W-8BEN for 401k withdrawal

EdSwippet

bostonerimus said:

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.

Though some smart folk inhabit it, most at UK-Yankee are (naturally!) US citizens subject to the US's sociopathic citizenship based tax regime, and most are not tax professionals.

As for invoking common sense and fairness in a sentence about US tax law ... seriously?!

bostonerimus

EdSwippet said:

bostonerimus said:

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.

Though some smart folk inhabit it, most at UK-Yankee are (naturally!) US citizens subject to the US's sociopathic citizenship based tax regime, and most are not tax professionals.

As for invoking common sense and fairness in a sentence about US tax law ... seriously?!

I think trying to avoid the 10% penalty is a bit aggressive and I would want to see a ruling or a specific instance of it working. I do like to step back from time to time and think what is sensible. People try to use the tax code to find an advantage when it’s often simpler to just think what is the tax code of the treaty trying to achieve. I would advise the OP to wait until 59.5 to tap the 401k and avoid the issue. If I did tap the 401k early I’d expect to pay the 10% penalty.

RzL

Interesting discussion regarding the 10% penalty. I am leaning that it might be better to pay it, but it sure would be nice to see a specific ruling clarifying this.

Regarding my early withdrawal: I can see scenarios where it might ultimately beneficial. Specifically, the "Germany" scenario, where preliminary investigation tells me that if I take a lump sum payment, Germany only taxes me on the appreciation in value as capital gains, which is a fixed rate. I might also get credit for the 10% tax penalty, so ultimately the tax burden might be quite small. Of course, this is something I would discuss with a local tax expert before making a move.

Having tax-deferred growth is generally as good as it gets, but looking further, adding the 401k funds to increase a down payment for my own place to live could save me lots of mortgage interest down the line or enable me to go from renting to owning in the first place. In that case, it might well be worth skipping the deferred growth.

bostonerimus

I think the IRS might argue that the treaty covers taxes on income, capital gains, dividends etc and that the penalty tax on early withdrawal doesn't fall into those categories. The savings clause isn't a factor for non US resident, non US citizens, but I don't think the IRS would go down without a fight about modifying the terms of the 401k/IRA arrangements. You'd have to try to avoid the penalty when you filed your US tax return or you could just wait until 59.5 or use the 72t rule. Anyway "tax treaty" does not appear in the IRS exemptions from the penalty. I would love to see a IRS letter on this subject and a real world example of avoiding the penalty using a tax treaty.

RzL

bostonerimus said:

I think the IRS might argue that the treaty covers taxes on income, capital gains, dividends etc and that the penalty tax on early withdrawal doesn't fall into those categories.

Yeah, that is what I am worried about.

Out of curiosity, any idea how to declare this properly in the 1040-NR? It has a field for pensions and the taxable amount, but nothing on early withdrawals. It looks like it could be in Schedule 1, "Penalty on Early Withdrawal of Savings", but then the instructions go on to reference 1099 forms, which are for residents if I understand it correctly.

US nonresident taxes are awfully documented and there seems to be nobody who is specialized in it to talk to, since most people who are getting taxed outside the US are citizens.

EdSwippet

RzL said:
Out of curiosity, any idea how to declare this properly in the 1040-NR?

IRS form 5329, Additional Taxes on Qualified Plans. See also: Topic 557. After withdrawal, your provider should send you a form 1042-S rather than form 1099, but don't bank on it getting this detail correct. Or any detail, for that matter.

RzL

Thanks a lot! My plan provider told me I would have to file a W-8BEN, then they'll look at the applicable tax treaty and send me a 1042-S the following year. Whether they'll actually do that, only one way to find out...

After reading the experiences of some other NRAs, it would not surprise me to get a 1099-R and 30% withholding or whatever else makes absolutely no sense.