US 401K withdrawals

[mmchaisi]

BBCWatcher, hope you're watching

I have a smallish 401K from the time I worked in the US funded with pretax dollars which is now sitting in a rollover traditional IRA with some holdings in index funds. I'm now over 60 and wish to withdraw. I'm not US tax resident. I don't need the full lump sum withdrawal right now, just looking for a tax efficient way to withdraw some holiday spend money. Thanks.

 

[BBCWatcher]

Who is the custodian? (Fidelity? Schwab? Vanguard? Other?)

For a Traditional IRA, my understanding is that your withdrawals will be subject to 30% withholding but you will likely be able to recover some of that withholding if/when you file a U.S. tax return (1040NR) -- although it'll take until the next tax filing season to recover. The actual tax owed should be equivalent to what a similarly situated U.S. person would pay. You must start taking withdrawals ("Required Minimum Distributions") no later than age 70 1/2.

Your other choice is a Traditional IRA to Roth IRA conversion, if your custodian will allow it. (It should.) You would pay the tax and file a tax return now, and then future gains/withdrawals would be U.S. tax free. Roths do not have RMDs. I can't remember if the 5 year minimum Roth holding period applies to conversions. You are allowed to convert only some of the funds. For example, you could take some cash in December (see below) and convert the rest.

If the IRA is "small," the major consideration is likely to be the paperwork -- to do that just once, ideally. Another consideration is that you might want to take your withdrawal(s) in December, so that your recovery is as soon as the following February or March. The quicker you can recover excess withholding, the better since you can put that recovered money to work that much sooner.

It depends on what the IRA is holding, but typically it would count toward your U.S. estate tax exemption of US$60,000.

If you're leaning in any particular direction(s), I can take a closer look at it. Those are the general highlights as I understand them.

 

[mmchaisi]

Thank you BBC, helpful as always.

The custodian is Millennium Trust, having been changed a couple of times.
I’ll probably trickle out a yearly amount and try to minimize the tax. There is no other US income and I’ll file the 1040NR to claw back the tax.

I guess the tax is on the withdrawals as income and I don’t have to worry about the gain as I liquidate some of the mutual funds, right?

Thanks again

 

[BBCWatcher]

I’ll probably trickle out a yearly amount and try to minimize the tax.

You can do that, but it's not likely to be a huge difference either way.

I found a tax lawyer who recently blogged about this situation. Phil Hodgen takes this view on how a Traditional IRA distribution is taxed when a non-resident alien (NRA) is the beneficiary. (His article deals with an ex-U.S. citizen who is not a "Covered Expatriate," meaning he's equivalent to an "ordinary" NRA like you.) His view is that the principal is taxed at ordinary U.S. income tax rates (with progressive tax brackets ranging from 0% to 37%) and the gains (accumulated interest, dividends, capital gains) are taxed at a flat 30%. This is for residents of countries that don't have tax treaties with the U.S., and Singapore is one such country. Hodgen doesn't explicitly say what happens if you make a partial withdrawal, but my guess would be pro-rata allocation. Your broker will hopefully provide a piece of paper that includes that breakdown between principal and gains, but even if not that should be fairly straightforward to calculate if you've got a record of your total contributions into the original Traditional 401(k).

If Hodgen is correct, I wouldn't expect too much money back from your 30% withholding, especially if your contributions have experienced lots of gains. But some would be nice.

A Roth conversion is possible and might be attractive, although (as always) you really have to do some careful research on it first. NRAs don't pay capital gains tax on U.S. assets ordinarily (Traditional IRAs are an exception), but they do pay 30% tax on dividends. A Roth conversion would shield those assets from even the dividend tax on future dividends. So a conversion is something to consider if you don't need these funds right away since it can help you hold U.S. investment assets but enjoy a special tax break on your dividends. You'd take the tax hit now rather than defer it -- that's the trade-off. Maybe this December (2018), the first year with the lower tax brackets?

 

[mmchaisi]

ok thanks. That was a good blog and very relevant to my situation. I think I understand most of it to try a DIY. I was hoping for a straightforward tax on the draw down at the normal tax rate.