Inherited IRA from America

gt568

EdSwippet said:

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.)

You mean that tax on the RMD being paid in the (UK for instance) as opposed to US?

I think this is a bit I'm not getting.  Take the RMD and you can pay UK income tax on it should you wish..... Take more than the RMD, pay US federal taxes... Why the difference?

EdSwippet

gt568 said:

EdSwippet said:

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.)

You mean that tax on the RMD being paid in the (UK for instance) as opposed to US?

I think this is a bit I'm not getting.  Take the RMD and you can pay UK income tax on it should you wish..... Take more than the RMD, pay US federal taxes... Why the difference?

It's not the RMD that's the difference; rather, it's the manner in which you take the withdrawals.

Take the RMD or more than the RMD in 'regular' withdrawals, and these are taxable to the UK only, under one treaty article. Take the full balance -- in this case also more than the RMD -- as a 'lump sum' and this is taxable to the US only, under a different treaty article.

The goal of RMDs is to force US resident taxpayers to take some IRA withdrawals, and so create a US taxable event, but it's a blanket rule, not restricted so as to apply only US resident taxpayers. The irony is that by applying that same RMD rule to US nonresident aliens in the UK, the US doesn't necessarily get to collect that tax. It might, but it might not, all depending on the manner in which withdrawals are taken.

The US/UK treaty is a bit of a mess in this area. However, for once its messiness can be used to the individual's advantage, rather than (as is more normal) the government's.

gt568

EdSwippet said:

It's not the RMD that's the difference; rather, it's the manner in which you take the withdrawals.

Take the RMD or more than the RMD in 'regular' withdrawals, and these are taxable to the UK only, under one treaty article. Take the full balance -- in this case also more than the RMD -- as a 'lump sum' and this is taxable to the US only, under a different treaty article.

The goal of RMDs is to force US resident taxpayers to take some IRA withdrawals, and so create a US taxable event, but it's a blanket rule, not restricted so as to apply only US resident taxpayers. The irony is that by applying that same RMD rule to US nonresident aliens in the UK, the US doesn't necessarily get to collect that tax. It might, but it might not, all depending on the manner in which withdrawals are taken.

The US/UK treaty is a bit of a mess in this area. However, for once its messiness can be used to the individual's advantage, rather than (as is more normal) the government's.

Thanks for the help so far, I think I'm nearly there. 

It looks like Schwab don't withhold tax on RMDs.  So could she for instance, over the next 3 years take 4 RMDs of $3,000 draining the IRA and pay tax on these at 20% in the UK negating the need for US tax returns? 

I realise that may not be the "cheapest" in cost terms but I want to present her all the options so she can choose herself.

EdSwippet

gt568 said:

It looks like Schwab don't withhold tax on RMDs.  So could she for instance, over the next 3 years take 4 RMDs of $3,000 draining the IRA and pay tax on these at 20% in the UK negating the need for US tax returns?  

Close. She'd have to take 25%, which is more than the RMD amount of 3% or so, but if Schwab don't withhold US tax on any 'regular' withdrawals from an IRA -- and they shouldn't if they follow the IRS's withholding tables for nonresident aliens in the UK, and providing your mother has a W-8BEN on file with them claiming UK treaty benefits -- then yes.

If you're going to rely on this, be sure to confirm absolutely that Schwab will not withhold US tax anyway. The US has multiple overlapping withholding rules, and some brokers apply them unevenly and at times regardless of whether or not the customer has a W-8BEN on file.

gt568

EdSwippet said:

gt568 said:

It looks like Schwab don't withhold tax on RMDs.  So could she for instance, over the next 3 years take 4 RMDs of $3,000 draining the IRA and pay tax on these at 20% in the UK negating the need for US tax returns?  

Close. She'd have to take 25%, which is more than the RMD amount of 3% or so, but if Schwab don't withhold US tax on any 'regular' withdrawals from an IRA -- and they shouldn't if they follow the IRS's withholding tables for nonresident aliens in the UK, and providing your mother has a W-8BEN on file with them claiming UK treaty benefits -- then yes.

If you're going to rely on this, be sure to confirm absolutely that Schwab will not withhold US tax anyway. The US has multiple overlapping withholding rules, and some brokers apply them unevenly and at times regardless of whether or not the customer has a W-8BEN on file.

W-8BEN?  I suspect she doesn't as this is a new account to her, she's never had an IRA with Scwab or anyone else.

I've been in contact with Schwab trying to confirm bits and pieces but dealing with them can be.....challenging at times.

EdSwippet

gt568 said:

W-8BEN?  I suspect she doesn't as this is a new account to her, she's never had an IRA with Scwab or anyone else.

If not, then get that sorted out first, and before doing anything else. It's filed with the broker, not the IRS. Sometimes the broker provides an online process that fills one out for you automatically, other times you have to print it out and send in by snail mail.

Either way, once they have that, they should start applying treaty withholding rates (though as noted, some don't even still -- Fidelity seem to be a major offender here). The UK treaty rate is 0% on pensions, the 'Pensions and Annuities' column, income code number 15, of the UK line in this table (link).

It's possible that this will set Schwab withholding to 0% for every IRA withdrawal, not just 'regular' withdrawals but also 'lump sum', but again brokers seem to make up rules on the hoof here, so no way of telling without asking (and double checking, since they often say one thing but do another anyway). In that case, on a lump sum withdrawal your mother might receive the entire $12k, and then fill out a 1040-NR and pay the $1.2k or whatever US tax in early 2021. Still a hassle, but at least there's no twelve months of £2.4k interest-free loan to the IRS due to dragging out a refund of overwithholding, but rather a year of $1.2k interest-free loan to your mother.

gt568

I'll get on that pronto!

jimmo

Have to say Well done, Ed Swippet. I for one admire your continual commitment to help the OP in an area where not too many of us on here would be able to contribute.

gt568

Yeah he's been a great help.