that I will properly declare and pay it myself as a tax paying US Citizen - which I will surely do.
As I interpret it, the reason behind the auto-withholding is to be sure the IRS gets their rightful due monies in the event a person leaves the US and then gives up citizenship or PR to avoid tax - and that ain't me - under the US Expatriation Law. (see IRS Publication 8854 if anyone is interested in the actual word).
I post this because maybe this will be useful to some other future enquirer of the same info.

Thanks to everyone that chipped in.
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Old Dec 20th 2009, 1:44 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

[QUOTE=J.J;8183752]Oh indeed dunrovin, we are all in our own way just trying to make the best of where we are and there are moving parts to the puzzle that we can't influence, can only react to when they happen.
Some just spend it all and to heck with tommorrow - me I'm stuck with this obsessive need to try to figure out every last detail - sounds like I need a few beers before I have a heart attack, eh? - but I'm an engineer so it's the way I look at things unfortunatley - roll on retirement and a home in the UK when I can just read, walk the countryside as I used to and put the craziness behind me.

Anyway, I figured out the USA auto-witholding on my USA IRA withdrawals after I become UK resident. There is a IRS form to sign & submit to the payer i.e. the IRA custodian, which removes their obligation to withhold tax because I am promising that I will properly declare and pay it myself as a tax paying US Citizen - which I will surely do.
As I interpret it, the reason behind the auto-withholding is to be sure the IRS gets their rightful due monies in the event a person leaves the US and then gives up citizenship or PR to avoid tax - and that ain't me - under the US Expatriation Law. (see IRS Publication 8854 if anyone is interested in the actual word).
I post this because maybe this will be useful to some other future enquirer of the same info.

Thanks to everyone that chipped in.[/QUOTE[/I]

I have just taken a brief look at IRS pub. 8854 and it seems to me that it applies to either a) someone who is relinquishing their US citizenship, or b) someone who leaving the US and is a long term resident (not a USC). Therefore, this would not apply to a person maintaining dual nationality. Am I correct??
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Old Dec 20th 2009, 4:47 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Well, I have a question about a Roth IRA I have. I only have about $5,000 in it, and want to take the money out. Would it be better for me to take it out right now before the end of the year while resident in the US? I may move back to the UK next summer and don't want the headache of trying to figure it out from the UK end when I get there? Any suggestions. It would definitely come in handy for moving expenses (that was my thought).

I'm a dual citizen of US and UK.
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Old Dec 20th 2009, 9:43 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Hello Marmalade, to your question, assuming you over 59.5 years old, it would be marginably easier to liquidate your Roth IRA while you are still resident in US.
You won't be due tax on it in either the USA or the UK because of the Tax Treaty. However if you wait til you get to UK then you will have more paperwork , for when you register your foreign address with the Roth custodian they are obliged to withhold 30% on a withdrawal as potential tax (Expatriation Law 2008) unless you file a IRS Form W-9 with them confirming your continued USC. Not a big deal but still something else to do when relocating.
You don't say if you are over 59.5 years old. If you are under 59.5 years then you are liable for an early withdrawal penalty , so then you have to choose if to take out and incur the penalty or just let it be until you reach beyond 59.5 (persumably in UK) and then get it all tax free. Advantage if you leave it in is it continues to grow tax-free, but then it's only $5k so it's not going to become a large sum even tax-free.
If you let it rest then when you notify of your new foreign address I suggest you also provide at the same time the W-9 confirming your USC status.
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Old Dec 20th 2009, 10:19 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Originally Posted by J.J View Post
Hello Marmalade, to your question, assuming you over 59.5 years old, it would be marginably easier to liquidate your Roth IRA while you are still resident in US.
You won't be due tax on it in either the USA or the UK because of the Tax Treaty. However if you wait til you get to UK then you will have more paperwork , for when you register your foreign address with the Roth custodian they are obliged to withhold 30% on a withdrawal as potential tax (Expatriation Law 2008) unless you file a IRS Form W-9 with them confirming your continued USC. Not a big deal but still something else to do when relocating.
You don't say if you are over 59.5 years old. If you are under 59.5 years then you are liable for an early withdrawal penalty , so then you have to choose if to take out and incur the penalty or just let it be until you reach beyond 59.5 (persumably in UK) and then get it all tax free. Advantage if you leave it in is it continues to grow tax-free, but then it's only $5k so it's not going to become a large sum even tax-free.
If you let it rest then when you notify of your new foreign address I suggest you also provide at the same time the W-9 confirming your USC status.
J.J. - Thanks for the reply. I am well under 59 1/2 so would incur the penalty. Just wanted to make sure there was as little paperwork as possible, thinking there would be less if I do it (meaning take the money out) while I am still resident in the US than in the UK. I know that I will pay a penalty, but with a small figure in my account it won't really hurt me to pay it. Thanks for your help.
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Old Dec 21st 2009, 5:46 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Originally Posted by dunroving View Post
You can never count on whether there'll be some weird situation arising, or change in government arrangements, etc. (especially considering we've had three major economic crises since 2000).

I've never really seen the sense in a Roth IRA anyway, except for very unusual circumstances.

We're all sitting here planning our retirements in 10, 20, 30 years based on assumptions about current tax agreements, statutory retirement ages, etc. As far as retirement is concerned, I'm firmly in the "I'll believe it when I see it" camp.
Dunroving, to address your point about Roth IRAs. I also thought there was not much value in them, since the money you invest in them is after-tax funds, so there is no current-year tax advantage to making the investment. However, for someone planning to live in the US until they die (just to get the moving abroad complication out of the way,) it seems to me that tax advantages of Roth IRAs start to become apparent as the years roll by.

If you have a regular IRA or an employer sponsored 403b, you must start taking distributions from those accounts by the age of 70.5 at the latest (minimum distribution requirement.) But with a Roth IRA, since the money invested was already taxed, there is no requirement to take distributions by a certain age. So, for someone in my age group (I'm 59) you can make long-term investment decisions in a Roth IRA knowing that the funds can accumulate & compound tax-free for 10-20 years or more, and you can draw on the funds in your own time, when you need them.. obviously at some point you die & the game is over.
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Old Dec 21st 2009, 6:55 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Originally Posted by robin1234 View Post
Dunroving, to address your point about Roth IRAs. I also thought there was not much value in them, since the money you invest in them is after-tax funds, so there is no current-year tax advantage to making the investment. However, for someone planning to live in the US until they die (just to get the moving abroad complication out of the way,) it seems to me that tax advantages of Roth IRAs start to become apparent as the years roll by.

If you have a regular IRA or an employer sponsored 403b, you must start taking distributions from those accounts by the age of 70.5 at the latest (minimum distribution requirement.) But with a Roth IRA, since the money invested was already taxed, there is no requirement to take distributions by a certain age. So, for someone in my age group (I'm 59) you can make long-term investment decisions in a Roth IRA knowing that the funds can accumulate & compound tax-free for 10-20 years or more, and you can draw on the funds in your own time, when you need them.. obviously at some point you die & the game is over.
Yes, actually I raised my opinion about Roths over on the USA board and from some of the responses, can understand some of the advantages (mainly much greater flexibility with what you can do with your investments). In my mind, though, it's all a gamble (on what the markets will do, how many years you'll make it after retirement, what the tax laws will be when you retire, etc.), and the main thing for me is that I'll likely retire on so little I'll hardly be paying any tax in retirement anyway, so why pay higher rate tax now - maximize returns and pay minimal tax in retirement. That's just my situation, though, and I can see that for others the Roth makes more sense.
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Old Jan 13th 2010, 1:58 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Hi J.J
I just saw you post on UK-yankee and then Googled "UK tax on US IRS" and came up with this thread. The problem with Googling some questions is that the results can be self referencing and clear professional advice is hard to come by. I'm glad you got the witholding issues on ROTHs for US expats sorted out.

Did you come up with any more information about the way UK taxes US mutual funds held inside qualified retirement accounts, or any other bright ideas about how a US/UK dual citizen domiciles and ordinarily resident in the UK should invest after tax money?
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Old Jan 14th 2010, 2:03 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Hi nun, is good to hear from you, I had noticed your previous posted interest in personal finance and benefitted from your clear reasoning for it seemed to closely match our circumstances.

No, I never did receive any insight from anyone re: UK tax treatment of US Mutual Funds inside a US Retirement Fund for UKC/USC persons domiciled and resident in UK. Odd that, I would have thought that more than just us two had been in this circumstance.

After trying to read deeply into possible complications I settled to take the Treaty at it's face value, that UK treats IRA as it would be treat by US, that withdrawals are taxable as earned income according to whatever income tax band they fall into.
Withdrawals trigger a 1099-R statement at tax year end, which simply reports $$ amount distributions from the retirement account, not the source(s) of the income. In the US the 'earner' will then pay income tax on that 1099-R amount.
Consider the US tax rates for Capital Gains is not same rate as earned income (CG currently generally lower rate but nothing to say it won't move to higher) but US does not discriminate for CG within Retirement Funds, it is all earned income upon withdrawal.
Re CG in UK there is a personal allowance so if UK considered source(s) of income within US Retirement Fund there would be discounts for CG along with higher charges for less favorable-to-taxpayer sources such as US Mutual Funds.
So I concluded to myself in independant interpretation that UK would look at it similarly, as the Treaty implies, just earned income without regard for the way the $$ were built within the Retirement Fund.

Nun, I would appreciate your (and anyone elses) critique of my conclusion. Thanks.
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Old Jan 14th 2010, 5:07 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Hi JJ
I agree with your reading of the way HMRC will treat an IRA/401k etc. As US citizens we both know how the IRS will deal with the withdrawals, as income. If we have US mutual funds inside those IRAs we never have to worry about CG or any tax issues until we make withdrawals and declare them as income. The tax treaty (and the quote I enclose form the HMRC website) leads me to believe that HMRC will treat the withdrawals as income too and so they have no issues with what you invest in. Of course you'll have to apply the UK residency rules to see if that income is taxed on an arising or remitted basis. So there's really nothing to do wrt IRS or HMRC until you start making withdrawals.

I'll probably get advice from a tax professional before I return to the UK so I avoid any CG and foreign funds issues with after tax investments and come up with an investment strategy for that money. I'll also get the first couple
of returns done professionally so I can see what needs to be done. After than I think I'll be able to handle it myself.

One area where there might be confusion is who do I pay first. IRS or HMRC. eg who gets the income tax on my 401k? My first thought would be to pay the IRS as the money is US earnings and then pay and then claim a foreign tax credit on my UK return.

"US investment and retirement accounts

Q I am US domiciled and have been living in the UK for 10 years. I hold three types of investment accounts in the US: a brokerage account and two different retirement accounts. My first retirement account is called a Roth IRA, similar to an ISA in that it grows tax free forever and you are not taxed in the US when you withdraw from it during retirement. The other account is called a Traditional IRA which is similar to a UK personal pension in that growth is tax deferred, ie you only pay tax on the income that you take from it during retirement. The third type of account that I hold is a standard brokerage account, ie stocks, mutual funds (similar to unit trusts), etc. I will not be making withdrawals from these accounts until I am retired.
Can you confirm whether these US retirement vehicles will be subject to UK tax?

A The tax treatment is different for the IRAs and the brokerage account.

Brokerage account - any income and gains from this investment will be taxed on the arising basis, unless you make a claim for the remittance basis to apply, in which case you will only be taxed on sums remitted to the UK.

IRAs - the UK/US Double Tax convention was amended in 2003 which made significant changes to the treatment of pensions (Article 17 of the convention). These comments apply to the UK tax years from 2003-04.

Roth IRA - paragraph 1(b) of article 17 provides for a distribution to be exempt from tax in the UK to the extent that it would be exempt in the US. This means that withdrawals from this IRA should be exempt from UK tax.

Traditional IRA - the UK treatment follows the US treatment: sums are taxed on withdrawal. But, of course, if you make a claim for the remittance basis to apply you will only be taxed on sums remitted to the UK.
"

Last edited by nun; Jan 14th 2010 at 5:09 pm.
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Old Jan 17th 2010, 9:56 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Nun,
In response to your thoughts,

My inclination is to pay the tax on my IRA withdrawals in US $$, if I paid it all in UK pounds then it would be in converted $$ and I'd be paying currency transfee costs to get the Pounds which is just cost on top of the tax.

We too have US non retirement savings, Mutual Funds (not advisable for UK residents) and State Municipal Tax-free Bonds (not tax-free once we move out of State. For both these we are planning to sell before we leave and put into interest bearing accounts ready for transfer to pounds. We are close to retirement and should be preserving our capital, so our risk investment will be in the IRA only. Prediction is that $/Pound will be slipping lower to 1.5 then 1.4 ish through 2011 which is good timing on our planned move to UK to move our money over.
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Old Jan 17th 2010, 10:49 pm
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Default Re: US Mutual Funds unfavorably taxed - in IRA?

Originally Posted by J.J View Post
Nun,
In response to your thoughts,

My inclination is to pay the tax on my IRA withdrawals in US $$, if I paid it all in UK pounds then it would be in converted $$ and I'd be paying currency transfee costs to get the Pounds which is just cost on top of the tax.

We too have US non retirement savings, Mutual Funds (not advisable for UK residents) and State Municipal Tax-free Bonds (not tax-free once we move out of State. For both these we are planning to sell before we leave and put into interest bearing accounts ready for transfer to pounds. We are close to retirement and should be preserving our capital, so our risk investment will be in the IRA only. Prediction is that $/Pound will be slipping lower to 1.5 then 1.4 ish through 2011 which is good timing on our planned move to UK to move our money over.
I also have US non retirement savings in mutual funds and want to minimize my risk investment. Why are you saying these are not advisable for UK residents? Are you talking about putting them into US savings accounts and keeping them there till a future date when the exchange is more advantageous and/or you will need the funds?
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