Vanguard makes life difficult for NRAs in the UK and India

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TedSwippet
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Vanguard makes life difficult for NRAs in the UK and India

Post by TedSwippet »

Just received, by email:
We're writing to inform you of an update to the U.S. tax withholding rate for distributions from your IRA at Vanguard.

A nonresident alien is an individual who's not a U.S. citizen or a resident of the U.S. Nonresident aliens are subject to U.S. income tax on income from sources within the U.S.

In general, nonresident aliens who are citizens of the United Kingdom and India are subject to a 30% tax withholding rate on IRA withdrawals. The income tax treaties between the U.S. and the United Kingdom and India do permit plan administrators to apply a reduced withholding rate to distributions that aren't lump-sum distributions; however, there's no clear definition of a lump-sum distribution.

So, to be conservative, as of January 1, 2024, Vanguard will withhold 30% from each IRA distribution to a nonresident alien of the United Kingdom or India.

If you're eligible for a lower rate, you may file a request with the IRS for a refund of any excess taxes withheld. Please consult your tax advisor if you have any questions about your specific situation.
Sigh.
assyadh
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by assyadh »

Why do they tie citizenship of the United Kingdom or India with a withholding rate in a tax treaty?

Someone needs to tell them that the UK and India have residency based taxation, and UK or Indian citizens not residing in their country of citizenship do not care about the associated US tax treaty. :annoyed
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mmse
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by mmse »

TedSwippet wrote: Wed Feb 21, 2024 10:26 am Just received, by email:
A nonresident alien is an individual who's not a U.S. citizen or a resident of the U.S. Nonresident aliens are subject to U.S. income tax on income from sources within the U.S.
HodgenLaw had an interesting case study on one application of a US Tax treaty for a Philippine citizen. Can this also apply to the UK?

Using Wayback machine:
https://web.archive.org/web/20230606235 ... -treaties/
https://www.youtube.com/watch?v=QaMZIlORpQM
Else
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by Else »

TedSwippet wrote: Wed Feb 21, 2024 10:26 am Just received, by email:
We're writing to inform you of an update to the U.S. tax withholding rate for distributions from your IRA at Vanguard.

A nonresident alien is an individual who's not a U.S. citizen or a resident of the U.S. Nonresident aliens are subject to U.S. income tax on income from sources within the U.S.

In general, nonresident aliens who are citizens of the United Kingdom and India are subject to a 30% tax withholding rate on IRA withdrawals. The income tax treaties between the U.S. and the United Kingdom and India do permit plan administrators to apply a reduced withholding rate to distributions that aren't lump-sum distributions; however, there's no clear definition of a lump-sum distribution.

So, to be conservative, as of January 1, 2024, Vanguard will withhold 30% from each IRA distribution to a nonresident alien of the United Kingdom or India.

If you're eligible for a lower rate, you may file a request with the IRS for a refund of any excess taxes withheld. Please consult your tax advisor if you have any questions about your specific situation.
Sigh.
Thank you for sharing. Besides this being a major hassle for you and others, it gives a pretty good picture how vanguard is changing. Of cause vanguard knows what" the clear definition of lump- sum distribution" is. But they question how it should be interpreted treaty wise. Perhaps costcutting measures in the legal and tax departments. Or they simply want us NRA's out. Which would be very short sighted. It might make Resident Aliens and dual citizens think twice about using Vanguard all together.
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typical.investor
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by typical.investor »

Else wrote: Wed Feb 21, 2024 4:17 pm
TedSwippet wrote: Wed Feb 21, 2024 10:26 am Just received, by email:
We're writing to inform you of an update to the U.S. tax withholding rate for distributions from your IRA at Vanguard.

A nonresident alien is an individual who's not a U.S. citizen or a resident of the U.S. Nonresident aliens are subject to U.S. income tax on income from sources within the U.S.

In general, nonresident aliens who are citizens of the United Kingdom and India are subject to a 30% tax withholding rate on IRA withdrawals. The income tax treaties between the U.S. and the United Kingdom and India do permit plan administrators to apply a reduced withholding rate to distributions that aren't lump-sum distributions; however, there's no clear definition of a lump-sum distribution.

So, to be conservative, as of January 1, 2024, Vanguard will withhold 30% from each IRA distribution to a nonresident alien of the United Kingdom or India.

If you're eligible for a lower rate, you may file a request with the IRS for a refund of any excess taxes withheld. Please consult your tax advisor if you have any questions about your specific situation.
Sigh.
Thank you for sharing. Besides this being a major hassle for you and others, it gives a pretty good picture how vanguard is changing. Of cause vanguard knows what" the clear definition of lump- sum distribution" is
What is the definition of a non-lump sum distribution then? That is the requirement for the reduced withholding correct? Does a yearly RMD qualify? Must it be fixed scheduled withdrawal such as an annuity pay? Do you have a definitive source for your answer that would alleviate any concerns Vanguard has about proper compliance?

My understanding is that how withholding is applied depends on whether the distribution is considered periodic or nonperiodic. Periodic payments are the minority of IRA distributions, encompassing only annuitized distributions from IRA annuities.

I don't believe RMDs qualify as period payments but rather get categorized as non periodic or lump sum.

Should NRAs be upset? Perhaps, but are the regulations Vanguard's fault?

Anyway, on what basis are you saying that RMDs or other ad-hoc withdrawals should be considered periodic payments? Aren't IRA distributions from an IRA that are payable upon demand are treated as nonperiodic payments?
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TedSwippet
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by TedSwippet »

typical.investor wrote: Wed Feb 21, 2024 5:33 pm What is the definition of a non-lump sum distribution then?
Precisely. The original aim of the 'lump sum' clause was to close off a "loophole" whereby the UK traditionally did not tax (foreign?) whole-pension lump sums, and under other clauses neither would the US. Clearly the US couldn't possibly accept this, hence this special 'lump sum' clause. This UK tax loophole is apparently long since closed, but the treaty clause remains.

The following discussion with HMRC is one that covers this area. It is notable for the confusion it generates. HMRC appears to reverse its position several times, cannot accurately address detailed scenarios provided, conflates interest with pension withdrawals, attempts what may be an authoritative reply, and eventually stops addressing the issue entirely:

UK tax implications for 401k pension withdrawal in the US - Community Forum - GOV.UK

HMRC's definition of 'lump sum' and the US's definition of 'lump sum' differ. The individual investor is left in the dark. Either guess, or use a professional to guess for you, with equal likelihood of error.
asteroidnix
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by asteroidnix »

I've seen that thread above before. Shocking on how they confuse interest vs distributions. Advice directly contradicts the treaty and they don't engage when folks point out their guidance is wrong.
ebeb
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by ebeb »

How about roth ira, which are supposed to be tax free withdrawal. Will they withhold 30% since India considers all retirement accounts in US same whether pretax or aftertax doesnt matter :annoyed
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TedSwippet
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by TedSwippet »

ebeb wrote: Sun Mar 03, 2024 6:48 am How about roth ira, which are supposed to be tax free withdrawal. Will they withhold 30% since India considers all retirement accounts in US same whether pretax or aftertax doesnt matter.
Don't know. I asked - they have so far not answered.
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Maple
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by Maple »

TedSwippet wrote: Sun Mar 03, 2024 7:49 am
ebeb wrote: Sun Mar 03, 2024 6:48 am How about roth ira, which are supposed to be tax free withdrawal. Will they withhold 30% since India considers all retirement accounts in US same whether pretax or aftertax doesnt matter.
Don't know. I asked - they have so far not answered.
I have similar but slightly different circumstances. Vanguard advised me that they will withhold taxes on distributions from my Roth IRA (I forget the % the rep stated; probably 25% or 30%). I am a tax resident of the Philippines with a residual Roth IRA in the USA. Accountants have advised me that the withholdings will be fully recoverable (minus time costs and accountants fees) after filing documents with the IRS.
ebeb
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by ebeb »

Maple wrote: Sun Mar 03, 2024 9:41 pm I am a tax resident of the Philippines with a residual Roth IRA in the USA. Accountants have advised me that the withholdings will be fully recoverable (minus time costs and accountants fees) after filing documents with the IRS.
The problem of roth ira is not with IRS but India tax authority. Since there is a DTAA regime between US and India, if it is not taxed in USA then it will get taxed in India since roth ira is not recognized in India. :shock:
80% VOO | 20% BND+TBILL+CASH | Don't believe Nobody because Nobody knows nothin' - Anon
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TedSwippet
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by TedSwippet »

TedSwippet wrote: Sun Mar 03, 2024 7:49 am
ebeb wrote: Sun Mar 03, 2024 6:48 am How about roth ira, which are supposed to be tax free withdrawal. Will they withhold 30% since India considers all retirement accounts in US same whether pretax or aftertax doesnt matter.
Don't know. I asked - they have so far not answered.
And now Vanguard have answered. Yes, they will withhold 30% for US tax on every Roth IRA withdrawal. Insane, not to mention pointless.
bagle
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by bagle »

TedSwippet wrote: Thu Mar 07, 2024 10:21 am And now Vanguard have answered. Yes, they will withhold 30% for US tax on every Roth IRA withdrawal.
Do you mean every Roth IRA held with Vanguard irrespective of the client's country of residency (or only for residents of the UK or India)?
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TedSwippet
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by TedSwippet »

bagle wrote: Fri Mar 08, 2024 3:55 am
TedSwippet wrote: Thu Mar 07, 2024 10:21 am And now Vanguard have answered. Yes, they will withhold 30% for US tax on every Roth IRA withdrawal.
Do you mean every Roth IRA held with Vanguard irrespective of the client's country of residency (or only for residents of the UK or India)?
I only asked in the context of my own situation; that is, Roth IRA holder, US nonresident alien, and UK resident.

Because Vanguard's original mail was directed at residents of both the UK and India, it's reasonable to assume that they plan to withhold 30% of all Roth IRA withdrawals for residents of the UK and India. No idea what they'd do for other countries, treaty or otherwise, so we can't extrapolate or infer anything beyond what they've stated.
rich1day
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Re: Vanguard makes life difficult for NRAs in the UK and India

Post by rich1day »

Does this mean Fidelity is the alternative for such individuals affected by this? Or do they have a similar policy? Who knows, if not now, may be they follow suit in future?
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