First Roth distribution

[Alan]

I did my first Roth IRA distribution this week and was amazed to discover that Vanguard stated that IRS rules require a minimum 10% tax withholding. We've never had to make withholdings when doing IRA to Roth conversions even though they are taxable by the IRS.* No tax will be due on my Roth withdrawals because I have had a Roth IRA for over 10 years and I am 66 years old so I don't understand the logic.* However, it is no big deal for me since I have to make estimated tax payments to pay for taxes on other US income such as our private pensions, so the withholding just means paying less in estimated taxes.

I finished doing IRA to Roth conversions 3 years ago, and my wife made her last Roth conversion this month.

Does this happen with others making Roth distributions or is it just because I reside overseas?

 

[Midpack]

I haven't taken a distribution yet, but that comes as a surprise to me (too)? Looks like you might be on to the answer to your own question.

Are IRA owners always allowed to waive withholding on IRA distributions?

The ability to waive withholding will depend on whether the IRA owner is a U.S. citizen or resident alien, or a nonresident alien. U.S. citizens and resident aliens can generally waive withholding on IRA distributions. But there are certain situations when these IRA owners will not be permitted to waive withholding and a mandatory 10 percent rate of withholding will apply.

Guidance from IRS Notice 87-7 addressed situations that would require mandatory withholding, specifically when the IRA owner has a residence address outside of the United States or does not provide an actual residence address, such as a post office box. This guidance is relatively old, however, and does not address situations that may arise more frequently in modern financial markets where payments are more likely to be made across international borders.

To clarify these requirements further, proposed Treasury regulations were issued in 2019. Specifically, these regulations state that withholding is required in the following situations.

The IRA owner requests a distribution be paid to a foreign bank account (even if the IRA owner provided a U.S. residence address).

The IRA owner requests a distribution be paid to a U.S.-based bank account but the IRA owner has a foreign residence address.

The IRA owner does not provide a U.S. residence address.

The regulation notably exempts military and diplomatic personnel who are outside of the United States from this requirement, as it states that any Army Post Office, Fleet Post Office, or Diplomatic Post Office address is considered to be a U.S. residence address for withholding requirements purposes.

https://thelink.ascensus.com/articl...withholding-requirements-on-ira-distributions

https://personal.vanguard.com/pdf/s156.pdf?2210105562

 

[MichaelB]

Does this happen with others making Roth distributions or is it just because I reside overseas?

Bummer, it’s because you reside overseas. A W-9 or equivalent should be on file but it may help if you file one.

https://personal.vanguard.com/pdf/s156.pdf?2210105562

Edit - W-9 won’t help.

Unless you’ve instructed us not to withhold taxes, the IRS requires us to withhold at least 10% of distributions from traditional, SEP, and SIMPLE IRAs. If your distributions are delivered outside the U.S., we’re required to withhold 10% federal income tax.

 

[SLV Golfer]

Yes, 10% w/h for foreign/overseas residents.

 

[Alan]

Thanks for the quick responses.

It is the Roth distributions being taxed that bugs me since there are no taxes due anyway.

Michael’s snippet from the Vanguard link doesn’t mention Roths, just the other types of taxable IRAs.

Unless you’ve instructed us not to withhold taxes, the IRS requires us to withhold at least 10% of distributions from traditional, SEP, and SIMPLE IRAs. If your distributions are delivered outside the U.S., we’re required to withhold 10% federal income tax.

It’s no big deal really but I think I will contact Vanguard anyway to see if I there is anyway I can elect not to have taxes withheld.

 

[MichaelB]

Thanks for the quick responses.

It is the Roth distributions being taxed that bugs me since there are no taxes due anyway.

Michael’s snippet from the Vanguard link doesn’t mention Roths, just the other types of taxable IRAs.

Sorry, missed that the Roth was missing. It is unusual, as withholding for overseas addresses is to ensure tax compliance, which is clearly not your case. I’m interested in Vanguard’s response.

 

[SLV Golfer]

From Vanguard's website, more to see on the Vanguard PDF doc.

• You’re a U.S. person (including a resident alien) and
we have a valid IRS Form W-9 on file. Please note
that if your distribution is delivered outside of the U.S.,
we’re required to apply 10% federal withholding to your
distribution. You can’t elect out of federal income tax
withholding for distributions delivered outside the U.S.

 

[braumeister]

From Vanguard's website, more to see on the Vanguard PDF doc.

• if your distribution is delivered outside of the U.S.,
we’re required to apply 10% federal withholding to your
distribution. You can’t elect out of federal income tax
withholding for distributions delivered outside the U.S.

Fidelity says the same thing on their website.

 

[Alan]

From Vanguard's website, more to see on the Vanguard PDF doc.

• You’re a U.S. person (including a resident alien) and
we have a valid IRS Form W-9 on file. Please note
that if your distribution is delivered outside of the U.S.,
we’re required to apply 10% federal withholding to your
distribution. You can’t elect out of federal income tax
withholding for distributions delivered outside the U.S.

Fidelity says the same thing on their website.

Oh well. As they say in England, C’est La Vie!

The important thing is that we have made multiple Roth conversions with no withholding and been able to pay the taxes due from after tax money. This just means adjusting down the estimated tax payments we pay. (Maybe a Roth conversion is not considered a distribution)

 

[jazz4cash]

This Fidelity Advisor document mentions withholding specifically for Roth distributions for account holders with non US addresses.

 

[jazz4cash]

This Fidelity Advisor document mentions withholding specifically for Roth distributions for account holders with non US addresses.

https://institutional.fidelity.com/app/proxy/content?literatureURL=/704656.PDF

 

[CRLLS]

Sure sucks! Perhaps it might be offset when filing your income tax? I seem to recall that if a company issues dividends to foreign shareholders, that some amount is automatically withheld. The amount depends on the country the foreigner is from. I don't know the logistics of claiming taxes elsewhere from the USA.

 

[SLV Golfer]

CRLLS - this is US withholding, essentially making sure the overseas citizen has a reason to file their US income tax return, to get this $$ refunded or applied against their tax liability. Alan has it correct to just adjust his estimated taxes to adjust for this withholding.

 

[Alan]

Sure sucks! Perhaps it might be offset when filing your income tax? I seem to recall that if a company issues dividends to foreign shareholders, that some amount is automatically withheld. The amount depends on the country the foreigner is from. I don't know the logistics of claiming taxes elsewhere from the USA.

Just to be clear, I am a US Citizen who just happens to live overseas, and I file a US tax return every year. I just find it strange that withdrawing already taxed funds requires me to withhold taxes even though they are not subject to taxation. When I withdraw savings from my US savings accounts I am not required to make a withholding, it’s just an anomaly with the US tax system.

I’m fine with it, I will also file W4s to minimize the withholdings on my US pensions.

 

[Midpack]

Just to be clear, I am a US Citizen who just happens to live overseas, and I file a US tax return every year. I just find it strange that withdrawing already taxed funds requires me to withhold taxes even though they are not subject to taxation. When I withdraw savings from my US savings accounts I am not required to make a withholding, it’s just an anomaly with the US tax system.

I’m fine with it, I will also file W4s to minimize the withholdings on my US pensions.

And reduce estimated taxes if applicable. But it does seem odd they won’t let you withhold as you wish.

 

[pb4uski]

If you still have a US bank account, would having the Roth withdrawal go to that avoid the the 10% withholding? Then transfer from the US bank to your UK bank.

 

[Alan]

If you still have a US bank account, would having the Roth withdrawal go to that avoid the the 10% withholding? Then transfer from the US bank to your UK bank.

That is exactly what happens. I have never attempted to have Vanguard transfer any money overseas. Our US bank has been linked to our VG accounts for at least 7 years and I then use Wise to transfer the money to our UK account.

ETA

Because of PFIC rules all our investments remain in the USA

 

[pb4uski]

Do your Vanguard accounts have your UK address? I'm wondering if that UK address is causing hem to do the 10% withholding.

 

[Alan]

Do your Vanguard accounts have your UK address? I'm wondering if that UK address is causing hem to do the 10% withholding.

Yes, that is how they know we reside overseas, we have never hidden the fact that we are not resident in the USA. We also use our UK mobile phone to receive verification codes when logging on. Never had a problem until now, our first Roth withdrawal.

We also have after-tax accounts and receive quarterly dividends and sell shares all of which are taxable but the only time we are required to make a withholding is when we withdraw money from a tax free account.

 

[pb4uski]

I'd talk with Vanguard as you plan to do.

If you really want to avoid the 10% withholding you could change your address to a US address... a trusted child, sibling or friend... and then set all your preferences to electronic communications so as little mail as possible goes to that address.

 

[CRLLS]

Just to be clear, I am a US Citizen who just happens to live overseas, and I file a US tax return every year. I just find it strange that withdrawing already taxed funds requires me to withhold taxes even though they are not subject to taxation. When I withdraw savings from my US savings accounts I am not required to make a withholding, it’s just an anomaly with the US tax system.

I’m fine with it, I will also file W4s to minimize the withholdings on my US pensions.

Thanks. I don't understand the "why" either. Your later post about the US bank account makes it just a little bit more confusing as to the "why". It appears to be a quirk in the IRS system. At least you can recover the withholding or at least adjust other withholding thru the year to make yourself whole at the end of the year.

 

[Alan]

I'd talk with Vanguard as you plan to do.

If you really want to avoid the 10% withholding you could change your address to a US address... a trusted child, sibling or friend... and then set all your preferences to electronic communications so as little mail as possible goes to that address.

Been there, done that.

The only child we have in the USA lives in California and the year we left, 2017, I changed our Vanguard correspondence address to her, but the Street Address was our UK address (Vanguard provides for both, with the street address clearly stated as the one where you are resident). I'm not prepared to lie and state that we are resident in the USA when we are not. (Very un-American of me I know)

We haven't received paper forms from Vanguard for many years so no problem there.

Our son moved to England later that year and when he quit his job at a Texas bank he gave them his sister's address as a forwarding address and in January 2018 she received his W2 and took a photo for him for his tax filing.

However, California came after both of us for State taxes and we had a bunch of forms to complete and proof to send that we were, a) not resident in California, and b) the companies that paid us the money did not have a presence in California.

If it turns out I have make a 10% withholding each time I make a Roth distribution then it really isn't a bother compared to all the other tax complications there are being a USC residing overseas. I have to file a return every year anyway so it's not as if I am losing money here.

 

[teej1985]

Yes, that is how they know we reside overseas, we have never hidden the fact that we are not resident in the USA. We also use our UK mobile phone to receive verification codes when logging on. Never had a problem until now, our first Roth withdrawal.

We also have after-tax accounts and receive quarterly dividends and sell shares all of which are taxable but the only time we are required to make a withholding is when we withdraw money from a tax free account.

I don't think that's necessarily true. If you had a traditional IRA, that distribution would require the same withholding.

 

[Alan]

Yes, that is how they know we reside overseas, we have never hidden the fact that we are not resident in the USA. We also use our UK mobile phone to receive verification codes when logging on. Never had a problem until now, our first Roth withdrawal.

We also have after-tax accounts and receive quarterly dividends and sell shares all of which are taxable but the only time we are required to make a withholding is when we withdraw money from a tax free account.

I don't think that's necessarily true. If you had a traditional IRA, that distribution would require the same withholding.

An IRA is tax deferred, not tax free like a Roth (I've had a Roth over 5 years and am 66 years old so all distributions are tax free). I would expect a tax withholding to be required on an IRA just like the VG website says. See below, no mention of a Roth.

https://personal.vanguard.com/pdf/s156.pdf?2210105562

Unless you’ve instructed us not to withhold taxes, the IRS requires us to withhold at least 10% of distributions from traditional, SEP, and SIMPLE IRAs. If your distributions are delivered outside the U.S., we’re required to withhold 10% federal income tax.

I messaged my rep today (Friday), probably not hear back until after the weekend.

 

[Alan]

Same day reply from Vanguard. I guess it was an easy question.

From me:

Tax withholding on a Roth distribution
Hi there,

I recently made a Roth distribution and had to make a tax withholding. I
have had a Roth at Vanguard for over 10 years and am almost 67 years old so
there are no taxes due on the distribution. I realize that this is because
I reside overseas but looking at your website it states the following,

httpsersonal.vanguard.com pdf s156.pdf?2210105562
"Unless you've instructed us not to withhold taxes, the IRS requires us to
withhold at least 10% of distributions from traditional, SEP, and SIMPLE
IRAs. If your distributions are delivered outside the U.S., we're required
to withhold 10 federal income tax."

No mention of Roth IRAs.

Is there a way I can elect to not have tax withholdings in future on Roth
distributions? It is annoyance simply because the distributions are not
taxable, but no big deal as I file taxes every year anyway and will adjust
by estimated tax payments this year to account for withholding on the Roth
payment.

Thanks in advance,

Alan

Dear Alan

Thank you for taking the time to contact us.

An IRA distribution delivered to a U.S. bank would not be considered
"delivered inside of the U.S." unless the IRA is registered under a U.S.
residence address. This applies to Roth IRAs along with pre-tax IRAs. Since
your Roth IRA currently is registered with a UK address, the distribution
is considered being delivered "outside of the U.S." and we are required to
withhold the 10% for federal tax. Currently, there is no option to elect
out of this withholding.

I apologize for any inconvenience this may cause.