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.

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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.
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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.

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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.

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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.

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