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Where Taxpayers and Advisers Meet

Tax on US IRA Distributions, UK resident/ national

Joined:Thu Jul 06, 2023 12:36 pm
Tax on US IRA Distributions, UK resident/ national

Postby don-one » Thu Jul 06, 2023 1:19 pm

Hello there,

I would appreciate any advice on this as the only information I can find on here (or elsewhere) seems quite dated.

I am a UK national who worked in the US for two spells, in 1989-96 and 2012-17. During the first period I was in two separate employer 401-K schemes, the proceeds from which went into a Rollover IRA with Fidelity, the value of which is now around $320,000. I also established Traditional IRA with Fidelity which I topped up during my second spell, it now stands at around $34,000. I had a green card which was formally abandoned in 2019. I am still filing a US 1040-NR (married filing separately) annually to report paltry US based interest income. I understand my US income is taxable at 10% from $0 to around $11,000, then 12% to ~$44,700, and then 22% above that to ~$99,375.
I have been resident in the UK since 2018 and am receiving a Final Salary based pension which uses up my personal alowance and then some, so my marginal rate here is the base rate of 20% but I have significant headroom to the higher rate band, which will be reduced a bit from 2029 when I get my state pension.

I'm looking to withdraw these IRA funds and move them to the UK tax efficiently, is it still thae case that if my withdrawals (distributions) are treated "lump sums" (i.e. one per UK tax year, at different times of the year) they will not be taxable in the UK, but the full amount of each lump sum is still taxable in the US? If so it would seem to make sense to draw it down starting at around $44K per year with an effective tax rate of 12%. Or, is it possible that the UK 25% tax free allowance on UK pension sums could be applied to each distribution under the tax treaty rules, increasing the amount that can be taken, or even that 25% of the total value of the two IRAs (about $89,000) could be removed in the first year without any tax again under the same rule?

Is there any different tax treatment of the Rollover vs the Traditional IRA, I believe I could take a "lump sum" from each in each UK tax year.

Thanks in advance.

Joined:Thu Aug 16, 2012 4:31 pm

Re: Tax on US IRA Distributions, UK resident/ national

Postby DavidTreitel » Thu Jul 06, 2023 6:34 pm

Under US domestic law, a lump sum is a complete distribution in a single calendar year. Again, from a US domestic perspective, in calculating US tax payable, any distribution(s) would need to be bifurcated between contributions & growth.

Treaties can override domestic law. The treaty states that lump-sums are taxed only by the United States. Under US domestic law, a lump sum is a complete distribution in a single calendar year. The distribution pattern mentioned would not constitute lump sums under US law. Our firm both advises on and prepares US tax returns in similar circumstances several times each year.

Joined:Thu Jul 06, 2023 12:36 pm

Re: Tax on US IRA Distributions, UK resident/ national

Postby don-one » Sat Dec 23, 2023 5:43 pm


Thanks for the reply and sorry about the delay in getting back onto this, but here's an update.

I'm a bit confused about the reply indicating that the US tax would be "...bifurcated between contributions & growth." I thought that the IRS assumption would be that any contribution into a (non-Roth) IRA (or previous rolled over 401K) was essentially made from tax deducted income, so income tax would be due on all of the "contributions and growth" when withdrawn? I was hoping that the 25% tax free allowance on pensions under UK law might be applicable via the treaty, but it appears that this was a one time loophole that was filled some time ago, from research elsewhere.

On the definition of a lump sum, I found this post in which is says from a UK perspective, a lump sum cannot be in the same, previous, or next UK tax year as another lump sum:
However the same post does imply that multiple lump sums can be taken in the US, in consecutive years, although this is an old post and things may well have changed. I do understand that the common use of the term "lump sum" in the US is to take a full IRA distribution, which would clearly not be tax efficient.

So, whether it's defined as a lump sum or not, a ~$44K distribution each year, taxed only in the US and as income at ~12%, seems a logical way forward and how I plan to proceed, starting this year. It may take about 9 years to get all of the funds out (depending on continued growth and rising thresholds) and I can delay my social security, which will otherwise eat into the US taxable income available at the 12% rate, to around 71-72 (73 max I understand, for minimum distributions).


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