IRA to Roth conversion as a UK resident (UK)

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Topic Author
Disqo
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Joined: Mon Mar 09, 2020 6:10 pm

IRA to Roth conversion as a UK resident (UK)

Post by Disqo »

I have looked over the forums, and have compiled what I hope is best practice for the return to the UK, but I can't see an answer pertaining to Roth conversions from the UK. I'm hoping the good people here can help - thanks in advance.
Some background:
As a UK citizen, I have been a US permanent resident for the last 6 years, am now unemployed, and plan to return to the UK later this year. I should not be subject to the "jackboot of the expatriation tax" (quoting @Ted Swippett).
I currently have IRA, Roth IRA and company 401K (normal and Roth) pension holdings. I currently plan to move all 401K funds into the IRA/Roth IRA with Vanguard for ease of maintenance, and on the expectation they won't be needed for at least another 10 years. I also have a taxable brokerage account with Vanguard, and plan to file a W8-BEN with them to hopefully ensure the correct US withholding is applied across the accounts. All funds are in ETF funds that are recognized by the UK to qualify for taxation of capital gains at capital gains rates, and not, as is default, income.

The question:
If, whilst in the UK, I initiate a Roth conversion, what tax rates would apply, and what personal allowances would apply, if any?

Per the UK/US double tax treaty, a non lump-sum drawdown (however that is defined) from the IRA should, I believe, incur no US taxes, and be taxed only in the UK. Given that, would UK tax rates and UK personal tax allowances apply to the Roth conversion? It seems .. odd ?

I would assume as a non resident that has surrendered their green card (via form I-407), that I would not qualify for taxation using the US bands. Worst case is no allowances apply at all, or a flat 15% treaty rate is applied, and I'm *really* hoping that is not the case.
Although a 1099-R will likely be triggered by the conversion, would I be right in assuming a 1040NR is NOT required, since no US tax should be due?

Many thanks in advance to those of you that made it here!
TedSwippet
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Location: UK

Re: IRA to Roth conversion as a UK resident (UK)

Post by TedSwippet »

Welcome aboard.
Disqo wrote: Wed Feb 17, 2021 4:50 pm I currently have IRA, Roth IRA and company 401K (normal and Roth) pension holdings. I currently plan to move all 401K funds into the IRA/Roth IRA with Vanguard for ease of maintenance, and on the expectation they won't be needed for at least another 10 years. I also have a taxable brokerage account with Vanguard, and plan to file a W8-BEN with them to hopefully ensure the correct US withholding is applied across the accounts. All funds are in ETF funds that are recognized by the UK to qualify for taxation of capital gains at capital gains rates, and not, as is default, income.
Looks good. Vanguard will insist on multiple W-8BEN forms, one per account. No good reason for this; of course, they'll all be identical. Just be aware that Vanguard's process for W-8BENs is far from seamless, efficient, or user-friendly (and potentially just completely broken).
Disqo wrote: Wed Feb 17, 2021 4:50 pm If, whilst in the UK, I initiate a Roth conversion, what tax rates would apply, and what personal allowances would apply, if any?
The current understanding is that Roth conversions are UK tax-free under the treaty, and US taxable. This is the converse of withdrawals. Ideally, you'd want some cover on this, in the form of an opinion from a paid professional. US tax should then be at normal ECI graduated rates, same as a US resident/citizen except that you get no standard deduction or personal exemption, so 10% from the first $1 converted.
Disqo wrote: Wed Feb 17, 2021 4:50 pm Per the UK/US double tax treaty, a non lump-sum drawdown (however that is defined) from the IRA should, I believe, incur no US taxes, and be taxed only in the UK. Given that, would UK tax rates and UK personal tax allowances apply to the Roth conversion? It seems .. odd ?
For clarity, drawdown is withdrawal and not Roth conversion. The two are separate things. For conversions, see above. Withdrawals from a traditional (pre-tax) IRA or 401k are just treated as normal UK income. Withdrawals from a Roth should be tax-free both in the UK and the US.
Disqo wrote: Wed Feb 17, 2021 4:50 pm I would assume as a non resident that has surrendered their green card (via form I-407), that I would not qualify for taxation using the US bands. Worst case is no allowances apply at all, or a flat 15% treaty rate is applied, and I'm *really* hoping that is not the case.
The 15% is for dividends. For pensions, the rate is as specified by the IRS for residents of treaty countries. It is 0% withholding for the UK, but many times, IRA and 401k providers either do not understand this or ignore it, forcing a 1040NR filing for cases where one should not be required.
Disqo wrote: Wed Feb 17, 2021 4:50 pm Although a 1099-R will likely be triggered by the conversion, would I be right in assuming a 1040NR is NOT required, since no US tax should be due?
No. You appear to have conversions the wrong way around. Again, current understanding is that Roth conversions are UK tax-free and US taxable (see the treaty 'lump sum' rule, and also 'not transferred to another ...' clause), the converse of withdrawals. So, conversion generates a 1099-R (or maybe a 1042-S), and you'd have to file a 1040NR to square away the US tax due (ECI rate, as noted above). Note the conversion as UK tax-free on UK self-assessment, under other information. You can find first-hand reports of this on the UK-Yankee forum.

All this with the proviso that it traverses abstruse and convoluted parts of the US/UK tax treaty, and that you should view with suspicion everything you read from random people who pop up on the internet. Including me. Get proper paid advice if the sums involved are anything other than insubstantial.
Topic Author
Disqo
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Joined: Mon Mar 09, 2020 6:10 pm

Re: IRA to Roth conversion as a UK resident (UK)

Post by Disqo »

Many thanks for the quick reply. It is very much appreciated.
TedSwippet wrote:Looks good. Vanguard will insist on multiple W-8BEN forms, one per account. No good reason for this; of course, they'll all be identical. Just be aware that Vanguard's process for W-8BENs is far from seamless, efficient, or user-friendly (and potentially just completely broken).
Good to know! I had read reports of Fidelity and Schwab being less than helpful, and thought that Vanguard may have been the best of the bunch. It seems ones chances are somewhat indeterminate and luck has too strong of a role.
TedSwippet wrote:The current understanding is that Roth conversions are UK tax-free under the treaty, and US taxable. This is the converse of withdrawals. Ideally, you'd want some cover on this, in the form of an opinion from a paid professional. US tax should then be at normal ECI graduated rates, same as a US resident/citizen except that you get no standard deduction or personal exemption, so 10% from the first $1 converted.
Very helpful. I wouldn't have guessed that conversions could have been treated differently to withdrawals.
I also take note of the recommendation to get paid advice. Is there any firm that you can recommend?
TedSwippet wrote:The current understanding is that Roth conversions are UK tax-free under the treaty, and US taxable. This is the converse of withdrawals. Ideally, you'd want some cover on this, in the form of an opinion from a paid professional. US tax should then be at normal ECI graduated rates, same as a US resident/citizen except that you get no standard deduction or personal exemption, so 10% from the first $1 converted.
I had to look up the definition of ECI graduated rates.. and found this page on the IRS site: ECI
It may be interesting to note one of the notes on the page:
IRS wrote:NOTE: If your only U.S. business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U.S. resident broker or other agent, you are NOT engaged in a trade or business in the United States.

I doubt that changes anything, and I would expect the US rates that apply to citizens and resident aliens to apply irrespectively.

thanks again.
bhradbh
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Joined: Thu Mar 16, 2017 2:22 pm

Re: IRA to Roth conversion as a UK resident (UK)

Post by bhradbh »

If one is aged under 59.5 years any IRA Distributions or Conversions are subject to a 10% additional penalty.
TedSwippet
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Location: UK

Re: IRA to Roth conversion as a UK resident (UK)

Post by TedSwippet »

bhradbh wrote: Thu Feb 18, 2021 8:11 am If one is aged under 59.5 years any IRA Distributions or Conversions are subject to a 10% additional penalty.
Can you unpack this statement? I'm having trouble reconciling it with what we know so far.

Roth conversions do not attract the 10% early withdrawal penalty for anybody, NRA or US person, though subsequent withdrawals from the Roth might. And for NRAs in treaty countries, and where the treaty reserves taxing rights to country of residence only, current thinking is that the 10% early withdrawal penalty for IRAs and retirement accounts does not apply at all.
bhradbh
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Joined: Thu Mar 16, 2017 2:22 pm

Re: IRA to Roth conversion as a UK resident (UK)

Post by bhradbh »

TedSwippet wrote: Thu Feb 18, 2021 8:29 am
bhradbh wrote: Thu Feb 18, 2021 8:11 am If one is aged under 59.5 years any IRA Distributions or Conversions are subject to a 10% additional penalty.
Can you unpack this statement? I'm having trouble reconciling it with what we know so far.

Roth conversions do not attract the 10% early withdrawal penalty for anybody, NRA or US person, though subsequent withdrawals from the Roth might. And for NRAs in treaty countries, and where the treaty reserves taxing rights to country of residence only, current thinking is that the 10% early withdrawal penalty for IRAs and retirement accounts does not apply at all.
Thank you for pointing out my mistake, conversions are not subject the the 10% penalty. Having filed Form 8606 many times over the years I cant understand how I slipped up like that.

I've dodged the minefield concerning the early withdrawal penalty having reached 59.5. There are many conflicting opinions on this and I'm pleased I don't have to navigate it. Language in the treaty suggests that early Roth distributions may be subject to the 10% penalty if it is indeed a tax. Article 17.1 (b) states:

Notwithstanding sub-paragraph a) of this paragraph, the amount of any such pension or remuneration paid from a pension scheme established in the other Contracting State that would be exempt from taxation in that other State if the beneficial owner were a resident thereof shall be exempt from taxation in the first mentioned State.

So if an early Roth distribution is subject to a 10% tax penalty this would not be exempt from taxation. Again, very pleased I've dodged all this and don't need to get involved with Treaty Lawyers for expert interpretation.
Topic Author
Disqo
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Joined: Mon Mar 09, 2020 6:10 pm

Re: IRA to Roth conversion as a UK resident (UK)

Post by Disqo »

Thanks all. I expect the Roth IRA will be one of the last funds used for drawdown, and I hope to be well past 59.5 at that point. (Unless an option to transfer US pensions to the UK ever materializes, which I hold very little hope for. [ Roth -> ISA, IRA->SIPP ?] )
If highlighting risks of early withdrawal from Roth IRA's, I believe the Roth IRA account should have been held for at least 5 year's before any withdrawals, or penalties will apply.

If anyone can recommend a financial advisory firm from whom to obtain paid advice in this area, I would be very grateful for contact details.
nr8209
Posts: 6
Joined: Sun Apr 04, 2021 8:03 am

Re: IRA to Roth conversion as a UK resident (UK)

Post by nr8209 »

Tedswippet thank you for your reply above:

"The current understanding is that Roth conversions are UK tax-free under the treaty, and US taxable. This is the converse of withdrawals. Ideally, you'd want some cover on this, in the form of an opinion from a paid professional. US tax should then be at normal ECI graduated rates, same as a US resident/citizen except that you get no standard deduction or personal exemption, so 10% from the first $1 converted."

which has very much put my mind at rest. Like Disqo however I am struggling to find an adviser with sufficient knowledge on this topic to help me. I have had offers from people without verified knowledge running well into 4 figures. Any tips would be welcome - not necessarily names but maybe the type of business I should look for? I'm in Birmingham region.
bhradbh
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Joined: Thu Mar 16, 2017 2:22 pm

Re: IRA to Roth conversion as a UK resident (UK)

Post by bhradbh »

I thought I had this all sorted out as well, Roth conversions US taxable and UK exempt along with two verbal confirmations from HMRC that the conversions were indeed UK tax exempt by treaty so no need to enter on a Self Assessment. That was until I received a 1042-S for 2020 stating all of my transactions, including Roth conversions, were exempt by treaty. Yes, no US tax due on Roth conversion and no need to file a 1040NR.

Unfortunately I had already paid estimated tax on the conversion believing it would be due and had not wanted to generate a penalty for late payment. So I have filed a 1040NR claiming a refund, it's currently located at the Austin, TX Post Office so should be with the IRS next week.

It could be that Vanguard completely messed up applying treaty provisions to all of my transactions, somehow I doubt it. If the IRS issue a refund we will know they don't consider Roth conversions US taxable to a UK citizen resident in the UK. If no refund then no problem and carry on regardless.

If the IRS determine I get the refund, this being my first year since repatriation, my situation should be relatively simple to sort out. For anyone who has multiple years of conversions, paying US tax and not filing UK tax, what a mess!
nr8209
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Joined: Sun Apr 04, 2021 8:03 am

Re: IRA to Roth conversion as a UK resident (UK)

Post by nr8209 »

I would be feeling very nervous about this situation. You can be sure that somewhere a tax man will get their pound of flesh from you. I would definitely take some professional advice before ignoring both tax bodies...
bhradbh
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Joined: Thu Mar 16, 2017 2:22 pm

Re: IRA to Roth conversion as a UK resident (UK)

Post by bhradbh »

How on Earth do you deduce I'm ignoring any tax authority?

I paid estimated tax on what, I believed at the time, was a US taxable event. Since then I received an official tax document, 1042-S, issued by a major US broker which states all of my transactions were US tax exempt by treaty which was also filed to the IRS. I have filed a US tax return, with bona fide supporting tax documents supplied by a major US broker, to claim a refund of tax paid according to those documents. If the IRS processes the refund it confirms the transaction was US tax exempt, if not then I have fully satisfied any tax liability. This is better than any opinion by any tax professional. It is straight from the horses mouth.

I have two separate verbal opinions from HMRC stating the transaction is UK tax exempt and does not need to be declared on the SA. Again the best professional opinion available to me.
TedSwippet
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Location: UK

Re: IRA to Roth conversion as a UK resident (UK)

Post by TedSwippet »

bhradbh wrote: Tue Apr 06, 2021 2:37 pm ... If the IRS processes the refund it confirms the transaction was US tax exempt, ...
About this ... I think you might be assuming the IRS does a lot more with most tax returns than it actually does.

In practice, unless there's a reason to do more -- for example an audit or other investigation -- the first-level IRS processing of a tax return really seems to only consist of:
  • Checking that the numbers on the return all add up (or multiply, or subtract, or divide) as they should, so that the entire return is self-consistent and contains no maths errors. Also perhaps that it is consistent with prior year returns for things like carry forward losses.
  • Checking that reported income, withholding, and so on at least reasonably closely matches information that the IRS has already received directly from payers, for example 1099s, W2s, and so on.
If those basic checks pass, in all likelihood you'll get any refund asked for without further questions. Whether or not questions arise later on will be unknown.

I am not saying anything about whether or not I think your stance on the taxability of your Roth conversion is correct. I am also not claiming that the IRS will necessarily ever question this in future. I'm just saying is that the IRS accepting your tax return claiming this position at face value is not really confirmation that the position is a correct one.
bhradbh
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Re: IRA to Roth conversion as a UK resident (UK)

Post by bhradbh »

TedSwippet,

Thanks for your input on this situation it is very much appreciated. You're expertise, willingness to share experiences and general participation in this forum is a major reason for its success.

In addition to the two verbal HMRC opinions which were actually noted on my personal HMRC account, I also requested a written opinion which should be forthcoming by the end of May. No more Roth conversions for me until I have a definitive answer regarding tax jurisdiction and the DTA.

Currently believing UK have the tax authority unless a lump sum conversion, that is, a conversion of all funds within an IRA account in one tax year leaving zero balance.
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: IRA to Roth conversion as a UK resident (UK)

Post by TedSwippet »

bhradbh wrote: Wed Apr 07, 2021 4:44 pm Currently believing UK have the tax authority unless a lump sum conversion, that is, a conversion of all funds within an IRA account in one tax year leaving zero balance.
Hmm. It would be depressing if this is the case. It's counter to everything we've heard so far, both from tax professionals and apparently also from HMRC (from your previous posting).

Shrug.
Topic Author
Disqo
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Joined: Mon Mar 09, 2020 6:10 pm

Re: IRA to Roth conversion as a UK resident (UK)

Post by Disqo »

I should have done this earlier, but.. better late than never I have ploughing through some of the mostly comprehensible notes in pub.519.
The most disappointing aspect is quite how long it will take to convert the IRA to Roth, since
a) I’m lucky enough to have a significant balance , and
b) I am forced to file 1040-nr as married filing separately, which has a much lower threshold for the 12% rate I planned to use.
If I can bear the paper work though, I can get it all converted before minimum distributions kick in at 72.x
I won’t do an IRA conversion this year just to keep the dual resident filing easier. ( and since the IRS don’t even allow a proportion of the standard deduction on the 1040 filing for the year you leave )

On a related note, are there ;
i) are any recommendations for us bank accounts that will keep their accounts open for nra’s? I am currently with a small credit union and worry they may not be set up to handle w8 filing.
I will call to find out, but curious to learn of others experiences here.
ii) any reputable us to uk money transfer companies? I used moneycorp on the way to the us, and had to do multiple transfers of small amounts at less than ideal rates. Xe ?

In other news, I finally have a vaccine shot, and have flight booked back to Blighty! Woohoo.
In terms of wrapping up my affairs cleanly, I believe that before I leave I have to;
1) arrange an interview with the IRS to get a sailing permit, and possibly complete an estimated 1040 and paying any tax ( should be just tax on dividends )
2) prepare the form I407 to mail back to the US on my arrival- to surrender green card and terminate residency ( I don’t believe I can see uscis at the airport of departure)
3) prepare w8Ben forms for US bank and with Vanguard
4) prepare for dual resident filing for 2021. 1040, and the new 1040-nr forms.
5) contact AA to get an international driving permit for the uk car rental on arrival.

Did I miss anything? Thanks in advance, and hope everyone is well.
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: IRA to Roth conversion as a UK resident (UK)

Post by TedSwippet »

Disqo wrote: Wed Apr 07, 2021 9:36 pm i) are any recommendations for us bank accounts that will keep their accounts open for nra’s? I am currently with a small credit union and worry they may not be set up to handle w8 filing.
I will call to find out, but curious to learn of others experiences here.
ii) any reputable us to uk money transfer companies? I used moneycorp on the way to the us, and had to do multiple transfers of small amounts at less than ideal rates. Xe ?
When I left the US, I held both a credit union account and a couple of bank accounts. Over time, the banks dropped off the list of usable US financial institutions -- not so much an unwillingness to handle NRAs as fees and restrictions made them no longer worth keeping -- but my credit union has remained reliable and steadfast. Not seamless though. They offer a lot of features that they won't let me use because I am an NRA; things like wire to non-US accounts and ACH push requests (in other words, just the sort of thing an NRA would need!). They've been moderately useful for a decade, since they connect to my US Vanguard account. But, I'm considering letting them go ...

... because TransferWise (now just Wise). They offer UK residents a 'borderless' account that has UK and US facets. That is, a UK sort code and account number for faster payments, and a US routing number and account number for ACH. Also, an ATM card. Up until recently these accounts' US facet only offered one-way ACH (push, not pull), but a few months ago they updated everything, so that this account can now operate almost as a full US based bank account. All electronic, so no cheques, paper statements and so on, but enough to handle ACH to/from Vanguard, and perhaps also with the IRS (not tried). And the ATM card is very useful when travelling. Their forex rates are usually among the best, certainly much better than large banks. (No connection, just a satisfied customer.)
Disqo wrote: Wed Apr 07, 2021 9:36 pm In terms of wrapping up my affairs cleanly, I believe that before I leave I have to;
...
Did I miss anything?
There is a sort-of checklist here. Perhaps worth a read if you haven't seen it already:

US tax pitfalls for a non-US person moving to the US - Permanently leaving the US

One thing you didn't mention is the US's Soviet-style 'exit tax'. I assume you have ensured that you won't fall under it. If not, before leaving the US is very much the time to do it. Once you've filed the I-407 it is too late to mitigate.
bhradbh
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Joined: Thu Mar 16, 2017 2:22 pm

Re: IRA to Roth conversion as a UK resident (UK)

Post by bhradbh »

Disqo wrote: Wed Apr 07, 2021 9:36 pm i) are any recommendations for us bank accounts that will keep their accounts open for nra’s? I am currently with a small credit union and worry they may not be set up to handle w8 filing.
I will call to find out, but curious to learn of others experiences here.
ii) any reputable us to uk money transfer companies? I used moneycorp on the way to the us, and had to do multiple transfers of small amounts at less than ideal rates. Xe ?
i) Ally Bank and HSBC allow non residents full access to accounts including via app and web. Ally Bank has no provision to add a non US phone number but I have a Skype US phone number which is valid and they can contact me via this if needed.
ii) I have used Wise, formerly TransferWise, for multiple transfers including six figure amounts and will continue to use them. Many other expats have similar opinions of their service.
Disqo wrote: Wed Apr 07, 2021 9:36 pm In terms of wrapping up my affairs cleanly, I believe that before I leave I have to;
1) arrange an interview with the IRS to get a sailing permit, and possibly complete an estimated 1040 and paying any tax ( should be just tax on dividends )
2) prepare the form I407 to mail back to the US on my arrival- to surrender green card and terminate residency ( I don’t believe I can see uscis at the airport of departure)
3) prepare w8Ben forms for US bank and with Vanguard
4) prepare for dual resident filing for 2021. 1040, and the new 1040-nr forms.
5) contact AA to get an international driving permit for the uk car rental on arrival.
1) I did not get the sailing permit and suffered no negative consequences. Actually attempted to get an appointment but none were available within the time frame the IRS specified. Not sure if they would be available now as a result of Covid.
2) Include a stamped self addressed envelope and request a confirmation of receipt. You will need the confirmation going forward. I mailed mine to USCIS at the US Embassy in Nine Elms, London but am not sure if that is still the correct mailing location.
3) Vanguard allow you to post the W-8BEN digitally on your personal online account. Once you have informed them of your change of address and status to non resident they will inform you how to file the W-8BEN online.
5) I used my US license till I received my UK license with new address, this was done online and completed promptly.

Just a heads up for you here: Vanguard froze all of my brokerage accounts including brokerage IRA's and brokerage Roth after repatriation. I still had access to them and only found out they were frozen when I attempted a distribution and was blocked. After a lot of phone calls with reps who did not have any understanding of NRA issues we resolved the problem which required Vanguard to open Mutual Fund accounts, convert all my ETF's to Funds and transfer those assets to the new MF IRA and Roth. Once completed I had unfettered access and still do. My taxable account was empty as I had liquidated those assets before repatriation. Explanation from Vanguard was that Non US persons not resident in the US cannot dispose of ETF's in brokerage accounts but that MF accounts are allowed. I was just pleased to get access to my funds at last so did not question any further.

If your Roth conversion generates a 1042-S indicating the transaction was Exempt by Treaty, as mine did, how do you propose filing the 1040NR to account for US tax on the conversion when the 1042-S indicates non is due?

Good luck with the move, all the planning and preparation will be well worth it.
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: IRA to Roth conversion as a UK resident (UK)

Post by TedSwippet »

bhradbh wrote: Thu Apr 08, 2021 4:06 am 1) I did not get the sailing permit and suffered no negative consequences. Actually attempted to get an appointment but none were available within the time frame the IRS specified. Not sure if they would be available now as a result of Covid.
Yeah. Virtually nobody bothers with this, and the IRS is well aware of that fact. Given this, you'd have to wonder why they keep this on the books at all.

My own form 1040-C experience was like something you might expect from a third-world country. Sent from office to office because they had nobody 'trained in that form'. Eventually handled in a ... well, let's say "perfunctory" manner by someone clearly just going through the motions. Including prep and waiting times, a complete waste of more or less an entire day. I doubt things have improved greatly in the intervening decade or so.
bhradbh wrote: Thu Apr 08, 2021 4:06 am 2) Include a stamped self addressed envelope and request a confirmation of receipt. You will need the confirmation going forward. I mailed mine to USCIS at the US Embassy in Nine Elms, London but am not sure if that is still the correct mailing location.
Unfortunately, USCIS closed up shop in the UK embassy last year ("for your increased customer convenience", perhaps?), and so no longer handle I-407 forms. You now have to mail them to the US.
Topic Author
Disqo
Posts: 10
Joined: Mon Mar 09, 2020 6:10 pm

Re: IRA to Roth conversion as a UK resident (UK)

Post by Disqo »

Many thanks for the quick replies and especially for the recommendation on (Transfer)Wise. I will definitely check them out.
TedSwippet wrote: Thu Apr 08, 2021 3:21 am One thing you didn't mention is the US's Soviet-style 'exit tax'. I assume you have ensured that you won't fall under it. If not, before leaving the US is very much the time to do it. Once you've filed the I-407 it is too late to mitigate.
Using calendar years, I am in year 7 of my green card, so will be getting out before this particular jackboot hits. At first I wasn't too worried about it, since, with no descendants, inheritance tax is of minor concern, and my notional gains would be less than the $2m threshold. However, the fact that large tranches of the tax treaty are voided, together with the ongoing reporting requirements make the whole thing execrable. I'm sorry you got caught in it Ted!

TedSwippet wrote: Thu Apr 08, 2021 4:23 am
bhradbh wrote: Thu Apr 08, 2021 4:06 am 1) I did not get the sailing permit and suffered no negative consequences. Actually attempted to get an appointment but none were available within the time frame the IRS specified. Not sure if they would be available now as a result of Covid.
Yeah. Virtually nobody bothers with this, and the IRS is well aware of that fact. Given this, you'd have to wonder why they keep this on the books at all.

My own form 1040-C experience was like something you might expect from a third-world country. Sent from office to office because they had nobody 'trained in that form'. Eventually handled in a ... well, let's say "perfunctory" manner by someone clearly just going through the motions. Including prep and waiting times, a complete waste of more or less an entire day. I doubt things have improved greatly in the intervening decade or so.

I have also heard from someone else with experience of this process that the IRS offices seemingly don't knowing anything about the sailing permit. I feel duty bound to try, but have my loins suitably girded for a frustrating experience. At least I can document the attempt, in case it's absence is ever cited for punitive tax treatment.

TedSwippet wrote: Thu Apr 08, 2021 4:23 am
bhradbh wrote: Thu Apr 08, 2021 4:06 am 2) Include a stamped self addressed envelope and request a confirmation of receipt. You will need the confirmation going forward. I mailed mine to USCIS at the US Embassy in Nine Elms, London but am not sure if that is still the correct mailing location.
Unfortunately, USCIS closed up shop in the UK embassy last year ("for your increased customer convenience", perhaps?), and so no longer handle I-407 forms. You now have to mail them to the US.
Yes, mailing back to the US is now the only option. I was briefly tempted to attempt to hand in the card whilst in the US, but without a visa, I'm sure that wouldn't have been advisable...

bhradbh wrote: Thu Apr 08, 2021 4:06 am If your Roth conversion generates a 1042-S indicating the transaction was Exempt by Treaty, as mine did, how do you propose filing the 1040NR to account for US tax on the conversion when the 1042-S indicates non is due?
This takes us neatly back to the original question. I am somewhat surprised that Vanguard took the view that they did, and agree with Ted that just because the IRS issue you a tax refund, that that isn't a tacit approval or confirmation of correct treatment.
After reading further on this, and in alignment with Ted's original advice above, I would expect to pay US taxes on any Roth conversion, using the graduated rates for single filers, and with no standard deduction. If Vanguard were to send a 1042-S, I guess the next course of events would be to write to Vanguard with documentation to convince them that was an error.. ?

bhradbh wrote: Thu Apr 08, 2021 4:06 am Just a heads up for you here: Vanguard froze all of my brokerage accounts including brokerage IRA's and brokerage Roth after repatriation. I still had access to them and only found out they were frozen when I attempted a distribution and was blocked. After a lot of phone calls with reps who did not have any understanding of NRA issues we resolved the problem which required Vanguard to open Mutual Fund accounts, convert all my ETF's to Funds and transfer those assets to the new MF IRA and Roth. Once completed I had unfettered access and still do. My taxable account was empty as I had liquidated those assets before repatriation. Explanation from Vanguard was that Non US persons not resident in the US cannot dispose of ETF's in brokerage accounts but that MF accounts are allowed. I was just pleased to get access to my funds at last so did not question any further.
Very interesting! Over time, I have purposely moved all my mutual funds into ETF's in the brokerage account since the UK requires only recognizes ETF accounts to recognize them for capital gains treatment. (https://www.gov.uk/government/publicati ... ting-funds )
I had not intended to liquidate my brokerage account in advance of repatriation due to a significant unrealized gain, and to do so from the UK over time, expecting to pay UK capital gains tax on the amounts converted.
This is a significant worry now, since converting to mutual funds would mean any gains would be taxed as income. Being able to take advantage of the capital gains allowance, and UK income tax allowances was my goal here. :/

Just to check my understanding:
  • Withdrawals from Roth should not be subject to any taxation, either in the UK or the US.
  • Withdrawals from an IRA should, pursuant to W-8BEN filing, be subject to the treaty tax withholding rate of 15% tax. No UK tax should then apply.
  • Interest from US bank accounts (incl. credit union) should, pursuant to W-8BEN filing, be subject to the same 15% withholding rate. Again, no UK tax should apply.
  • Withdrawals from the brokerage account, should not be subject to any withholding, with the gains being taxable in the UK. If the sale is from recognized reporting funds, capital gain taxation applies, if not, the gain would be taxed as income.
Assuming the above is right, I should have no objection to converting all funds in the IRA to mutual funds, but having to convert the brokerage funds would be disappointing to say the least.

Do I have that right?
bhradbh
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Re: IRA to Roth conversion as a UK resident (UK)

Post by bhradbh »

Disqo wrote: Thu Apr 08, 2021 11:44 am
Just to check my understanding:
  • Withdrawals from Roth should not be subject to any taxation, either in the UK or the US.
  • Withdrawals from an IRA should, pursuant to W-8BEN filing, be subject to the treaty tax withholding rate of 15% tax. No UK tax should then apply.
  • Interest from US bank accounts (incl. credit union) should, pursuant to W-8BEN filing, be subject to the same 15% withholding rate. Again, no UK tax should apply.
  • Withdrawals from the brokerage account, should not be subject to any withholding, with the gains being taxable in the UK. If the sale is from recognized reporting funds, capital gain taxation applies, if not, the gain would be taxed as income.
My understanding of the US/UK DTA is as follows:

Fully qualified Roth distributions are exempt from US and UK tax

Traditional IRA distributions are US tax exempt subject to UK income tax

Interest is US tax exempt subject to UK tax reporting

I have no skin in the the taxable brokerage account game so consequently will offer no opinion
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Disqo
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Re: IRA to Roth conversion as a UK resident (UK)

Post by Disqo »

bhradbh wrote: Thu Apr 08, 2021 12:24 pm
My understanding of the US/UK DTA is as follows:
Fully qualified Roth distributions are exempt from US and UK tax
Traditional IRA distributions are US tax exempt subject to UK income tax
Interest is US tax exempt subject to UK tax reporting
Ah, quite right! The W-8BEN then assures the correct tax treatment as above, and also sets the 15% withholding for dividends in a taxable account.
This tax treaty table from the IRS is quite helpful:
https://www.irs.gov/pub/irs-utl/Tax_Tre ... 19_Feb.pdf

I remain concerned about Vanguard freezing the brokerage account and insisting all funds are moved to mutual funds, which would change the UK tax treatment. Has anyone else had that experience? I'll attempt to talk to them in advance, and get something in writing.
TedSwippet
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Re: IRA to Roth conversion as a UK resident (UK)

Post by TedSwippet »

bhradbh called these out correctly above, but just to confirm (put differently, bhradbh beat me to it while I was writing, but I don't want to waste my efforts -- sunk cost fallacy!):
Disqo wrote: Thu Apr 08, 2021 11:44 am Withdrawals from Roth should not be subject to any taxation, either in the UK or the US.
Yes. Treaty Article 17 paragraph 1(b).
Disqo wrote: Thu Apr 08, 2021 11:44 amWithdrawals from an IRA should, pursuant to W-8BEN filing, be subject to the treaty tax withholding rate of 15% tax. No UK tax should then apply.
No. Pension payments are taxable only to the UK, no US tax. Treaty Article 17 paragraph 1(a).
Disqo wrote: Thu Apr 08, 2021 11:44 amInterest from US bank accounts (incl. credit union) should, pursuant to W-8BEN filing, be subject to the same 15% withholding rate. Again, no UK tax should apply.
No. Interest is taxable only to the UK, no US tax. Treaty Article 11 paragraph 1 (though the US does not tax most types of interest paid to NRAs anyway, including bank interest).
Disqo wrote: Thu Apr 08, 2021 11:44 amWithdrawals from the brokerage account, should not be subject to any withholding, with the gains being taxable in the UK. If the sale is from recognized reporting funds, capital gain taxation applies, if not, the gain would be taxed as income.
You will pay US tax of 15% on dividends paid by whatever you hold in the brokerage account. Treaty Article 10 paragraph 2(b). You can claim up to this amount against UK tax as a credit, though if your UK tax on dividends falls below this level -- and it could well; remember that the UK has a separate dividends tax-free allowance -- then the excess paid to the US is deadweight tax loss.

On sales, UK capital gains tax, or income rates on non-reporting funds (sigh). Nothing to pay on the US side for capital gains. Again, the US does not routinely tax capital gains of NRAs (except for real estate).
Disqo wrote: Thu Apr 08, 2021 11:44 amAssuming the above is right, I should have no objection to converting all funds in the IRA to mutual funds, but having to convert the brokerage funds would be disappointing to say the least.
This whole forced ETF selling thing seems to be a bit of a fabrication of Vanguard's. It might be related to PRIIPs, but it is hard to say. PRIIPs prevents brokers from offering US domiciled ETFs to EU and UK residents, but it specifically does not prevent you holding or selling them, so that any you owned prior to PRIIPs regulations -- or by extension, any you held before becoming an EU or UK resident -- can be held without any problems, and sold only when needed.

Could you move your taxable account to a more reasonable broker before leaving the US? Maybe Interactive Brokers? Based on reports here, they will I think prevent you from buying more of these US domiciled ETFs once you move back to the UK, but they should not force you to sell the ones you do have at any point.
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Disqo
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Re: IRA to Roth conversion as a UK resident (UK)

Post by Disqo »

TedSwippet wrote: Thu Apr 08, 2021 1:49 pm Could you move your taxable account to a more reasonable broker before leaving the US? Maybe Interactive Brokers? Based on reports here, they will I think prevent you from buying more of these US domiciled ETFs once you move back to the UK, but they should not force you to sell the ones you do have at any point.
Thats an interesting idea. I just had a first look at IB, and they appear to be able to transfer full positions from other brokers via Automated Customer Account Transfer Service (ACATS). ( https://www.interactivebrokers.com/en/index.php?f=620 ).
I will also need to check that VTI,VXUS, BIV and BNDX positions are eligible for transfer.
My hope is that this service exists to avoid having to cash everything out, and rebuild a position from scratch, thus it would not trigger US capital gains.

Are there any indications that IB are also likely to apply the W-8BEN filings correctly, since I know many here have struggled with Vanguard and others?
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Disqo
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Re: IRA to Roth conversion as a UK resident (UK)

Post by Disqo »

TedSwippet wrote: Thu Apr 08, 2021 1:49 pm This whole forced ETF selling thing seems to be a bit of a fabrication of Vanguard's. It might be related to PRIIPs, but it is hard to say. PRIIPs prevents brokers from offering US domiciled ETFs to EU and UK residents, but it specifically does not prevent you holding or selling them, so that any you owned prior to PRIIPs regulations -- or by extension, any you held before becoming an EU or UK resident -- can be held without any problems, and sold only when needed.

Could you move your taxable account to a more reasonable broker before leaving the US? Maybe Interactive Brokers? Based on reports here, they will I think prevent you from buying more of these US domiciled ETFs once you move back to the UK, but they should not force you to sell the ones you do have at any point.
Quick update.
I spoke to someone in Customer services today, who assured me that there should be no reason for my account to be frozen, or need to move my position into mutual funds. He also stated that any IRA to Roth conversion would trigger a 1099 and not a 1042-s.
Apparently those in Customer services do not have customer facing email addresses, so he couldn't put that in writing, but advised I submit a request for confirmation via the Message centre. That done, I'll wait to hear before making a move to IB.

I have also completed a test (transfer) Wise from the US credit union to the UK bank, and that went smoothly. It looks like larger amounts will require setup of a wire from the Credit Union which may be a slight hassle, but otherwise the service looks good.

p.s.
One way tickets booked for mid July!!
nr8209
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Re: IRA to Roth conversion as a UK resident (UK)

Post by nr8209 »

With regards to money transfer I found the Credit Union charged a reasonable $40 for my test transfer some years ago; however upon arrival in Barclays I got slammed for a significant 3% to put it into my a/c. Bye bye transfers and Barclays! I used a daily max atm transfer (no fees in CU) to pull the rest over!
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Disqo
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Re: IRA to Roth conversion as a UK resident (UK)

Post by Disqo »

nr8209 wrote: Thu Apr 22, 2021 9:38 am ...however upon arrival in Barclays I got slammed for a significant 3% to put it into my a/c. Bye bye transfers and Barclays!
3% is indeed egregious. I transferred $10K to Barclays via debit card, and have seen no charges at the Barclays end.

nr8209 wrote: Thu Apr 22, 2021 9:38 am I used a daily max atm transfer (no fees in CU) to pull the rest over!
Since the rate flexes depending on how much you transfer, I intend to do a single large transfer, and then annual transfers until the brokerage account is emptied. (Intending to manage the annual gain that will keep my capital gains taxation rate below the 20% higher rate)
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Disqo
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Re: IRA to Roth conversion as a UK resident (UK)

Post by Disqo »

bhradbh wrote: Thu Apr 08, 2021 4:06 am Just a heads up for you here: Vanguard froze all of my brokerage accounts including brokerage IRA's and brokerage Roth after repatriation. I still had access to them and only found out they were frozen when I attempted a distribution and was blocked. After a lot of phone calls with reps who did not have any understanding of NRA issues we resolved the problem which required Vanguard to open Mutual Fund accounts, convert all my ETF's to Funds and transfer those assets to the new MF IRA and Roth. Once completed I had unfettered access and still do. My taxable account was empty as I had liquidated those assets before repatriation. Explanation from Vanguard was that Non US persons not resident in the US cannot dispose of ETF's in brokerage accounts but that MF accounts are allowed. I was just pleased to get access to my funds at last so did not question any further.

If your Roth conversion generates a 1042-S indicating the transaction was Exempt by Treaty, as mine did, how do you propose filing the 1040NR to account for US tax on the conversion when the 1042-S indicates non is due?
@bhraddbh :
I just had written confirmation from Vanguard that they will not freeze the account, nor require me to convert to mutual funds.
They also stated that an IRA to Roth conversion would trigger a 1099-R to assess payment of tax in the US, which is what I believe should have happened for you. Time will tell how all this plays out of course!
bhradbh
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Re: IRA to Roth conversion as a UK resident (UK)

Post by bhradbh »

[quote=Disqo post_id=5962834 time=1619131322

[/quote]
@bhraddbh :
I just had written confirmation from Vanguard that they will not freeze the account, nor require me to convert to mutual funds.
They also stated that an IRA to Roth conversion would trigger a 1099-R to assess payment of tax in the US, which is what I believe should have happened for you. Time will tell how all this plays out of course!
[/quote]

And I have confirmation of new accounts opened by Vanguard, transfer of assets, initiated by Vanguard, to new accounts. I also have two Form 1042-S detailing Roth Conversion and all other transactions.

This was all carried out at management level and not by regular customer service. Regular customer service could not handle the situation and had no idea why the accounts were frozen. They could not even carry out transaction through the back end because it was a systemic blanket freeze generated automatically in system. If they have changed or fixed that then all well and good. But it did take high level management intervention to remedy.
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