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Nothing in the Treaty overrides the requirement that the distribution must qualify as an “eligible rollover distribution” within the meaning of section 402(c)(4). The rollover of the pension funds would not be taxable as long as they go into an eligible plan.Even if the UK plan would accept the amount that doe snot mean that the US would see the plan as eligible.
The Treaty provides that lump-sum distributions derived from a pension scheme established in one country and beneficially owned by a resident of the other country are taxable only in the country where the pension scheme is established. So if the distribution occurs in the US it will be taxable to the US. The W8 could not be used to request no withholding.
This is unfortunate but the money was deferred from taxation while the contributions were being made in the US.
They have not been taxed. Of course if the 401K had any money in it that was taxed already (called basis) then that amount would be protected from tax on the distribution.
Unfortunately, the transfer of funds from U.S. Plan to U.K. Plan would not satisfy the rollover requirements under the domestic law of the United States because U.K. Plan is not an eligible retirement plan described in section 402(c)(8)(B).3
This action would be a distribution for US tax purposes.
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