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Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.
There are about 15 different types of IRAs, could you be a little more specific as to which one you have so i can address you question fully?
As an UK resident you are liable to UK taxation of your world wide income. Any tax deducted by the States is, under the Double Taxation Treaty between the UK and the USA (and indeed some individual States within the Union as well) the same income stream cannot be taxed in both jurisdictions, allowed as a tax credit against any liability in the other. The Treaty does not, however, protect from differences in rates of taxation.
Here is the IRS advice on the types of plan available:
'Types of Retirement Plans
Individual Retirement Arrangements (IRAs)Roth IRAs
401(k) Plans403(b) Plans
SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)SEP Plans (Simplified Employee Pension)SARSEP Plans (Salary Reduction Simplified Employee Pension)Payroll Deduction IRAsProfit-Sharing PlansDefined Benefit PlansMoney Purchase PlansEmployee Stock Ownership Plans (ESOPs)
Governmental Plans457 Plans409A Nonqualified Deferred Compensation Plans'
I know from my US colleague that to we Brits the US system of pensions appears plumb crazy unless your ex employer is paying you a pension as happens in the UK. In the States you have a pension pot, don't often buy an annuity and just draw down from that. Assuming that you do not have an ex employer's pension you will be drawing down from a pot. In the UK that is akin to pension liberation and 25% of the drawdown is tax free and the balance taxed at your marginal rate of Income Tax (IT). If you are an EEA citizen you are entitled to a Personal Allowance, currently 11K thereafter taxed at 20% up to 32K and 40% thereafter. You will have to declare your pension income to HMRC on an annual self assessment tax return although if the income is low that Department may well tell you not to bother, but you must get their approval. The W-8BEN is to advise your pension provider that you are an overseas resident so there may be no IRS deductions from your drawdown.
You could, of course, get the whole pot transferred direct to an UK annuity provider which would simplify things immensely. Make sure that the sum involved does not pass through your hands or you will be hammered for UK IT.
If as you say the pension is taxed in the Contracting State then we must fall back on Double Taxation Treaty protection and the UK does not have such Treaties with all the States in the Union so I have to ask, which State?
Firstly, sorry for the delay in response. I am a diabetic so was going through my insulin and breakfast routine.
Under the Treaty between the UK and the USA pension funds have 100% relief. Thus you will have to declare your pension income annually to HMRC for IT purposes unless they tell you not to bother.
Yes, these firms are quite prepared to sell you an annuity or accept an UK exchange, but going through the palaver of a foreign transfer is something even the big boys are not prepared to undertake. At least you are not being taxed in the USA. Welcome to UK taxation!
Yes, never forget Benjamin Franklin's quip that in life there are but two certainties, death and taxes!
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My colleague has made the following observation: it would appear that you will need the Double Taxation Relief:
'There is no transfer of a US IRA to any foreign account to avoid US tax. The US is going to withhold on any distribution from that account at a 30% rate. The IRA holder will not transfer any of that money to a UK account without withholding tax. That is the additional purpose of the, not only to advise they are a non US person but to also have tax withholding apply because they are a non US person. The person received a tax benefit on that money when it was first contributed in the 401k (pension) and they paid no tax when it was rolled over to the IRA. The tax treaty does not allow for any avoidance at all in the US on the tax.'
It is on the UK side that the 100% relief is given on the transfer.
Thank you for your support.
We all learn a little more every day!
Delighted to have been of assistance.
Just one small point; these Treaties do not protect you from differences in rates of taxation.
Unfortunately, yes as these Treaties do not protect from differences in rates of taxation.
Maybe it won't be so bad in reality, otherwise it's just Sod's Law!