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Hi I have had an e-mail regarding the inherited 401k. I have

been advised that I can...
Hi I have had an e-mail regarding the inherited 401k. I have been advised that I can take periodic payments and withdraw all funds within 5 years or can take it over my life expectancy. They have now acknowledged the tax treaty agreement (they initially said there wasn't one). Am I right in reading that a lump sum is taxable at source and not in my resident country?) What is considered a lump sum? 100%? can I take a larger amount and then smaller payments? would they all then be no withholding in accordance to the tax treaty. If a lump sum from a deceased person under 75 is not taxable in the UK, why do they tax a lump sum in the US?
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11/2/2013
jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
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Greetings,

 

Am I right in reading that a lump sum is taxable at source and not in my resident country?)

Yes, as discussed in your prior question. http://www.justanswer.com/tax/802ef-beneficiary-fathers-401k-us-texas-pension-scheme.html

You will file a US nonresident Form 1040-NR to report the income and pay the tax.

What is considered a lump sum? 100%?

Yes, all at once is a lump sum.

 

can I take a larger amount and then smaller payments?

Yes, so long as it all taken within the five years.

 

would they all then be no withholding in accordance to the tax treaty.

The rules for withholding do not change based on the frequency of withdrawal.

If you do not need to withhold on the lump sum you would, by the same rules, not have to withhold on the multiple payments.

If a lump sum from a deceased person under 75 is not taxable in the UK, why do they tax a lump sum in the US?

That is simply a difference between the US tax law and UK tax law.

Though I can almost always tell you what the tax law may be I can almost never tell you why those that pass laws do what they do.

 

Please ask if you need more discussion or clarification.

Thank you.

 

 

 

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Customer reply replied 4 years ago

The rules for withholding do not change based on the frequency of withdrawal.


'If you do not need to withhold on the lump sum you would, by the same rules, not have to withhold on the multiple payments'.


 


Hi sorry this does not make sense, as you initially said the lump sum would be taxed in the US.


 


Do you mean........one larger sum followed by smaller sums? Could I withdraw the funds as two payments or do they need to be periodic say every year (provided all withdrawn in 5 years)


 

Hello again,

 

Withholding and having to pay tax are two different phases.

An item of income can not be subject to withholding and still be subject to tax, required to be included when filing and perhaps create a balance of tax due.

 

Withholding is simply a prepayment or payment held for when the tax return is prepared and the actual tax due is computed.

 

The fact that withholding is or is not required is separate from whether a payment received is subject to income tax and has to included on the tax return. No withholding does not mean no tax may be due on the payment received.

 

one larger sum followed by smaller sums? Could I withdraw the funds as two payments or do they need to be periodic say every year (provided all withdrawn in 5 years)

Yes, any arrangement that gets it all paid out in less than 5 years can be used.

 

Hope this clarifies for you; but please continue to ask if you need more help.

Thank you.

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Customer reply replied 4 years ago

Can you please clarify....


If I was to take distribution of say 70% and 30% would there be no with holding in the US? as 70% is not a 100% lump sum. Tax would be due in the UK my country of residence in accordance to my tax situation?

Hello again,

 

If you spread distribution over several years - for periodic distributions you may claim tax treaty benefits - means your distribution would not be taxable in the US and will be taxable in the UK based on your residency.

As discussed in the prior thread.

 

Hope that clarifies for you. .

jgordosea
jgordosea, Enrolled Agent
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Customer reply replied 4 years ago

Thank you for your answer - apologies for seeming very ignorant on this subject.


If you spread distribution over several years for periodic distributions you may claim tax treaty benefits - means your distribution would not be taxable in the US and will be taxable in the UK based on your residency.


What is the maximum % I can initially withdraw and claim treaty benefits?

Hello again,

 

The Tax Treaty leaves open areas for interpretation, but since a lump sum is defined as 100% then presumably any amount less than 100% would still qualify.

That is, it can be interpreted that any amount less than the 100% lump sum does qualify as periodic payments regardless of what percentage of the account each payment represents.

 

An analysis of the tax treaty treatment of pensions is available at http://www.weil.com/news/pubdetail.aspx?pub=8292

 

"Benefits Taxable in Country in Which Individual Resides

Article 17 of the Tax Treaty provides, as a general rule, that pension benefits paid to an individual will be taxable only in the country in which that individual then resides. However, the country in which the individual then resides must exempt from tax any amount of such pension benefit if such benefit would be exempt from taxation in the country in which the pension plan was established. For example, a distribution from a USbased Roth IRA to a UK resident would be tax exempt in the UK to the same extent it would be exempt from tax in the US if distributed to a US resident. In addition, a transfer by a UK resident of US pension funds between pension plans, e.g., a rollover, would continue to be exempt from tax, as it is not deemed distributed
for US or UK purposes.

Lump Sum Exception.

An exception to the above rule concerns lump sum distributions. Lumpsum payments to an individual - regardless of where the individual resides - will be taxable in the country where the pension plan is established. However, due to the Tax Treaty's "savings clause," the country where the individual resides is still
able to tax the lump sum distribution. This exception was enacted to avoid the
lump sum distribution being exempt from tax in both the US and the UK, because
the UK does not tax lump sum pension distributions, and individuals who
anticipated receiving a lump sum distribution from a US pension plan were
previously able to avoid US withholding tax on such distribution by establishing
residence in the UK for the year in which the distribution was to be received.
The impact of the savings clause, though, allows the US to tax such
distributions from a UK pension plan to a US resident."

 

So long as you are not avoiding paying tax in both countries any series of payments is allowable.

 

There is no set amount or percentage that is required or prohibited to be distributed so long as the total is distributed within five years.

 

Hope this clarifies that the rules are in place to prevent not paying tax to either country on the distributions.

 

 

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YourTaxDefender
YourTaxDefender, Enrolled Agent
Category: Tax
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Hello. I specialize in Tax Resolution. State and Federal Wage Levies and Bank levies. Can assist in all IRS issues.

Assuming you are not a US citizen, and that the 401k is your only source of US income, you won't have to file with the IRS as long as you file a W-8BEN with your 401-k administrator. This will identify you as an NRA and allow you to claim zero withholding and zero US tax on any 401-k distributions.

You will have to file an SA form and the foreign pages when you start withdrawing from the 401-k as you will then have foreign income.

You will have to file with the IRS and your pension provider to get the correct tax treatment of your distributions.

You can leave your 401k and IRA in the US. You should declare them to HMRC and claim the treaty exemption so that any gains remain tax free in US and UK. You can make distributions from them according to the US regulations.
How they are taxed is covered by the tax treaty and will depend on your citizenship, you won't pay "double tax".
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Customer reply replied 4 years ago

You should declare them to HMRC and claim the treaty exemption so that any gains remain tax free in US and UK. ??


 


It's hardly surprising normal people get confused! The treaty is very open to interpretation according to which tax advisor you talk to. I have enlisted the help of an international uk based tax professional. Many Thanks for your help. Smile

Best of luck in your endevours. I wish you the best. If we assisted you please leave feedback. Thanks, jr
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