Inherited IRA from America

gt568

EdSwippet said:

gt568 said:

She is 73.  I have no idea what you mean by the bolded bit?

You can ignore it, then. Early withdrawal penalties are not relevant if your mother is 73. (It's possible she should have been taking 'required minimum distributions' after age 70.5. That's another whole can of worms though, and for now I'd suggest pretending you'd not heard of these.)

gt568 said:

As to the earlier bit of the post, am I right in thinking then I fill out the 1040-NR declaring only the IRA money?  All the rest of her money was taxed in the UK.
...
As an aside is there no tax efficient way to withdraw from an IRA?

Only US source income goes on the 1040-NR, so yes, just the IRA lump-sum withdrawal (assuming your mother has no other US financial connections or US based accounts).

She receives a US SS pension, but I (and Dad previously) declared that to HMRC and pay tax on that here, so does that need to be on the 1040-NR?  And would I declare the ~12k as a withdrawal or what she actually gets into the account from Schwab (~12k-30%)?

gt568

EdSwippet said:

gt568 said:

She is 73.  I have no idea what you mean by the bolded bit?

You can ignore it, then. Early withdrawal penalties are not relevant if your mother is 73. (It's possible she should have been taking 'required minimum distributions' after age 70.5. That's another whole can of worms though, and for now I'd suggest pretending you'd not heard of these.)

gt568 said:

As to the earlier bit of the post, am I right in thinking then I fill out the 1040-NR declaring only the IRA money?  All the rest of her money was taxed in the UK.
...
As an aside is there no tax efficient way to withdraw from an IRA?

Only US source income goes on the 1040-NR, so yes, just the IRA lump-sum withdrawal (assuming your mother has no other US financial connections or US based accounts).

As for tax efficiency, if taken as a lump sum your mother would face around $1,246 in US tax on a $12,000 withdrawal. That's 10.4%.

What is her current top marginal UK tax rate? If she's a basic rate taxpayer, taking this as a single lump sum is already tax efficient, relative to taking it as normal withdrawals that would be taxable at 20% in the UK. If her income is below £12,500 annually, so that she currently pays no UK tax, then taking 'regular' withdrawals from this IRA, up to the £12,500 limit each year, would be more efficient. In the case of regular withdrawals, treaty Article 17 paragraph 1(a) says that these types of withdrawal are taxable only to the UK and not the US. In this case, you would need to file a 1040-NR and form 8833 to the US citing this article, so as to recover the entire US withholding applied by Schwab.

She is a basic rate taxpayer.

gt568

EdSwippet said

I'm not clear how much more tax efficiency you could look for. I assume your mother holds a pre-tax traditional IRA, and not a Roth IRA. In that case, it was funded from untaxed income, and so there's tax to consider on withdrawals one way or another. The US/UK treaty gives you some flexibility in which country you end up paying that tax to, by virtue of its separation of lump sum and normal withdrawal treatments, but playing that flexibility off against your mother's other general tax circumstances is going to be the best achievable. A tax rate of 0% might be doable, but if not then 10.4% is not a bad rate, considering that this is almost certainly lower than the US tax rate avoided on this money when the IRA contributions were made. 

Yes it's a traditional IRA, you'll have to forgive me, I have no idea how these work compared to UK finances so I'm in the dark a bit.

Are you also saying if she were to rake the RMD each year she would pay no tax on that in the US and we could declare that as foreign income for HMRC purposes?  Would Schwab still w/h 30% in that instance?

EdSwippet

gt568 said:

She receives a US SS pension, but I (and Dad previously) declared that to HMRC and pay tax on that here, so does that need to be on the 1040-NR?  And would I declare the ~12k as a withdrawal or what she actually gets into the account from Schwab (~12k-30%)?

Article 17(3) of the treaty says that only the UK may tax her US Social Security payments. The safest treatment for this when having to file a 1040-NR to reclaim overwithholding on an IRA withdrawal is probably to add these Social Security payments to the 1040-NR, schedule NEC line 8, but under column (d) and entering a tax rate of 0%. Add a form 8833 claiming article 17(3) of the treaty on this money. I'm not sure if this is strictly necessary -- not a US tax pro, just a fellow sufferer! -- but it heads off any questions from the IRS that might otherwise arise, since rather than silently claiming the treaty, you've explicitly stated the treaty claim.

As for how much to declare on the 1040-NR, that would be the complete $12k withdrawal. The 30% withholding still forms part of the gross withdrawal, just a part you haven't yet got. If you mock up a 1040-NR you'll see how it all falls out. For an idea of the numbers, on a $12k withdrawal with Schwab withholding $3.6k, you should see a US tax liability of around $1.2k and a refund amount of $3.6k - $1.2k = $2.4k, give or take.

Finally, note the unhelpful timing here. If you take this money out now, you cannot file the 1040-NR to claim your refund from the IRS until around this time next year. The US tax system works on calendar years, and won't take tax returns for 2020 until around Feb 2021. You may then need to allow weeks or even months for the IRS to process this; they have a glacial process for nonresident alien returns. It's likely to be a long wait until you get that rebate, then. That's the US for you.

EdSwippet

gt568 said:

Are you also saying if she were to rake the RMD each year she would pay no tax on that in the US and we could declare that as foreign income for HMRC purposes?  Would Schwab still w/h 30% in that instance?

The RMDs are things you are supposed to take (your mother is supposed to have taken in the past?) once over age 70.5. They're just normal withdrawals though, so would taxable as income in the UK. The RMD amount is around 3-4% or so of the IRA balance annually at age 70, so your mother may have missed a couple of these. There's an ugly IRS penalty for missing them, but getting forgiveness for this is easy because a lot of folk miss them. Fixing up the missed RMDs could be a lot of paperwork though, and the amounts are small, perhaps $300/year withdrawals missed. There are special rules for inherited IRAs that might protect (or not) against these RMD issues; not my area I'm afraid.

It's anybody's guess what Schwab would do on withholding RMDs, since these days providers seem to simply make up the rules as they go along. Theoretically, they should use 0%, since that is what the treaty and the IRS withholding instructions they are suppose to work to provide. What they withhold or not though, and at what rate, isn't really relevant; what matters is your actual US (and UK) tax rates. And from the sound of things, taking this IRA as a lump sum is going to be the lowest tax route, since the US's 10% or so is handily lower than the UK's 20% basic rate tax.

As for traditional pre-tax IRA, think SIPP here. Money goes in from you and/or your employer pre-tax, and you get to pay tax later on the withdrawals. There is no 25% tax-free lump sum with IRAs though. And also a wrinkle that you can (if you want, but it's relatively rare) put post-tax money in an IRA, after which you then have to track it with annual paperwork so you don't wind up paying tax on that part of things when you withdraw from the IRA. At the opposite extreme is a Roth IRA, which is all post-tax money and tax-free, like an ISA. Presumably (and most likely), your mother's IRA is all traditional pre-tax, in which case you can ignore all these additional complications around post-tax amounts and Roth accounts.

gt568

Mums never had to take RMDs because she didn't have an IRA.  It was only in my Dads name....I'm certain he was taking them, he was really clued up on this.

I'm beginning to wonder if I need to do a US tax return for him as well.

gt568

EdSwippet said:

Finally, note the unhelpful timing here. If you take this money out now, you cannot file the 1040-NR to claim your refund from the IRS until around this time next year. The US tax system works on calendar years, and won't take tax returns for 2020 until around Feb 2021. You may then need to allow weeks or even months for the IRS to process this; they have a glacial process for nonresident alien returns. It's likely to be a long wait until you get that rebate, then. That's the US for you.

Great stuff so far, many thanks.

I'm wondering, due to that tax timelines in the US, if she should just take her RMD now, and close it later in the year?  Or sit on it fully and action this in December?

EdSwippet

gt568 said:

Mums never had to take RMDs because she didn't have an IRA.  It was only in my Dads name....I'm certain he was taking them, he was really clued up on this.

I'm beginning to wonder if I need to do a US tax return for him as well.

If your father was taking RMDs correctly, and took 2019's before he died, you should be able to forget about them for past years; and so far, from what you've said I don't see a need to file an US tax return for him. If he didn't, strictly your mother needs to take 2019's from the IRA now, but she can claim a 'reasonable cause' exception to the penalty. She can then drain the IRA fully in one final lump sum. Making these two separate withdrawal events makes these actions crystal clear to the IRS.

And you thought the UK's pension system was complicated ...

EdSwippet

gt568 said:

I'm wondering, due to that tax timelines in the US, if she should just take her RMD now, and close it later in the year?  Or sit on it fully and action this in December?

If your father took his RMD for 2019, I think it's debatable whether your mother need take one for 2020 and then drain the IRA, or just simply drain the IRA. The goal of RMDs is to force a withdrawal of at least some of the IRA each year after age 70.5, and so create some minimum level of taxable income, but withdrawing more than the minimum is fine.

In this case, if she withdrew the lot, the IRS should have no cause for complaint, because that's more than the minimum. Ironically, for nonresident aliens living in countries with tax treaties that match the UK's, this forced IRA withdrawal regime creates a tax liability that is payable to the other governments, and not to the US. (Famously, of course, the US does not understand irony.)

gt568

EdSwippet said:

gt568 said:

Mums never had to take RMDs because she didn't have an IRA.  It was only in my Dads name....I'm certain he was taking them, he was really clued up on this.

I'm beginning to wonder if I need to do a US tax return for him as well.

If your father was taking RMDs correctly, and took 2019's before he died, you should be able to forget about them for past years; and so far, from what you've said I don't see a need to file an US tax return for him. If he didn't, strictly your mother needs to take 2019's from the IRA now, but she can claim a 'reasonable cause' exception to the penalty. She can then drain the IRA fully in one final lump sum. Making these two separate withdrawal events makes these actions crystal clear to the IRS.

And you thought the UK's pension system was complicated ...

I'll have to check his statements but he certainly took it in 2018, I can see from his HMRC tax return the IRA withdrawal being listed as untaxed foreign income.

I'll never know now, but it seems he was taking RMDs and paying tax in the UK at 20%, whereas it looks like he could have just closed the IRA and paid the IRS 10%.  I wonder his logic here because he was pretty savvy with money.....  Only advantage I see it to avoid the IRS tax return...?