IRA Distributions for US Non Resident Alien

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Seriousvoyager
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IRA Distributions for US Non Resident Alien

Post by Seriousvoyager » Mon Oct 30, 2017 1:26 pm

I am a US Non Resident Alien (Not a US Citizen, Not a Green Card Holder and Not a US Resident of any kind).
I renounced and I am Not a 'covered expatriate.'
I am a UK Citizen.
I have a regular IRA in the USA from previous US employment.
I file a 1040NR every year and I live in Portugal.
I am a qualified and full time resident of Portugal.

For the purpose of answering my question please assume that the USA/Portugal treaty is the same as the USA/UK treaty (unless you want to read the US/Portugal treaty) they are similar, pensions taxed in resident's State.

My IRA custodian insists on a 30% withhold on my IRA distributions regardless of any correctly filled out W8BEN. They say it’s a new rule (policy) this year that all IRA distributions to NRAs have 30% withheld.

Does anybody see any problems with any of the followings?

Taking out a large IRA distribution and subject it to tax in Portugal ONLY and not the US.
Claiming back the entire 30% Withhold on my 2017 1040NR Tax return.


I've read previous posts on this. It’s a jungle out there!

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prudent
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Re: IRA Distributions for US Non Resident Alien

Post by prudent » Mon Oct 30, 2017 3:23 pm

Topic moved to Investing - Help with Personal Investments.

TedSwippet
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Re: IRA Distributions for US Non Resident Alien

Post by TedSwippet » Mon Oct 30, 2017 5:00 pm

Seriousvoyager wrote:
Mon Oct 30, 2017 1:26 pm
Does anybody see any problems with any of the followings?
Taking out a large IRA distribution and subject it to tax in Portugal ONLY and not the US.
Claiming back the entire 30% Withhold on my 2017 1040NR Tax return.
I can't see any superficial problem with this. I assume you are aiming to make use of the preferential tax rates that Portugal offers for pension payments made to non-habitual residents (can you tell that I have looked into this myself already?!).

The danger, of course, is that the IRS holds up or otherwise baulks at repaying the 30% that was over-withheld by the IRA custodian. Apparently a six-month IRS delay is entirely possible, perhaps even normal. And to add to this, US brokers are notoriously slow at providing 1042-S reports for NRAs -- it's probably the bottom of their list of end-of-year priorities -- so it is likely that you would be unable to even file your 2017 1040NR until around the end of March at the earliest.

It is indeed a jungle. Several IRA providers are now known to basically ignore W-8BEN forms when it comes to paying out of IRAs or 401ks to NRAs. You don't name names here, but Fidelity and TIAA-CREF spring to mind. As far as I can tell it is a policy that is entirely invented by the custodian, and nothing that US regulation or the IRS has put in place.

If this were me, and if I had the luxury of being able to phase this over a few years, I would try taking a small-ish part of the pension this year and make sure that the paperwork flow and tax refund happens as expected before moving on to the larger chunk. Maybe you don't have that luxury, but if you do it could be worth considering.

Oh, and maybe consider moving to a more NRA-friendly custodian. If you can find one, that is.

Seriousvoyager
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Re: IRA Distributions for US Non Resident Alien

Post by Seriousvoyager » Mon Oct 30, 2017 7:36 pm

Thanks for that TedSwippet.

I briefly looked into moving to a more "withhold friendly" custodian but initial findings were that to open an IRA account as a US Resident followed by change of status to NRA is OK. The IRA will stay yours in your new resident country.
But to open a new IRA account (for the assets to be switched into from the "withhold UNfriendly" custodian) is not possible once you’ve acquired the new NRA status. You must be a US person to open an IRA account, so I’m told.
So I’m stuck unless you know different.
I’ve taken a little professional advice and like your advice, I was advised to start off small to see how it goes. So not even professionals are sure of the end result.
You could potentially be withheld up to 18 months then with a January distribution. That’s dismal unless the markets crash.

Seriousvoyager
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Re: IRA Distributions for US Non Resident Alien

Post by Seriousvoyager » Mon Oct 30, 2017 7:49 pm

TedSwippet,

I suppose the idea of a TIRA to Roth Conversion has been flogged to death on this site and determined that the treaty does not apply then?
I only found this site today and have read a few of your posts.
I understood from some posts that a Roth Conversion is not considered a Distribution and so escapes Treaty treatment?
Or have you found anything new on this?

TedSwippet
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Re: IRA Distributions for US Non Resident Alien

Post by TedSwippet » Tue Oct 31, 2017 3:45 am

Seriousvoyager wrote:
Mon Oct 30, 2017 7:36 pm
But to open a new IRA account (for the assets to be switched into from the "withhold UNfriendly" custodian) is not possible once you’ve acquired the new NRA status. You must be a US person to open an IRA account, so I’m told.
So I’m stuck unless you know different.
I don't know different at all, but in your shoes -- and I may well be in a few years :-( -- the two places I would first approach would be Charles Schwab and Interactive Brokers. The former has an office in London and so at least some notion that there are countries other than the US, and Interactive Brokers is internationally competent. Of course, both may have the same restriction that you cite, but worth asking if you haven't already.

Beyond that, how heavily have you berated your current IRA provider on this? Because if we all just roll over and let them off the hook on this then the practice will both continue and spread, and that's not good for anyone. Formal complaint? Push the issue up the management tree? Letter to the CEO?
Seriousvoyager wrote:
Mon Oct 30, 2017 7:36 pm
You could potentially be withheld up to 18 months then with a January distribution.
Same for anyone waiting for a US tax refund on over-withholding. Sucky indeed, but that's just the US's system, unfortunately. NRAs are often sent to the back of the bus by US bureaucracies, but for once nothing special here.

As for Roth conversion, I determined that under the US/UK treaty a Roth conversion is taxable only to the US and at normal graduated rates. For me, that's a decent deal since the US rate I would face should be lower than my UK rate. It might not be appropriate for you though. Your Portuguese rate on foreign pensions may well be lower even than low US graduated rates, which undermines the entire reason for converting. And I have not looked at the US/Portugal treaty at all to see if it works in exactly the same way.

Moreover, Roth conversion only works optimally for me because Vanguard correctly applies a the 0% treaty withholding rate on conversion amounts. If they didn't, but instead withheld at either 15% or 30% that withholding would not be replaceable into the Roth, making the strategy non-optimal. (And worse, it would be treated by the IRS as an early IRA distribution, so not just taxable but with an added 10% penalty because I am under age 59.5.)

Sorry I can't provide anything more positive. If you do make any progress here, please report back. I'm sure other would be interested in the outcomes.

TedSwippet
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Re: IRA Distributions for US Non Resident Alien

Post by TedSwippet » Tue Oct 31, 2017 6:58 am

TedSwippet wrote:
Mon Oct 30, 2017 5:00 pm
The danger, of course, is that the IRS holds up or otherwise baulks at repaying ...
When I wrote 'baulk' here, the case I was thinking of but couldn't find at the time was this one:
This is a cautionary tale of the risks of buying property in the US. My wife and I bought a holiday home in Florida in 2008 and in 2015 we decided to sell up. The property market had declined and we sold at a loss.

The sale was completed in August 2015 and the conveyancing firm held back 10 per cent of the price while the Internal Revenue Service satisfied itself there had been no capital gain. It was expected this would be resolved within 40 days. It was not and the IRS now says it will not pay out to a non-taxpayer.

I obtained a temporary US tax number, but the IRS says it will not pay out on this either. All this is because I am not an American citizen and the US does not like refunding money to non-residents.
Now there may be more to this than meets the eye, it involves real estate rather than pensions, and it could be just an isolated case. But nevertheless it is a disturbing sign of the potential for hassles in retrieving over-withholding from the IRS as an NRA.

Precisely because of this danger, as a general rule I now suggest to anyone working temporarily in the US or who expects to be outside the US and not a US citizen on retirement to think very carefully indeed before committing fully and irrevocably to an IRA, 401k, or other US-captive retirement savings account. Unfortunately that ship sailed long ago for both you and I.

Seriousvoyager
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Re: IRA Distributions for US Non Resident Alien

Post by Seriousvoyager » Tue Oct 31, 2017 8:28 am

That’s an awful story. Wish I knew more.

As far as berating custodian, I spent a month on phone calls, emails, providing copies of Treaty withhold schedules etc. All of this to the correct departments.

Their only concern is complying with what’s on the computer monitor in front of them. As I understand it, if they allow an IRA distribution leave the property with a zero Tax withhold In error, they pay.

They're not concerned with Treaty Article passages. They can’t possibly lose using such policies.

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