30% withholding

[brianbbc]

So vanguard is going to withhold 30% tax from ira distributions instead of 15%, this forced me to file a 1040nr to recuperate 15% . Question: where the heck on that form can I do it? I can’t find anywhere where I can apply a tax treaty to the excess tax, Do I need to file form 8833 along with it?

[nelsona]

Report the withdrawal on EITHER the front page as connected income, or on the NEC schedule as non connected income, whichever yields the lower tax.

The report the withheld tax, and calculate your refund.

[brianbbc]

Interesting, I thought ira distribution had to be reported as connected income only.

[nelsona]

No, it is your choice. Connected is almost always better, except if it a huge lump sum (in which case IRS could deny the 15% rate as being non-periodic).

[brianbbc]

I did crunch the numbers, I save about $250 on a 50k distribution. I took it as a one time withdrawal, I didn’t think it matters if the distributions needed to be periodic to qualify for the 15% rate

[brianbbc]

The irs does state lump sums 30%, periodic 15% (ensuring w-8 filed with custodian) . But vanguard and fidelity just treats it all the same and taxes 30% on any distribution. Regardless, upon tax filing, can the irs deny the 15% treaty rate if only a lump sum is performed on a yearly basis. This seems out of line with the treaty agreement with the added headache of taking a distribution out at least every month

[nelsona]

Which way saves you? page 1 or NEC?

The treaty is VERY clear that only periodic withdrawals are eligible for 15% (read it yourself 18(2)a). In the past the IRS (and most firms) simply held to the 15% rate regardless. However, as you have found out, firms are now withholding 30%, likely due to IRS instructions (to them) that they risk being required to pay the extra 15% themselves if they under withhold a foreign person.

Periodic does not refer to the number of withdrawals in a year, it refers to the amount withdrawn during the year being such that you are planning to withdraw over several years -- like at least 20.

Canada has a clear definition of what periodic is for RRIF withdrawals. IRS doesn't have such a clear definition (other than pension SEPP which can avoid penalties for early withdrawal and might not apply to as a treaty definition.)

In any event, if you report the withdrawal as page 1 income, you will not be denied. Besides, you are likely paying more in Canada on this income, so reducing the US tax merely adds to your Cdn tax.

[brianbbc]

Thanks again. I’m gonna keep petitioning vanguard to stick with the 15% withholding as per treaty and will post it they finally agree

[nelsona]

Sure, But expect the same argument presented her: your withdrawal is too large to be considered periodic, and the treaty spefifies the 15% withholding on periodic payments.

[brianbbc]

I wonder if I submitted the w8ben information properly. Specifically: Line 6a (foreign tax identification number) I left blank, 6b I checked as I am not legally required (since I have a SIN), 7, I wrote “none”.
For 10 I used: “XVIII 2(a), 15%, pension income”. Fourth field I left blank.
I’m pretty sure that’s correct.

[nelsona]

your foreign tax id is your SIN, which was issued by the country you live in. I would have put it, but it doesn't matter. I have explained why you are being withheld at 30%. You will get the same explanation from Vanguard. The change in internal policy was made a few years ago by MANY firms, because IRS doesn't provide a clear definition of "periodic".