W-8BEN for 401k withdrawal

WastedWords

I am a UK citizen and resident with a 401k from a short period working in the US. No ties to US since leaving 12 years ago.

Quick question for those with experience of 401k periodic withdrawals. When completing W-8BEN form to avoid US tax withholding, does Line 9 = United Kingdom cover it or does anything need to be entered on Line 10 Special Rates and Conditions?

sammyjammy

You might be better off posting on an   ex pat board for US citizens living in the UK or something similar, unlikely to get much knowledge here.

EdSwippet

WastedWords said:

Quick question for those with experience of 401k periodic withdrawals. When completing W-8BEN form to avoid US tax withholding, does Line 9 = United Kingdom cover it or does anything need to be entered on Line 10 Special Rates and Conditions?

You should be fine leaving Line 10 blank. There's nothing "special" about your situation, so the country information alone ought to trigger the 401k provider to apply the standard 0% withholding rate on pension payments as specified by the IRS (column 15, 0 for the UK).

Of course, not all US 401k providers follow the rules. Fidelity in particular is known to be flaky in this respect. In the case that the provider withholds US tax anyway, you would recover it entirely by filing a US 1040-NR return (followed typically by a loooong wait, perhaps as much as 18 months or even more; after all, this is the IRS we're talking about).

bostonerimus

On line 9 you'd enter "United Kingdom"

On line 10 you could enter "Article 17, Paragraph 1" then "0%" the "pensions including 401k withdrawals" finally you might say under conditions " I am a UK resident and I am not a US citizen and not a US resident and so I claim 0% tax and 0% withholding on my 401k withdrawals under the US/UK Tax Treaty"

WastedWords

Thanks EdSwippet & bostonerimus. Hoped one of you might respond having seen your previous posts regarding 401k.

RzL

Pardon my intrusion, but would the W-8BEN and tax treaty also prevent the 10% penalty tax on an early withdrawal from a 401k? It is surprisingly hard to find an answer to that, not even my plan administrator seems to want to tell me.

bostonerimus

RzL said:

Pardon my intrusion, but would the W-8BEN and tax treaty also prevent the 10% penalty tax on an early withdrawal from a 401k? It is surprisingly hard to find an answer to that, not even my plan administrator seems to want to tell me.

No because the penalty isn't a tax covered by the tax treaty. The IRS will still impose the early withdrawal penalty.

RzL

bostonerimus said:

RzL said:

Pardon my intrusion, but would the W-8BEN and tax treaty also prevent the 10% penalty tax on an early withdrawal from a 401k? It is surprisingly hard to find an answer to that, not even my plan administrator seems to want to tell me.

No because the penalty isn't a tax covered by the tax treaty. The IRS will still impose the early withdrawal penalty.

Thanks! Do you know if that penalty tax would be withheld by the plan (assuming the plan actually does things correctly, which looks like a pretty big "if"), or would I have to go through the hoops and file a 1040-NR and then pay it myself?

The plan (Schwab) seems at least seems to know there is such a thing as tax treaties and a W-8BEN, so that is somewhat encouraging.

Also, do I see it correctly that taxation fully goes back to the US in case of a lump sum due to article 17.2 of the US-UK tax treaty, while many other countries like Germany or Sweden do not have a comparable provision? They still seem to have the basic article 17.1 provision that pension plan payments are only taxable where you live. So if I were to live in such a third country for a while, this may be a good time for a lump sum withdrawal, depending on how these third countries tax 401k payments.

EdSwippet

bostonerimus said:

RzL said:

Pardon my intrusion, but would the W-8BEN and tax treaty also prevent the 10% penalty tax on an early withdrawal from a 401k? It is surprisingly hard to find an answer to that, not even my plan administrator seems to want to tell me.

No because the penalty isn't a tax covered by the tax treaty. The IRS will still impose the early withdrawal penalty.

You sound very sure. How sure are you, exactly? And do you have any sources you can cite?

To me it looks like a rather grey area, and several tax professionals appear to entirely disagree with you, and conclude that treaties that reserve tax to country of residence do indeed prevent having to pay the early withdrawal penalty.

Where you run into problems is where the US/UK treaty reverses the normal "taxable only to country of residence" for lump sums. In that case, the treaty almost certainly cannot defeat the 10% early withdrawal penalty. For non-lump sum withdrawals though (however defined), it seems like it may well.

bostonerimus

Over at UK-Yankee the idea is that the penalty isn’t a tax. It’s the rules of the account set up by the IRS and as the 401k is in the US you have to follow all the rubric. Additionally it just seems that basic fairness and common sense would impose the early withdrawal penalty because it has nothing to do with tax residency just age.

EdSwippet

RzL said:
Also, do I see it correctly that taxation fully goes back to the US in case of a lump sum due to article 17.2 of the US-UK tax treaty, while many other countries like Germany or Sweden do not have a comparable provision?

Yes, it's a specific US/UK treaty oddity. A way to avoid some (perhaps now historic) double-non-tax loophole, apparently.

The thing is though, taking a lump sum could still be beneficial to you while in the UK, since your US tax is computed only on US source income, presumably only the 401k withdrawal. An example. Say you have normal UK income of £50k/year from a job, investments, and so on, and say your 401k is worth $40k. Take this $40k as "regular" (whatever that means) income and you pay 40% higher rate UK tax on it. However, take it as a lump sum and you pay US tax at graduated 10-12% + 10% penalty, for less than 22% total tax.

Primarily a tax efficiency play, then. You need to look at your entire financial position in order to find the best route.

One final question: why are you contemplating early withdrawal? For a UK resident, a 401k behaves the same as a UK pension, albeit with (usually) a slightly later access age. As with any pension then, usually better to keep until retirement than to destroy early.