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Since transfers or direct rollovers from US IRAs are only allowed to be rolled over to IRS qualified plans foreign pension plans are not governed by the U.S. Tax Code, they cannot be classified as qualified trusts. Accordingly, amounts from these plans cannot be rolled over to any of the retirement accounts not in the country that governs them.
This means that what you will really be doing is a Lump Sum distribution from the US IRA. The US-UK tax treaty does cover this subject. Article 17 of the treaty deals with pensions. Since the IRA was generated with money from a 401K it would fall under pensions for tax treaty determination.
Under the previous treaty, a lump-sum payment from a pension scheme was taxable only in the country of residence. So if an individual moved from the US to the UK before receiving a lump sum from a US pension scheme, they would be taxable on the lump sum neither in the US (because of the treaty) nor in the UK (which does not tax lump sums anyway).
The treaty was changed and now the individual will only be taxed in the country where they are resident at time of distribution.
The withholding of the taxes in the US would be the real problem. Could the W8 form cover this with the understanding that you are requesting no withholding based on Tax Treaty provisions under Article 17? Here is a link to the W8 Form:
Part II of the W8 allows you to fill in the treaty information that allows for no withholding.
The IRA administrator would keep this to show the reason for not withholding the taxes. If they will not then you would still need to file a 1040NR and use the Article 17 Treaty to request your withholding back from the US.
Your situation is complicated, it is only recently that treaties were changed to allow for contribution deductions when made in a foreign country by a resident.
I sincerely XXXXX XXXXX is helpful,
So from your response, and by the way thank you for that very helpful, we complete the W8 form and tick part II. For Q9 tick a
For Q10 we state Aticle 17 and claim 30% withholding Tax or should this be zero?
what do we specify as type of income? Is it that this is a Lump Sum payment from a Pension, the fund originating from contributions to a 401k?
The reasons then being....that under the latest US and UK Treaty this sum will only be assessed for taxation in the individual's country of residence at the date of distribution, the UK?
You are correct. It is a lumpsum payment that will need to be made and per the treaty you should not be taxed on the amount since it will be taxable to UK. 0% withholding should be claimed. The 30% is what we are trying to avoid.
Now will the administrator accept the W8? I would call them and ask. Like I stated this is new ground and although stock trades and other investment accounts have been going through this for years the IRA situation i s really still new ground.
I think they will but if they say they cannot (they will probably site internal reasons if they will not accept) know that you can file the 1040NR and get the withholding back that way as the treaty article will be a normal procedure for IRS to deal with.
I really hope this all works out for you,
Many thanks Robin, much appreciated. This is really useful.
You are welcome.
The provider of the IRA still refuses to transfer without withholding tax. Can you be engaged formally, or can you recommend somebody who could be engaged formally, so that the provider in Florida could be provided with sufficient comfort to make the transfer without withholding the tax?
Or do I need to get something from the IRS that again confirms that the current IRA provider is able to make the transfer. AGain, could you facilitate this?
I appreciate that this would involve fees at a much higher level.
The W8 form is the IRS form that is used. If the provider will not accept then you will need to file the 1040NR to get back the withholding. I am not in a position to intercede for you and I am prevented form any recommendation. I wish I could tell you other wise but I can see their position. As a third party in the transaction they are afraid to not withhold as it could place them in a position with the treasury department for liability. They are most probably deeming this US source since it is from an IRA that is established in the US.