Fidelity 401k And W-8BEN

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mrploppy
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Fidelity 401k And W-8BEN

Post by mrploppy » Wed Jun 06, 2018 1:23 pm

I'm a UK citizen and resident and filed a W-8BEN with Fidelity in the hope that they wouldn't withhold tax from any withdrawals from my 401k. They assured me that this would be the case when I filed the form. Well, on a sample of one withdrawal, this has failed miserably. The person on the phone insisted that they had to withhold 30% - and even went away and checked. I asked him, if that's the case, what's the point of the the W8-BEN, to which he said "that's a very good question".

Anyone else had this happen with Fidelity? If so, is there any recourse? Surely, they are wrong to withhold tax on periodic withdrawals if there's a tax treaty in place with the foreign country in question (in this case the UK)?

Dottie57
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Re: Fidelity 401k And W-8BEN

Post by Dottie57 » Wed Jun 06, 2018 4:08 pm

A link to the US IRS form

https://www.irs.gov/pub/irs-pdf/fw8ben.pdf

I think OP needs to talk to a supervisor or higher level mgmt. perhaps an advisor could help if OP has one.

mrploppy
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Re: Fidelity 401k And W-8BEN

Post by mrploppy » Wed Jun 06, 2018 4:32 pm

Thanks. As stated, I've already submitted a W-8BEN to Fidelity. They actually sent it to me in the first place, and now they've chosen to effectively ignore it.

I'll speak to them again tomorrow and try and get some sense from someone who actually knows the score.

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BeBH65
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Re: Fidelity 401k And W-8BEN

Post by BeBH65 » Wed Jun 06, 2018 4:42 pm

One use of the W8BEN for non-us residents is to lower the dividend-witholding tax from the default 30% to a lower % as per the applicable tax-treaty (often 15%).

Taxation of the withdrawals from a tax advantaged account are something different, where the W8Ben might or might not lower the taxation.

I am sure some people with experience will join this thread.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Hug401k
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Re: Fidelity 401k And W-8BEN

Post by Hug401k » Wed Jun 06, 2018 8:43 pm

Do you pay US taxes on your pay? It's tough to avoid Uncle Sam.

https://www.investopedia.com/articles/p ... idents.asp

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BeBH65
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Re: Fidelity 401k And W-8BEN

Post by BeBH65 » Wed Jun 06, 2018 10:28 pm

From the investopedia article:
To top it off, your entire 401(k) withdrawal will be taxed as income by the U.S. – even if you’re back in your home country when you withdraw the funds. Because contributions to traditional 401(k) accounts are made with pretax dollars, this means any withdrawn funds are included in your gross income for the year the distribution is taken.

Read more: How Are 401(k) Withdrawals Taxed for Nonresidents? | Investopedia https://www.investopedia.com/articles/p ... z5Hhri1G00
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mrploppy
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Re: Fidelity 401k And W-8BEN

Post by mrploppy » Thu Jun 07, 2018 3:57 am

I don't know if I made it clear but I'm a UK citizen and a UK resident. Much of what's been said only applies to US citizens. No, I don't pay US tax on my pay - of course I don't. And the way 401k withdrawals are taxed for non-citizen, non-residents is well understood (or at least I thought it was). Lump sum distributions are taxed by the US. Partial distributions are taxed by the country of residence. Where there's a tax treaty in place, a W8-BEN can be filed (with Fidelity in this case) to prevent the 30% withholding on partial distributions. Or not ... as appears in this case.

TedSwippet
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Re: Fidelity 401k And W-8BEN

Post by TedSwippet » Thu Jun 07, 2018 4:58 am

mrploppy wrote:
Thu Jun 07, 2018 3:57 am
I don't know if I made it clear but I'm a UK citizen and a UK resident. Much of what's been said only applies to US citizens. No, I don't pay US tax on my pay - of course I don't. And the way 401k withdrawals are taxed for non-citizen, non-residents is well understood (or at least I thought it was). Lump sum distributions are taxed by the US. Partial distributions are taxed by the country of residence. Where there's a tax treaty in place, a W8-BEN can be filed (with Fidelity in this case) to prevent the 30% withholding on partial distributions. Or not ... as appears in this case.
Right.

A W-8BEN should trigger a reduced withholding rate on US pension withdrawals. In this case, the US rate on pension payments made to UK residents with treaty coverage is 0% -- see the income code 15 entry for the UK in this table from the IRS. And from the horse's... er... mouth on withholding for payments to NRAs:

Publication 515 (2018), Withholding of Tax on Nonresident Aliens and Foreign Entities | Internal Revenue Service
Pensions and annuities.
In most cases, you must withhold tax on the gross amount of pensions and annuities that you pay that are from sources within the United States. This includes amounts paid under an annuity contract issued by a foreign branch of a U.S. life insurance company.

Most tax treaties provide an exemption from tax on non-government pensions and annuities. See the specific treaty rules for government pensions. The exemption may not apply to lump-sum payments. See, for example, Article 17(2) of the United States–U.K. income tax treaty. In addition, it does not apply to payments treated as deferred compensation, which is often treated as income from employment.

For purposes of chapter 3 withholding, in the absence of a treaty exemption, you must withhold at the statutory rate of 30% on the entire distribution that is from sources within the United States. ...
Apparently, Fidelity does not understand the concept of a "treaty exemption". Previous occurrence with Fidelity reported here. And another report of similar problems surfaced recently, this time involving Voya.

So, where the 401k provider does not properly comply with the treaty withholding rules, you have to recover this over-withholding from the IRS later, by filing a 1040NR. That potentially means up to 18 months of delay in receiving 30% of your pension withdrawal, not to mention the hassle and expense of filing a US tax return and then later depositing the refund check.

All very, very frustrating. It appears that many US 401k and IRA providers are now so scared of tripping up on overbearing and complex US compliance requirements that they would rather ignore the whole area and delegate treaty compliance to the individual NRA themselves. Or perhaps these providers simply cannot fully understand all the ever-growing and complex US compliance that is being thrown at them.

Either way, this is not an encouraging time to be a US NRA who will rely on being able to draw a US pension in retirement. And it does not take a huge leap of imagination to come up with a future in which the situation is worse still. Medallion signature guarantees, for example.

Finally, to answer your last three questions in the original post:
mrploppy wrote:
Wed Jun 06, 2018 1:23 pm
Anyone else had this happen with Fidelity? If so, is there any recourse? Surely, they are wrong to withhold tax on periodic withdrawals if there's a tax treaty in place with the foreign country in question (in this case the UK)?
(a) Yes. (b) On the Fidelity side of things, apparently not. And (c) yes, they are wrong.

TedSwippet
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Re: Fidelity 401k And W-8BEN

Post by TedSwippet » Thu Jun 07, 2018 7:24 am

BeBH65 wrote:
Wed Jun 06, 2018 10:28 pm
... Read more: How Are 401(k) Withdrawals Taxed for Nonresidents? | Investopedia https://www.investopedia.com/articles/p ... z5Hhri1G00
I realise you did not write this article and are not even slightly responsible for its content :-) , so this is not aimed at either you personally or at the prior poster at all, but... overall, this article looks to me to be so inaccurate and incomplete as to qualify as negligent.

A partial list of factual errors and omissions:
  • It begins with the hook line "If you’re a citizen of Canada, Mexico or..." but then largely (or perhaps completely) ignores the treaty rates for both these countries in later statements. The stated "15-20% withholding tax" on RRSP rollover for Canada later on might be a treaty reference, or not. I really cannot tell.
  • It fails to distinguish between 'lump sum' and regular withdrawals. There is sometimes a treaty difference on these points, but the author appears unaware.
  • The article suggests rollover to IRA as a way to lower tax payments, but unless you plan become a 60+ year old 'mature student' at a IRS-recognised educational establishment that is outside the US or 'qualify' for $10k as a first-time homebuyer at retirement age -- and let's face it, these are extremely unlikely -- generally it won't. With and without treaties, both are more or less the same.
  • The advice to rollover to an IRA ignores the important (and likely quite useful) age 55 early withdrawal penalty exception for 401ks on separation from service.
  • It states without qualification that "withdrawals from 401(k)s are taxed the same way for residents and nonresidents." Not true where a treaty overrides.
  • The mandatory 10% withholding on IRA payments abroad only applies to US citizens, and not to non-resident aliens, the subjects of the article. See IRS form W-4P for more.
  • The only mention of treaties is in connection with the 'mandatory 10%' referenced above, already noted as mistaken in itself. This is entirely misleading. I suspect the author wrote the whole article without knowing anything at all about treaties, and only discovered that treaties modify things substantially about two minutes before (or perhaps after!) their publication deadline.
  • "Before you make this important decision regarding your 401(k) withdrawals, consider speaking with a financial professional or tax attorney." Finally something with which I have no argument, but I would entirely exclude the article's author from this group!
TL;DR Investopedia is often reasonably reliable, but this particular article is almost entirely complete rubbish. Ignore it.

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BeBH65
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Re: Fidelity 401k And W-8BEN

Post by BeBH65 » Thu Jun 07, 2018 8:41 am

@Ted, Thanks for your expert look at this.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

TedSwippet
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Re: Fidelity 401k And W-8BEN

Post by TedSwippet » Thu Jun 07, 2018 10:40 am

BeBH65 wrote:
Thu Jun 07, 2018 8:41 am
@Ted, Thanks for your expert look at this.
No worries. And I would not say 'expert' either, just a fair bit more clued in than the article's author, it seems :-)

I do realise that by quoting it, you (and the prior poster) were trying to help, and that neither of you would necessarily see these flaws in the article, so please do not feel that I am in any way criticising your responses. It is just that by leaving this article hanging out here unchallenged, it seemed like future readers might think it to be useful, rather than almost entirely wrong.

It is actually pretty depressing that there are few if any really accurate resources for NRAs to use when it comes to holding US retirement accounts. Of course, this combination will not be exactly 'mainstream', but neither is it exceptionally rare these days. Most cases will be relatively straightforward within themselves, but there is a wide variation in that straightforwardness across individuals, depending on treaty, country of residence, country of domicile, and so on.

The IRS guidance on this, though, is pretty well non-existent, and what little that does exist is scattered sparsely over a huge range of IRS publications and form instructions. And 401k and IRA providers themselves generally do not address it -- as we have seen, some probably do not understand it themselves.

mrploppy
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Re: Fidelity 401k And W-8BEN

Post by mrploppy » Thu Jun 07, 2018 12:06 pm

Thanks @TedSwippet - great info there.

I intended to call Fidelity today and speak to someone "in authority", with a view to getting them to apply the rules as we all seem to think they should work. But then I wondered if it wouldn't simply be an exercise in frustration - so I didn't.

I would love to quote to them their own documentation that says
"If you are a nonresident alien and you do not do a direct rollover to a U.S. IRA or U.S. employer plan, instead of withholding 20%, the Plan is generally required to withhold 30% of the payment for federal income taxes. If the amount withheld exceeds the amount of tax you owe (as may happen if you do a 60-day rollover), you may request an income tax refund by filing Form 1040NR and attaching your Form 1042-S. See Form W-8BEN for claiming that you are entitled to a reduced rate of withholding under an income tax treaty. For more information, see also IRS Publication 519, U.S. Tax Guide for Aliens, and IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities."

When I made my first withdrawal yesterday, I did it by phone. I've since realised that I could do it online - you can "preview" a withdrawal to see what's what. However, it obviously knows if you're an NRA (presumably from your address on file) and won't allow you to enter a value of less that 30% in the "withholding" box. I daresay it's the same mechanism that the rep has when you do it over the phone - so it's "hardcoded" in their processes.

TedSwippet
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Re: Fidelity 401k And W-8BEN

Post by TedSwippet » Fri Jun 08, 2018 3:23 am

mrploppy wrote:
Thu Jun 07, 2018 12:06 pm
I intended to call Fidelity today and speak to someone "in authority", with a view to getting them to apply the rules as we all seem to think they should work. But then I wondered if it wouldn't simply be an exercise in frustration - so I didn't.
I completely understand the sense of resignation, but if this were me I would push Fidelity further on this. If we all just roll over a play dead the situation will only worsen for everyone. They ought to provide you with a full and understandable explanation of why they do things this way, if nothing else.

Written communication rather than phone calls will probably be more effective. Front-line staff are unlikely to know the answer to this one, and their workflow motivates them to give the most immediate believable response rather than perhaps the right one.

It is not beyond every 401k provider's capability to do the right thing for NRAs. Vanguard seem to be on the ball, at least for now. From the sound of things as you describe them (I don't have a Fidelity account), it looks more like they just overlooked NRAs in their system programming -- or perhaps just thought we all didn't matter -- rather than a top-down designed policy of ignoring W-8BEN treaty claims. Otherwise, why have any W-8BEN process at all?

I would also imagine that the IRS isn't completely thrilled with having to process 1040NR refund claims that would otherwise not have to be filed at all (NRAs don't need to file 1040NR where the tax withholding matches exactly the US tax liability). So a chunk of pointless busywork for both the individual and the IRS. If you can find the right person in the IRS to apply leverage to Fidelity there might be some traction to be had there too, although it will probably be hard to impossible to get this to the right level inside the IRS.

Finally, if this persists your best course is clearly to take just one large withdrawal at the very end of the year, so that you can turn round the 1040NR claim for refund as quickly as possible. That way you only give the US an interest free loan of 30% of your retirement money for three or four months, rather than as many as 18 months.
Last edited by TedSwippet on Fri Jun 08, 2018 9:23 am, edited 3 times in total.

mrploppy
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Re: Fidelity 401k And W-8BEN

Post by mrploppy » Fri Jun 08, 2018 7:25 am

You're absolutely right, I should make the effort. It'll be something to do in between World Cup matches! And I'll do it in writing - saves hours on the phone and may actually reach someone who can do something about it. I'll take the salient points from your comments and others on the threads you pointed to.

If there are any nuggets of information e.g. in IRS publications, over and above those you've mentioned already, please let me know.

I'll report back if/ when I receive a response, but who knows how long that might be.

Edit: Agree on the withdrawal strategy too. My plan would be to use the refund in lieu of a further withdrawal - effectively mimicking two withdrawals per year (one of 70% and one of 30% of my annual withdrawal).

mrploppy
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Re: Fidelity 401k And W-8BEN

Post by mrploppy » Tue Jul 10, 2018 6:04 am

Here's an update. I wrote to Fidelity a few weeks ago and received a response today. Hurrah! Sort of.

The gist of it is this: periodic payments are indeed subject to a 0% withholding as per the tax treaty. My withdrawal, albeit a tiny fraction of my 401k's value (about 1%), was treated as a lump sum distribution - hence the 30% withholding. Their definition of periodic payments is regularly occurring payments over a period greater than 1 year. They treat Minimum Required Distributions (MRDs at age 70?) and Systematic Withdrawal Payments (SWPs - whatever they are) as periodic payments. It's unclear to me at this point whether me calling up every month and withdrawing some money would qualify as a periodic payment - after 1 year of doing so. Obviously, this withdrawal strategy had to start somewhere, so I guess my first withdrawal was no guarantee of my intention to make future withdrawals.

My tasks now are to
(a) find out what periodic withdrawals are available to me as an NRA (I think I read elsewhere that Fidelity don't allow periodic payments to NRAs)
(b) find out what on earth SWPs are

It's "interesting" that they classed my first withdrawal as a lump sum even though it was only 1% of my pot. Most definitions of lump sum I've seen, at least as far as the US are concerned, suggest it's the whole balance, or the whole remaining balance.

TedSwippet
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Re: Fidelity 401k And W-8BEN

Post by TedSwippet » Tue Jul 10, 2018 6:29 am

mrploppy wrote:
Tue Jul 10, 2018 6:04 am
It's "interesting" that they classed my first withdrawal as a lump sum even though it was only 1% of my pot. Most definitions of lump sum I've seen, at least as far as the US are concerned, suggest it's the whole balance, or the whole remaining balance.
I too would have thought that 'lump sum' meant 'take out everything in one go'. But there doesn't seem to be any generally accepted and binding definition of the term anywhere. At least, none that I could find. And it is certainly not defined in the US/UK tax treaty. So yet another large and well-defined area of doubt and uncertainty here, then. :-(

Thanks for the update, much appreciated. At least we know that this is chapter 3 tax and not chapter 4 FATCA withholding, so a bit of daylight showing there. It will be interesting to see to what extent you can arrange 'periodic' withdrawals -- however defined by Fidelity's somewhat capricious and opaque rulebook -- and whether this will work around the problem.

One other idea, since you apparently now have Fidelity's attention. Have you thought about asking them what would happen if you opened a Roth IRA and converted some of your 401k into that? As far as I can tell, under the US/UK treaty this conversion would be taxable only to the US, and this might give you a less taxing (in more ways than one!) way forwards with your withdrawals. I converted a small test amount of my 401k to a Roth IRA with Vanguard last year, and it went through with no tax withholding whatsoever. No telling what Fidelity will do, of course, but potentially worthwhile to find out.

Again then, thanks for the update. It all helps build up a picture of the frustrations of dealing with assorted US pension providers when not a US citizen or resident.
Last edited by TedSwippet on Tue Jul 10, 2018 4:36 pm, edited 1 time in total.

mrploppy
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Re: Fidelity 401k And W-8BEN

Post by mrploppy » Tue Jul 10, 2018 7:12 am

TedSwippet wrote:
Tue Jul 10, 2018 6:29 am

Thanks for the update, much appreciated. At least we know that this is chapter 3 tax and not chapter 4 FATCA withholding, so a bit of daylight showing there. It will be interesting to see to what extent you can arrange 'periodic' withdrawals -- however defined by Fidelity's somewhat capricious and opaque rulebook -- and whether this will work around the problem.

One other idea, since you apparently now have Fidelity's attention. Have you thought about asking them what would happen if you opened a Roth IRA and converted some of your 401k into that? As far as I can tell, under the US/UK treaty this conversion would be taxable only to the US, and this might give you a less taxing (in more ways than one!) was forwards with your withdrawals. I converted a small test amount of my 401k to a Roth IRA with Vanguard last year, and it went through with no tax withholding whatsoever. No telling what Fidelity will do, of course, but potentially worthwhile to find out.
I'm almost afraid to ask what is the significance of chapter 3/chapter 4 FATCA withholding because, invariably, the more I delve into US tax the more I scare myself!

Regarding a Roth IRA conversion - I've heard tell of this! I thought I'd read somewhere that a Roth conversion isn't possible if you don't have a US address. Or is this an arbitrary rule applied by some companies? Do I understand correctly that the conversion is taxable by the US, and that in your case you've filed to pay the tax rather than have it withheld by Vanguard? Also, am I correct that withdrawals from a Roth are not taxable at all - even by the UK?

TedSwippet
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Re: Fidelity 401k And W-8BEN

Post by TedSwippet » Tue Jul 10, 2018 7:33 am

mrploppy wrote:
Tue Jul 10, 2018 7:12 am
I'm almost afraid to ask what is the significance of chapter 3/chapter 4 FATCA withholding because, invariably, the more I delve into US tax the more I scare myself!
In 2010 the US, yet again short of money, decided that just one 30% standard withholding regime on unenfranchised NRAs was not enough, and they needed another. Enter FATCA. So now we have tax withholding on NRAs not in US treaty countries, and potentially FATCA withholding on NRAs in countries without a FATCA IGA and where the banks in that country have not "agreed" (under threat of business-destroying penalties!) to act as unpaid informants for the IRS. In the worst case, both can apply for a 51% overall US withholding rate.

The UK has both a decent tax treaty with the US that has sub-30% rates all round and a FATCA IGA, so neither full 30% should apply to payments from the US to UK residents. The open question was, which 30% withholding regime was Fidelity (mis-)applying. Now we know, I guess.
mrploppy wrote:
Tue Jul 10, 2018 7:12 am
Regarding a Roth IRA conversion - I've heard tell of this! I thought I'd read somewhere that a Roth conversion isn't possible if you don't have a US address. Or is this an arbitrary rule applied by some companies? Do I understand correctly that the conversion is taxable by the US, and that in your case you've filed to pay the tax rather than have it withheld by Vanguard? Also, am I correct that withdrawals from a Roth are not taxable at all - even by the UK?
I am sure it varies by company, and I know what Vanguard does. We don't know what Fidelity will do, though. Nor do we know how long anything of what Vanguard, Fidelity, or anyone else does now will persist into the future.

My reading of the treaty is that Roth conversions are not taxable to the UK, under the 'transferred to another pension scheme' rule, but are taxable to the US. I have seen arguments that they are taxable to neither (a conversion being a 'distribution'), but this seems potentially flimsy to me. More investigation required here.

In my case, I converted only $4,050 last year. I filed a 1040-NR showing this, but $4,050 is the 2017 US tax personal exemption so nothing to pay the US there. This year I may convert more (not least because the TCJA at the end of last year eliminated the personal exemption for NRAs, and NRAs also do not benefit from the doubling of the standard deduction -- sigh), and that will have a real US tax liability attached, which I will pay from other money for now, and then later out of the Roth itself once I get past the 10% Roth withdrawal penalty phase. My aim is to have most of my 401k converted before RMDs kick in. We'll see what happens as plans progress.

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Re: Fidelity 401k And W-8BEN

Post by mrploppy » Tue Jul 10, 2018 11:46 am

I don't suppose this will hold any water with the folks at Fidelity, but I found a definition of lump-sum distribution on the IRS's own website

https://www.irs.gov/taxtopics/tc412

Clearly, by this definition my withdrawal was not a lump sum. However, I couldn't reasonably argue that it was a periodic withdrawal (the first in the series) either.

TedSwippet
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Re: Fidelity 401k And W-8BEN

Post by TedSwippet » Tue Jul 10, 2018 12:31 pm

mrploppy wrote:
Tue Jul 10, 2018 11:46 am
I don't suppose this will hold any water with the folks at Fidelity, but I found a definition of lump-sum distribution on the IRS's own website ... Clearly, by this definition my withdrawal was not a lump sum. However, I couldn't reasonably argue that it was a periodic withdrawal (the first in the series) either.
Nice find. I can see no harm in throwing that back at Fidelity to see what they come out with next.

The US/UK tax treaty has specific language in it for 'lump-sum' payments, Article 17 paragraph 2, but it says nothing at all about anything that is not 'lump-sum' having to be periodic. So any form of withdrawal that is not lump-sum should therefore qualify for the 0% UK withholding rate under the treaty. (The only place 'periodic' appears is in relation to divorce maintenance payments.) Well, that's my armchair-lawyer reasoning, anyway.

I approach my own 401k withdrawals with trepidation. Retirement is supposed to be the point where you can transform prior planning and saving into somewhat relaxed financial comfort. Having retirement savings held hostage in a foreign country with a hostile and capricious non-resident tax regime that worsens with each congressional term is not at all relaxing. It is the precise opposite. If I had my time over again, I am not sure that I would save into a 401k at all. The future political risk from congress may now be too great to justify doing so.

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Re: Fidelity 401k And W-8BEN

Post by mrploppy » Wed Jul 11, 2018 10:03 am

TedSwippet wrote:
Tue Jul 10, 2018 12:31 pm
The US/UK tax treaty has specific language in it for 'lump-sum' payments, Article 17 paragraph 2, but it says nothing at all about anything that is not 'lump-sum' having to be periodic. So any form of withdrawal that is not lump-sum should therefore qualify for the 0% UK withholding rate under the treaty. (The only place 'periodic' appears is in relation to divorce maintenance payments.) Well, that's my armchair-lawyer reasoning, anyway.
I've been reading the tax treaty again, but this time I thought I should read the technical notes as well
https://www.treasury.gov/resource-cente ... eus-uk.pdf

A couple of things caught my eye in the notes for Article 17.

In the note for Paragraph 1, it says "While the term "pension" generally would include both periodic and lump-sum payments, paragraph 2 of the Article provides specific rules to deal with lump-sum payments, so they are not subject to the general rule of paragraph 1". So, the implication is that there are no specific rules to deal with periodic payments. They don't define what periodic payments are and as you rightly said, there's no mention in the treaty itself (apart from divorce, etc). I don't know if the IRS have a definition of periodic payments elsewhere in the same way as the do for lump sums - I haven't found one yet.

The note for Paragraph 2 is (in its entirety)
Paragraph 2 is intended to deal with a particular type of double non-taxation that arose under the prior Convention because the United Kingdom does not tax lump-sum distributions from pension funds. Under the prior Convention, a lump-sum payment was treated in the same way as any other pension, and was taxable only in the country of residence of the beneficial owner. Accordingly, a person who anticipated receiving a lump-sum distribution from a U.S. pension scheme with respect to employment in the United States could avoid U.S. withholding tax on the distribution by establishing residence in the United Kingdom for the year in which he received the distribution. The person would not be subject to tax in either the United States or the United Kingdom with respect to the lump-sum distribution, resulting in a significant windfall.

Paragraph 2 prevents this unanticipated benefit by providing that, notwithstanding the exclusive residence-country taxation of paragraph 1, any lump-sum payment derived by a resident of a Contracting State from a pension scheme established in the other Contracting State shall be taxable in that other State.


I remember this loophole being closed but I never fully appreciated why the loophole existed in the first place. The salient point is that the United Kingdom does not tax lump-sum distributions from pension funds. Can you explain this to me? I guess I know less about UK pensions than I do about 401(k)s.

I still intend following up with Fidelity, basing my argument on the definition of "lump-sum" but I want to get all my ducks in a row first.

TedSwippet
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Re: Fidelity 401k And W-8BEN

Post by TedSwippet » Wed Jul 11, 2018 10:32 am

mrploppy wrote:
Wed Jul 11, 2018 10:03 am
I remember this loophole being closed but I never fully appreciated why the loophole existed in the first place. The salient point is that the United Kingdom does not tax lump-sum distributions from pension funds. Can you explain this to me?
Honestly, no I cannot. It is as mysterious to me as to you.

I managed to drag this up with a bunch of Googling, but even here there doesn't seem to be much explanation, just a note that there used to be some special treatment in UK tax law for lump sums from non-UK pensions, but there now is not, so whatever reasoning there is in the treaty technical explanation presumably no longer applies:
Under current law, individuals whose foreign pension savings relate wholly to periods of non-UK residence with no UK working can usually draw them in a single lump sum (assuming this is permitted by the scheme) with no UK tax applying to the lump sum withdrawal. However, a significant change is set out in the draft Finance Bill clauses, such that from 6 April 2017 any lump sum paid to a UK tax resident is potentially to be liable to UK tax in full.
Potentially liable to tax is interesting. Does this mean that this is a tax treaty override, or that treaty protection still applies to protect against UK tax? Article 17 paragraph 2 is not an exception to the 'saving clause' in Article 1 paragraph 5(a), but generally only the US wields the 'saving clause'. Shrug.

Clear as mud, eh? Luckily we are not taking lump-sums here.

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Re: Fidelity 401k And W-8BEN

Post by mrploppy » Thu Jul 12, 2018 11:45 am

So there I am, composing my follow-up letter to Fidelity, and I start playing devil's advocate with myself. What triggered it was re-reading the IRS definition of lump-sum that I found recently, namely:
A lump-sum distribution is the distribution or payment within a single tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans).

That part "within a single tax year" is what's bothering me. Because I could, theoretically, withdraw 10% of my total balance today and the remaining 90% next week, and the whole amount would qualify as a lump-sum. I only withdrew 1%, but on the basis that Fidelity don't know what my plans are, they could argue that they're taking the pragmatic approach and protecting themselves.

Thinking further though ... while I have no idea at what point Fidelity hand over the withholdings to the IRS, one could imagine a scenario where they hold on to them until the end of the tax year. If they do that, it would be entirely feasible at that point to determine whether the withdrawal(s) satisfy the definition of lump-sum and if not, refund the tax withheld. It would still mean waiting for the refund but would avoid having to file a 1040NR. That's probably wishful thinking.

I'm not quite sure if I've argued in favour of Fidelity's approach. Or where it leaves me - except for finding out if there is a way to set up an automatic periodic withdrawal.

mrploppy
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Joined: Thu May 04, 2017 5:20 pm

Re: Fidelity 401k And W-8BEN

Post by mrploppy » Mon Aug 13, 2018 7:12 am

Another update - and some questions. I haven't resolved the tax issue and am resigned to living with it for this tax year.

When I last spoke to Fidelity, I asked about Systematic Withdrawal Payments because I'd seen nothing online that suggested it was an option for me. Turns out that they are available to me but they have to be arranged through the plan administrator - which I found odd because I haven't worked for that company for many years. I guess that's the reason there was nothing online about it - odd.

So I now have a decision to make - and a form to fill in. To recap: I'm assuming, given Fidelity's written response to me, that as long as I have a W-8BEN filed, SWPs will be paid to me gross. The options I have for SWPs are (they're referred to as Installments Over A Period of Time)
1. based on my life expectancy (as determined by the IRS I think)
2. based on my, and my wife's, life expectancy
3. a fixed amount per installment
where installments can be paid monthly, quarterly, annually.

Note: the fixed amount can't be decreased, but it can be increased.

It's not clear to me how 1 and 2 work except that the intention (I guess) is to exhaust the balance over that period. Anyone have experience with this? I could speak to Fidelity, but, well, you know ....

Number 3 appears to be the least flexible, but is the one I'm leaning towards. It will at least provide me with a set amount of dollars per month (or however frequent I choose). Of course, that won't result in a set amount of GBP per month - but I'm stuck with that fact anyway. And it won't handle inflation unless I increase the fixed amounts every year. There are so many variables that it's almost impossible to come up with a foolproof strategy. The fixed amount I'm thinking of withdrawing (without increasing annually) would exhaust my 401k in 15 years if there's zero growth in my fund while currently keeping me out of 40% tax. I may have mentioned elsewhere that I have other pensions I can take at 62 (US State), 65 (UK company pension) and 66 (UK State), which is one of the reasons I'm leaning towards using the 401k "early" and not worrying whether it'll cover my life expectancy.

Thoughts?

I could, on the other hand, stick with calling Fidelity periodically, withdrawing however much I want, and putting up with the US tax pain!

TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm

Re: Fidelity 401k And W-8BEN

Post by TedSwippet » Mon Aug 13, 2018 7:47 am

mrploppy wrote:
Mon Aug 13, 2018 7:12 am
Turns out that they are available to me but they have to be arranged through the plan administrator - which I found odd because I haven't worked for that company for many years. I guess that's the reason there was nothing online about it - odd.
It took me a while to sort out the full difference between an IRA and a 401k too.

Up until I started Roth conversions I thought that IRAs and 401ks were equivalent to SIPPs and employer GPPs respectively. However, it turns out that while you own both a SIPP and a GPP, you own an IRA but only part-own a 401k. There is a chunk of it allocated to you, but under the overall admin of the 401k sponsoring company. This gives it a bit of additional protection from things like bankruptcy, but also means that most things you do that involving moving cash into or out of it -- although not within it -- require the say-so of the sponsor.

I have an IRA and a 401k at Vanguard, and while I can do most things in the IRA with the push of a web-based button, these same things in the 401k usually involve real wet-signature paperwork and a transit delay for that paperwork. So far I haven't hit a brick wall with my plan sponsor, but if I ever did the obvious response would be to rollover everything into an IRA to cut them out of the loop. My 401k fund options are great though, so I don't want to do that unless it becomes unavoidable.

How good are your 401k's fund choices, and are Fidelity's withdrawal rules different for IRAs and 401ks? Perhaps a bit of a long shot, but if so then rolling over to an IRA might help you. Or at minimum, something to think about.
mrploppy wrote:
Mon Aug 13, 2018 7:12 am
It's not clear to me how 1 and 2 work except that the intention (I guess) is to exhaust the balance over that period. Anyone have experience with this? I could speak to Fidelity, but, well, you know ....
Nor me. And no. Too rigid to be decidable, from the look of it. Is this same set of restrictions applied to US citizens and residents too, or is it something 'special' for non-resident aliens (to the extent you can tell from Fidelity's opaque processes here, that is)? Weird, anyway.

I take it you've mulled the possibility of Roth conversions here? Not that these are exactly a bed of roses with US platforms either, but I've been able to succeed so far at least. The latest fly in the ointment is the tax increase for NRAs introduced by the Trump tax decreases for more or less everyone else, but I think I have a workround for that.

The advantage of a Roth IRA is that you pay the tax now, but after that the growth is tax-free in both the US and the UK (under the tax treaty) and unlike traditional IRAs and Roth and non-Roth 401ks, a Roth IRA has no required minimum distributions. This would mean that it won't push you into higher tax brackets once your other pensions kick in at age 62 and 65. Only a benefit if you don't need to use the 401k withdrawals to fund current spending, of course.
mrploppy wrote:
Mon Aug 13, 2018 7:12 am
I could, on the other hand, stick with calling Fidelity periodically, withdrawing however much I want, and putting up with the US tax pain!
Yup. Annoying, but if you withdraw at the very end of the year you can at least minimise the delay on getting your money back from the IRS. Of course, there is also more work and overhead for both Fidelity and the IRS out of this option, but that's not your problem.
Last edited by TedSwippet on Mon Aug 13, 2018 4:25 pm, edited 1 time in total.

mrploppy
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Re: Fidelity 401k And W-8BEN

Post by mrploppy » Mon Aug 13, 2018 2:43 pm

Thanks for that enlightening response - again. As usual though, you make me realise how much I don't know!

I hadn't appreciated the difference between an IRA and 401k. I read the link you supplied but it didn't clarify for me the question of part-owning a 401k. I'm not sure whether I should be worried! I assumed that because I'm "fully vested" that the whole balance was mine, come what may. Is that not the case? I see terms like Safe Harbor Elective and Employer Discretionary but I didn't, for one minute, think that it wasn't mine to do with as I choose. I assumed all along that if I called Fidelity and asked them to give it all to me in one go that the sponsor had no say in it - they haven't, as far as I know, been involved in my withdrawals so far.

I can't honestly say I know whether Fidelity's fund choices are any good. I made the decision a year ago (was it?) to stop messing around with individual funds and put everything in their 2020 fund. I've always understood, from what I'd read elsewhere, that as an NRA an IRA, including Roth, wasn't an option for me. As far as being an NRA is concerned, other than having no rollover option, and their stance on taxation, I don't believe they treat NRAs differently.

I should also say, one thing that's always been a worry for me, and now increasingly for my wife (now that we're "getting on" - sheesh, I'm only 60!) is that we have this fairly large sum of money in a 401k in the USA, with all the added complications of understanding the taxation, the mechanics of getting it to the UK, etc. As someone who tends not to get involved in the nasty business of finances, she has occasional "panics" about how she'd manage this if I died before her. To that end, we've sort of decided that it makes sense to move it to the UK as quickly as possible, without incurring a huge tax burden in the US or UK, of course. That means taking it now, and leaving the "easy" stuff, like UK pensions, to later. There will be an overlap at some point, obviously, when we are inevitably going to end up in the 40% tax bracket. First World Problems, I suppose - so not complaining.

TedSwippet
Posts: 1865
Joined: Mon Jun 04, 2007 4:19 pm

Re: Fidelity 401k And W-8BEN

Post by TedSwippet » Mon Aug 13, 2018 5:14 pm

mrploppy wrote:
Mon Aug 13, 2018 2:43 pm
I read the link you supplied but it didn't clarify for me the question of part-owning a 401k. I'm not sure whether I should be worried! I assumed that because I'm "fully vested" that the whole balance was mine, come what may. Is that not the case?
I don't think you need worry about that. I'm in the same position, and I don't(*).

As far as I can tell the 401k just has a bit of a different legal structure to an IRA. Perhaps a bit closer to a 'defined benefits' pension than a 'defined contribution' personal pension in the way that the company that sponsors it has some input into its running (and rather nicely in some cases, takes care of some of the running costs). That lets them control vesting, ensure that there is a sensible but usually a little constrained fund choice available, and so on.

Because it's in a pool with those of other employees at the same company, my own 401k gets me access to Vanguard's institutional funds and trusts, with TERs in the 0.01-0.03% range. No incentive at all to roll it all over to an IRA there, then. I'll continue to hold it for as long as I can, even though I left this employer some time ago.

Once you have left an employer and are fully vested, I don't think there is anything the sponsor can do to stop you transferring out or rolling into an IRA if you want to. Some folk do, perhaps where their 401k plan isn't a great one; others (like me) don't.
mrploppy wrote:
Mon Aug 13, 2018 2:43 pm
I can't honestly say I know whether Fidelity's fund choices are any good. I made the decision a year ago (was it?) to stop messing around with individual funds and put everything in their 2020 fund. I've always understood, from what I'd read elsewhere, that as an NRA an IRA, including Roth, wasn't an option for me. As far as being an NRA is concerned, other than having no rollover option, and their stance on taxation, I don't believe they treat NRAs differently.
When I switched from US green card holder to NRA, I held a 401k and a small 'stub' IRA. I have successfully opened a new Roth IRA with Vanguard since then, and rolled over a small portion of my 401k into it as a 'proof of concept'. I got a 1099-R and later a 5498. Same as a US resident or citizen would have received.

So on a sample set of one, it's possible at Vanguard if you push a little on the right doors. Unfortunately that tells you nothing about Fidelity, though.
mrploppy wrote:
Mon Aug 13, 2018 2:43 pm
I should also say, one thing that's always been a worry for me, and now increasingly for my wife (now that we're "getting on" - sheesh, I'm only 60!) is that we have this fairly large sum of money in a 401k in the USA, with all the added complications of understanding the taxation, the mechanics of getting it to the UK, etc. As someone who tends not to get involved in the nasty business of finances, she has occasional "panics" about how she'd manage this if I died before her. To that end, we've sort of decided that it makes sense to move it to the UK as quickly as possible, without incurring a huge tax burden in the US or UK, of course. That means taking it now, and leaving the "easy" stuff, like UK pensions, to later.
That's one strategy. However, I have a friend who died here in the UK rather unexpectedly a few years ago and who held a 401k from having worked in the US. His wife knew nothing about handling US finances or tax. We helped her through the 706-NA US NRA estate tax return, and once past that the 401k provider were excellent. They did all of the necessary stuff, with a bit of help from the 401k sponsoring company, who were also excellent, to ensure that she inherited the 401k intact and with as little hassle as possible. She takes advice from a UK IFA, and still holds this 401k and draws from it as necessary.

The 401k provider? Fidelity. So all is not lost.


(*) Well, I don't worry at all about my ex-employer screwing up access to my 401k.

I do worry about the US government coming up with some bonkers new law or regulation that does this, though. Or riding roughshod over the US/UK tax treaty (again). Or some 're-interpretation' of new or existing rules that might prompt Vanguard to take a commercial decision to purge its customer base of NRAs (I think this might actually provide a good argument for staying in the 401k -- I can imagine that it is much harder for a provider to evict an individual member of a large company's pooled 401k than to evict a plain IRA holder).

Or exchanging USD to GBP becomes vastly more difficult, or expensive, or complicated. Or a UK government deciding that foreign pensions should be subject to a surtax (they already took one hit a year or two back when the 10% tax-free element was scrapped -- thanks for nothing, Spreadsheet Phil). Or new know-your-customer rules putting a spanner in the works. Or inability to run my account because I don't have a US phone number on which to receive SMS auth codes. Or...

There are so many far larger threats to retirement assets held in the US than a potentially uncooperative ex-employer. :-(

mrploppy
Posts: 21
Joined: Thu May 04, 2017 5:20 pm

Re: Fidelity 401k And W-8BEN

Post by mrploppy » Tue Aug 14, 2018 7:06 am

Good stuff, as always. Glad to hear there's helpful hands out there when it comes to sorting out inherited 401ks. I'll certainly take that into consideration.

As far as the US, or the UK, moving the goalposts - indeed. Who knows. I was slightly disappointed with change from 90% to 100%, although I never quite understood the rationale for 90%.

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