USA IRA Pension Funds - UK citizen

kangoora

I'm a UK citizen but have a small IRA in the States from working there for a few years about 20 years go. It's currently around $28k and I'll be 59.5 in October next year. I still have my US tax number (SS ID) but I never qualified for a green card, I was working there on an L2 visa.

1. From my reading so far I need to fill out a W8-BEN form and provide that to the funds holder for them to be able to pay me without any USA tax withholding. Obviously I then need to ask them to sell my holdings and transfer the cash to UK. I realise I'll need to declare this to HMRC but it won't take me into HRT on my current pension income.

Is that the extent of it or do I need to do more?

2. On a related topic, I've also qualified for a small PBGC pension (USA equivalent of PPF) - anyone aware if this would be a similar process?

3. I think I also managed to get enough credits for a small USA Social Security pension but I'd need to check that out, any idea where I should start with this - everywhere I've looked only gives me a USA toll-free number you can't use from the UK.

EdSwippet

kangoora said:

1. From my reading so far I need to fill out a W8-BEN form and provide that to the funds holder for them to be able to pay me without any USA tax withholding. Obviously I then need to ask them to sell my holdings and transfer the cash to UK. I realise I'll need to declare this to HMRC but it won't take me into HRT on my current pension income.

Is that the extent of it or do I need to do more? 

Perhaps. But. Pay attention to the US/UK tax treaty. Article 17 para 1(a) reserves taxing rights to the UK, but article 17 para 2 overrides that for "lump sum" payments, instead reserving taxing rights to the US. So it appears that if you were to take a one-off full withdrawal of your $28k, you might be able to reduce your overall tax liability here. US rates for 2020 are 10% to $9,875, then 12% to $40,125. Compare to your UK rate on this money.

Even with a W-8BEN, the provider may withhold 30% for US tax -- and almost certainly should/will for a "lump sum" withdrawal -- in which case you'd need to file a 1040NR and (probably) 8833 with the IRS to recover the overwithholding. A fair few US 401k and IRA providers seem to be poor when it comes to following treaty withholding rates correctly, even when spoon-fed these rates by the IRS.

No idea on your other two questions.

kangoora

Thanks Ed, that was quick. It looks like I'll be better off not using the W-8BEN as the full $28k would be taxed in UK at 20%, instead of the 10% and 12% if I take it as a lump sum and pay US tax on it ($5.6k UK tax or $3.16k US tax)

Here's hoping they get the taxation correct so I don't  need to claim tax back, just looked at the 1040NR and it looks like a PITA to fill out

TBC15

With regard to the toll free numbers you may be able to use them via Skype and a VPN

EdSwippet

kangoora said:

Thanks Ed, that was quick. It looks like I'll be better off not using the W-8BEN as the full $28k would be taxed in UK at 20%, instead of the 10% and 12% if I take it as a lump sum and pay US tax on it ($5.6k UK tax or $3.16k US tax)

Here's hoping they get the taxation correct so I don't  need to claim tax back, just looked at the 1040NR and it looks like a PITA to fill out

You'd still want to send the provider a W-8BEN. Otherwise they might do something unexpected. Arguably, you should have sent it as soon as you became a UK resident and no longer a US one, but until withdrawals it doesn't really have any effect on IRAs.

As for them applying the correct rate if you take a lump sum ... no chance whatsoever. Even for US citizens the whole thing is based on flat-rate assumptions and guesswork. Nothing like a PAYE tax code in the US. And the flat-rate assumptions and guesswork tend to be high rates for money going outside the US (even for US citizens), so likely 30% withholding on a lump sum ... although, 0% is possible if they take treaty rates published by the IRS at face-value, in which case you would owe the IRS, requiring you to send a 1040NR and a USD cheque.

The 1040NR is a bit of a beast, but it's not impossible to manage yourself. Most of it won't apply. You only put your US source income on it, so the pension lump sum (around line 16a), and the rest is name/address and other assorted identifying information or computation. You can ignore Schedule A (you have no deductions) and Schedule NEC if this pension is your only US source income. You do have to trudge through Schedule OI, but it's pretty self-explanatory, if very intrusive. For pensions specifically, I seem to recall you can omit the 8833, but details are sketchy. Since you'll be paying full normal US tax on the pension anyway, no treaty reduction, so perhaps irrelevant. The biggest PITA is that you can't file this until some time in March of the year following withdrawal, and the IRS is slow to handle 1040NR, so potentially an 18 month wait for any overwithholding refund.

DairyQueen

kangoora said:

3. I think I also managed to get enough credits for a small USA Social Security pension but I'd need to check that out, any idea where I should start with this - everywhere I've looked only gives me a USA toll-free number you can't use from the UK.

I am also a UK citizen who worked in the US for two years but as a permanent resident. I also paid federal taxes but believe that you only qualify for max 4 credits p.a. and you require a min. 40 credits (10 years) to qualify for Social Security (state pension).

I may be the only person in history to voluntarily give-up their green card. It wasn't for reasons of tax or investment but removing the complication of the US tax system from my life has turned-out to be a very welcome side effect.

kangoora

I think i read a long time ago it as needing 10 credits, not 10 years worth @4 credits a year - my error, thanks for pointing it out

I only worked there for 2 years but actually gained 12 credits due to salary and the 2 years stretching over 3 US financial years. I've just gone onto the SS qualification rules and it is 40 credits, needing 10 years.

Time to strike out a line on my forecasted income in retirement, luckily it isn't crucial and I only estimated it at about £50/month so not a big deal.

EdSwippet

DairyQueen said:

I may be the only person in history to voluntarily give-up their green card.

Well, there's me also. Couldn't wait to ditch it once out of the US -- freedom at last.

From this article, it looks like around 10k-18k people a year file an i-407, up to seven years ago anyway. That seems to leave a potentially large group of people who exit the US but who don't file this form, and so remain 'US taxable persons' forever, even if their status is no longer valid for US immigration or residency. Also, a bit of a visible uptick in numbers around the time the US passed its Soviet-style 'expatriation tax' law in 2008.

Cook_County

A complete distribution is taxable only in the USA.  The distribution is divided between original contributions and growth when the tax return is prepared. Growth is taxed at 30%. The contributions at graduated rates. 

EdSwippet

Cook_County said:

The distribution is divided between original contributions and growth when the tax return is prepared. Growth is taxed at 30%. The contributions at graduated rates. 

Even under the US/UK tax treaty? Article 25 (Non-discrimination) paragraph 1 states:

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected.

A flat 30% US tax on pension growth is definitely "more burdensome" than the US tax that US citizens or residents face on 401k and IRA withdrawals. US citizens and residents would pay simple graduated rates on the entire withdrawal amount, almost certainly resulting in a lower overall US tax liability on the withdrawal than the treatment you described.

Also, as a practical matter, separating contributions and gains may require considerable financial forensics, since it is information that the IRA or 401k custodian is not required to track, particularly across rollover between providers.

Cook_County

EdSwippet said:

Cook_County said:

The distribution is divided between original contributions and growth when the tax return is prepared. Growth is taxed at 30%. The contributions at graduated rates. 

Even under the US/UK tax treaty? Article 25 (Non-discrimination) paragraph 1 states:

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected.

A flat 30% US tax on pension growth is definitely "more burdensome" than the US tax that US citizens or residents face on 401k and IRA withdrawals. US citizens and residents would pay simple graduated rates on the entire withdrawal amount, almost certainly resulting in a lower overall US tax liability on the withdrawal than the treatment you described.

Also, as a practical matter, separating contributions and gains may require considerable financial forensics, since it is information that the IRA or 401k custodian is not required to track, particularly across rollover between providers.

No objection in theory; but in practice it is hard to get anyone at the IRS to agree with a 1040NR for a pension LSD - even ignoring the US/UK tax treaty.