Rollovers and Foreign Withholding

[DTH]

A nonresident alien, who worked and lived outside the U.S., is participating in a U.S. qualified pension plan. If the participant terminates employment and directly rolls over the U.S. qualified pension plan dollars into a U.S. IRA, how does the withholding work?

IRS Publication 590 only refers to withholding on U.S. citizens and resident aliens who receive a distribution outside the U.S.

Thanks!

[Appleby]

There is no withholding, as the withholding rules do not apply to a direct rollover

[DTH]

Sorry. I meant when the nonresident alien IRA owner subsequently takes a distribution from the IRA, what are the withholding requirements?

[Lame Duck]

This more properly a question for a tax professional who deals with the US taxation of nonresident aliens. However, I belive that an individual can elect out of withholding on any distribution from an IRA. I would just make the election not to have withholding and let it go at that. The mandatory withholding provisions apply to plans qualified under 401(a), 403(a) and 457(b) (See IRc 3405(d)(2)(B).

[DTH]

IRS Publication 590 (IRAs) provides that an individual cannot elect out of withholding for any payment that is delivered outside the U.S. [Note: The same rule applies when a distribution is sent to a P.O. Box address.] The individuals the Publication refers to are U.S. citizens and resident aliens (has a green card or meets the substantial presence test). The rate of withholding for a U.S. citizen or resident alien is 10% for this instance.

I'm looking for anyone who has experience dealing with nonresident alien withholding. Do you withhold at 30% unless there is lesser treaty rate or 10%.

Thanks.

[Appleby]

If the individual is a nonresident alien, then the IRA custodian is required to withhold 10-percent for federal tax (under IRC 3405) from non-periodic distributions ( or the periodic rate for periodic distributions). The IRA owner may elect to waive this withholding, but then becomes subject to withholding under IRC 1441, which is 30 percent or the treaty rate- for this purpose, the individual must provide Form W-P and Form W-8BEN. For withholding under IRC 1441 , the distribution is reported on Form 1042-S, not Form 1099-R…this is so even if the treaty rate is zero.