UK resident : Vanguard USA dropped a bombshell

bozo007

BlisteringBarnacles said:

Thanks Bostonerimus1 and others. I was able to buy and sell inside the Roth IRA online with no issues at all even as recently as few months ago. Perhaps they were lax in applying the rules.

I have updated the bogleheads thread. I spoke to a representative later in the day and he seemed to think that I will be transitioned over to the brokerage account automatically. Sounds too good to be true. I will call couple more times and see if I get consistent info.

Looks like i will be barred from buying mutual funds but they will probably allow me to sell and buy ETFs which is not too bad I suppose.

I may be able to move my Roth IRA to Fidelity where I already have a Roth IRA. Fidelity does not allow me to buy mutual funds, only ETF allowed. So, for Roth I have a solution : Either Vanguard allows me to buy ETFs or I move to Fidelity.

My taxable is where I have the problem. I hold non HMRC distributing funds. Want to try my best to avoid selling and triggering income tax to the tune of my profit of $160,000. If Vanguard allows me to just keep the funds (and not force me to liquidate) thats not such a bad option. But if they force me to sell or force me to go to another provider who will not allow in-specie transfer then I could be in big trouble.

Anyway I dont need to decide now. I have until end of 2025. Given my haphazard portfolio with non distributing funds etc, I am probably better off going away to India or Australia for 5 years, liquidate all these suboptimal investments without any capital gains tax. India has a 1 year tax holiday and Australia will only tax the growth in investment value after I relocate there. I have permanent residency in India (something like a green card) and as regards Australia I might be able to get a job there, as an English manager from the old days who had high regard for my work relocated to Australia and never returned.

Thanks

I have a general taxable, Roth and IRA accounts at Fidelity thanks to my US stay many years ago. Fidelity doesn't allow the purchase of ETFs or mutual funds for those who are not US tax residents, if these are not allowed to be sold in the account owner's current tax residence (and they have blocked conversion of the IRA to Roth which I had been patiently doing every year by moving an amount up to the 12% tax bracket, but I digress!). However, what you already hold can continue without any pressure to sell.

leosayer

It's not the first time Vanguard US have gone themselves into a mess with capital gains tax....

https://www.investmentnews.com/etfs/vanguard-settles-lawsuit-over-tdf-capital-gains-tax-mess/257374

BlisteringBarnacles

Schwab has agreed to transfer my Taxable and Roth IRA "in specie". I would need to open the taxable and Roth IRA acounts with Schwab first. They will allow me to open Roth IRA as a non resident alien.

With Fidelity I already have a Roth IRA. But Fidelity does not allow non resident aliens to hold US mutual funds. I doubt I will be able to transfer in specie. The customer support associates also lack this type of knowledge. So, for every question they have to call back office with 30 minute wait time and who knows if the answer is correct or not. Same with Vanguard these days.

With Schwab, I got to speak to a knowledgeable associate, not just a help desk person. He assured me that they can transfer Vanguard mutual funds in specie.  

regarding taxes : Yes my portfolio is a mess. Needs sorting out.

In Vanguard US taxable, I hold VFIAX (500 Index Fund Admiral shares) and VTSAX (Total Stock Market Index fund Admiral shares). I dont get capital gains distribution. I have not sold any of these yet.

In Etrade US, I hold these US domiciled ETFs in taxable : The first two below do not have UK HMRC distributor status, the rest do. On my ETrade 1042-S I see a Capital Gains Distributions (Income code 36) of usually less than $20.00 and Return of Capital (Income code 37) of around $200
   QQQ  POWERSHARES QQQ TRUST
   TIP  iShares TIPS Bond ETF
   VEU  VANGUARD INTL EQUITY IND FD
   VNQ    VANGUARD SECTOR INDEX FDS
   VTI    VANGUARD TOTAL STOCK MARKET
   BND  Vanguard Total Bond Market Index Fund ETF

Thanks !

PS : I file US tax return every year altho I probably do not need to (Pub 519) if my W8-BEN is on file. My US tax accountant says it is best to do it just in case and I do it. (1040-NR).

BlisteringBarnacles

bozo007 said:

I have a general taxable, Roth and IRA accounts at Fidelity thanks to my US stay many years ago. Fidelity doesn't allow the purchase of ETFs or mutual funds for those who are not US tax residents, if these are not allowed to be sold in the account owner's current tax residence (and they have blocked conversion of the IRA to Roth which I had been patiently doing every year by moving an amount up to the 12% tax bracket, but I digress!). However, what you already hold can continue without any pressure to sell.

Interesting. I also have a Roth IRA with Fidelity. They mentioned a few years ago that as non resident alien in UK I was not going to be allowed to buy US mutual funds but they said I could buy US ETFs. Then after couple of years, I remember Etrade blocked me from buying US ETFs such as VTI due to PRIIP. I forgot to ask Fidelity if I would still be allowed to buy US ETFs but what you are saying makes sense. 

The US brokers will not allow us to buy US mutual funds and US ETFs and they dont offer UCITS ETF either so our only option is international brokers such as Schwab / Interactive Brokers. 

But until very recently (few months ago) Vanguard US allowed me to buy / sell Vanguard mutual funds. Heck, I bought VMFXX-Vanguard Federal Money Market Fund just weeks ago. There was no problem. Let me try it just to see if it will work. Within my Roth I would certainly want to switch from VTSAX (Total Stock market Index) to VTWAX (Total World Stock Index). After that I dont care, as long as they dont force me to liquidate, its not so bad.

Thankfully I completed my Roth conversion a few years ago by moving up to the 12% tax bracket as you point out.

goodValue

In Vanguard US taxable, I hold VFIAX (500 Index Fund Admiral shares) and VTSAX (Total Stock Market Index fund Admiral shares). I dont get capital gains distribution. I have not sold any of these yet.

PS : I file US tax return every year altho I probably do not need to (Pub 519) if my W8-BEN is on file. My US tax accountant says it is best to do it just in case and I do it. (1040-NR).

As VFIAX and VTSAX will distribute dividends during the year, do you not have a US tax liability?
This would be reported on SCHEDULE NEC of form 1040-NR, and be taxed at the 15% rate.

BlisteringBarnacles

Yes I have US tax liability. As I said I do file a 1040-NR every year. 

But I believe if W8-BEN is on file then the correct amount of tax on dividend is automatically withheld as per treaty (15% for UK-US). I need to renew the W8-BEN form every 3 years or so. Sometimes I am lazy and forget to do this and the broker (ETrade, Vanguard in the US) would then withhold 30%. If I file the return, I can claim it back. US bank interest and Capital gains are not taxable to Non resident aliens. 

So I guess the only US tax liability for non resident aliens is on the dividends.  If you diligently maintain your W8-BEN on file or one doesnt care about the extra tax withheld, then no need to file a US tax return ?

Apologies for not replying sooner.Not following this forum for a while. Need to catch up now.

goodValue

It's my turn to apologise for not replying. I've been away for the last two weeks, and don't know how I missed your post before I left.

I'm in a similar situation to you, but with much less in holdings.
I file each year to notify the IRS of my dividends.
Given your explanation above, and the fact that the IRS are struggling under the amount of paperwork they have to deal with, I'm surprised the IRS hasn't notified me it's not strictly necessary to file, so they could reduce their own workload.

If you are a buy and hold investor, could you keep your funds at Vanguard, the difficulty then being how to get your money when you eventually sell?
You could use the notice period Vanguard have given, to set up your funds in the state you would like them to be in until you decided you wanted to sell.
Or have Vanguard moved the goalposts again in the last couple of weeks.

BlisteringBarnacles

goodValue said:

I file each year to notify the IRS of my dividends.
Given your explanation above, and the fact that the IRS are struggling under the amount of paperwork they have to deal with, I'm surprised the IRS hasn't notified me it's not strictly necessary to file, so they could reduce their own workload.

The US IRS never struck me as efficient and particularly helpful

If you are a buy and hold investor, could you keep your funds at Vanguard, the difficulty then being how to get your money when you eventually sell?
You could use the notice period Vanguard have given, to set up your funds in the state you would like them to be in until you decided you wanted to sell.
Or have Vanguard moved the goalposts again in the last couple of weeks.

The problem with Vanguard is they are being coy on what is going to happen post 2025. 1) We NRAs cannot be upgraded to brokerage account 2) The mutual fund "legacy" retail platform (on which we poor NRAs are stuck) is going to be "retired" end of 2025. As of now Vanguard are saying that beyond 2025, the account will be restricted to only sell and transfer out of the "legacy" accounts and we cannot buy. That in itself is not a problem, but will we lose online access ? what does "retired" mean ? I doubt they can "support" a "legacy" platform forever. Appears to be a strategy to gently nudge us NRAs to pack up and leave.

All the gory details are on that Bogleheads thread linked in the first page on this thread. With my non stop rants, I managed to get that thread locked

My funds are pretty much in the state I want them in. In taxable, I don't want to sell now anyway (the funds don't have UK HMRC distributor status). In Roth IRA, I may move from Total US stock Index fund which has done well to Total World stock Index which is pretty much the only stock index fund I want to own in all my brokerages (as Lars Kroijer says). My plan is to move it all to Schwab in-specie. All the details of what Schwab will allow etc are on that Bogleheads thread. Schwab customer service has been fabulous, a pleasure to work with.

Apologies for the late response. The winter blues are getting to me. Cant seem to get anything done. Being unemployed (between-jobs/Semi-retired/FIRE-ed is the euphemism I am looking for LOL) is probably bad for the soul.

goodValue

I've only just seen your post, as I'm not a regular on this forum, so my apologies for a late response.

Being in a similar situation to you, I have used the euphemism "involuntary retired".

It does sound worrying if Vanguard are not being clear with their intentions.

If they are trying to nudge NRA's away from the platform, have they given any indication about making it easy to transfer to another brokerage?

A few years ago, I saw posts from NRA's trying to get around different US brokerage problems, by paying for a mail redirect service that effectively gave them a US address.

It wasn't clear whether or not this was viable.

If such a service was available, could you change to a full brokerage account with Vanguard, allowing you to use all of their services?

I tried looking at the Bogleheads link, but it gave the message:

The requested topic does not exist.

Bostonerimus1

goodValue said:

I've only just seen your post, as I'm not a regular on this forum, so my apologies for a late response.

Being in a similar situation to you, I have used the euphemism "involuntary retired".

It does sound worrying if Vanguard are not being clear with their intentions.

If they are trying to nudge NRA's away from the platform, have they given any indication about making it easy to transfer to another brokerage?

A few years ago, I saw posts from NRA's trying to get around different US brokerage problems, by paying for a mail redirect service that effectively gave them a US address.

It wasn't clear whether or not this was viable.

If such a service was available, could you change to a full brokerage account with Vanguard, allowing you to use all of their services?

I tried looking at the Bogleheads link, but it gave the message:

The requested topic does not exist.

The US mail service for a US address does work. I know of people who use their UK residential address on their Vanguard account and a US mail service as their mailing address (Vanguard allows for two separate addresses) and they have full service with Vanguard.