US tax filing/burden for 401k early withdrawal
 

I’m a UK citizen who worked in the US for ~6 years until late 2010, first under an L1B and then an H1B visa (if I recall correctly). I paid into a 401k during that time. I moved back to the UK in late 2010 and left my 401k purring along in the US.

After submitting a W8-BEN to my provider, and getting my withholding set to 0%, I took $14000 out of the 401k last year (2016) as an early withdrawal with the understanding I would need to pay a 10% penalty. No withholding was taken by my provider.

I’m currently studying and receiving a tax free stipend in the UK. So part of my thinking was this withdrawal would be beneath the threshold for tax in the UK, and because of the US/UK tax treaty for pension withdrawals it wouldn’t be subject to taxes in the US.

My assumption was I would just need to complete and submit a 5329, and then pay my $1400 penalty?

However, now I’ve come to complete the admin, I’ve been reading around, and I’m unclear if I also need to complete a 1040NR for 2016 too? I had very little other income in the US from dividends - which was taxed 15% at source according to the tax treaty - and p2p lending (tiny amounts), and in total I’m under the personal allowance for 16/17 in the UK (£11000) BUT, obviously, over the $10000 threshold for US income.

So I suppose my questions are:

1. Do I need to submit a 1040NR in addition to the 5329?
2. Can I expect to be paying some federal taxes in addition to the $1400 penalty or does the UK/US tax treaty mean I have no tax burden in the US as I had assumed?

I’d be very grateful for anyone who has been a similar position that can share their experiences and insight!

Re: US tax filing/burden for 401k early withdrawal
 

The IRS will expect a Form 1040NR. HMRC will expect this reported as foreign pension income. File both returns.

Re: US tax filing/burden for 401k early withdrawal
 

Thanks for the quick response!

Is that because the the IRS sees it as US income, and that's not mitigated by the tax treaty? So I can expect to pay federal taxes because I crossed the $10k threshold? And because I have no tax burden in the UK I won't be able to offset it using the treaty?

From a UK perspective: I don't currently complete SAs, but are you suggesting this transaction would warrant a SA even though there will be no tax owed?

Re: US tax filing/burden for 401k early withdrawal
 

It is roughly £10,000 - are you saying that this plus all other income is below your personal allowance? If so (and only if so), you'd owe no UK tax on the payment.

Re: US tax filing/burden for 401k early withdrawal
 

US dividends are not taxed at source. Also your pension administrator might have withheld 30% from your 401k payments if they were paid to an address outside the USA. You do not get the same deductions and exemptions as a resident so you will need to file a 1040NR for your US source income and gains and pay any tax and/or claim back any excess withholding.

In the UK you should file a SA for your foreign income and pay any UK tax due and apply credit for any US tax you have paid.

Re: US tax filing/burden for 401k early withdrawal
 

Correct. I receive a tax free stipend for my studies.

I guess what I'm unsure about is who (US or UK) is the entity that is taxing this sum? Either way the tax I'll owe (I think) will be zero or negligible, but I just want to make sure I'm doing it in the correct way!

Re: US tax filing/burden for 401k early withdrawal
 

Thanks for the response!

I believe it's standard to withhold 15% on dividends for a UK resident NRA?

My pension administrator did not withhold any amount from the 401k withdrawal.

What I'm unclear about is whether I report this income to the IRS or HMRC, and who is the primary taxing authority. My read of the UK/US tax treaty for pension withdrawals is that it depends on if this is a lump sum (which I would be taxed by the IRS) or periodical (...taxed by the HMRC). Logically, I would interpret this as a lump sum and thus report it the IRS...but the IRS definition of lump sum re 401k seems to be if you withdraw the whole amount?

Re: US tax filing/burden for 401k early withdrawal
 

It is not a lump-sum. The UK has the taxing rights. You could also file a 1040NR claiming treaty exemption.

Re: US tax filing/burden for 401k early withdrawal
 

Great, thanks! That interpretation makes sense to me.

Re claiming a treaty exemption. Is that a defensive move to make sure I'm covered in case the IRS takes a different view on the 'lump-sum' definition?

Because I see on the IRS site about exemptions for the need to file a 8833 (link below) includes the following: https://www.irs.gov/individuals/inte...reaty-benefits that