IRA Rules

Archive for November, 2008

Question: How do I resolve UK tax payment on a US IRA cash distribution?

I am a UK national residing in UK. I lived in the US for 8 years some years ago and worked as full US tax payer under standard tax payer conditions. During that time I commenced and paid into an IRA.

In December 2009 I needed some money to pay for some legal fees related to child support and visitation in befenit of issues relating to my son who resides in the US with his Mother. The dispursement was paid into my US bank account and I was sent a 1099-R by the Trust managing the IRA. The amount shown in Box 1 “Gross distribution” is the total amount received, 2a is empty and 2b is checked “taxable amount not determined.”

Two questions: Is the full amount probably fully taxable under US/UK treaty rules and how should it be declared on income assessment? Given I am in UK and therefore not subject to US tax, is there anyway the US IRS 10% penalty for early distribution can apply?

Thanks and regards.

Answer: IRA money is considered US-connected income.

The money needs to be reported on a 1040-NR on page 1, on line 16a and 16b.

Unless you made post-tax contributions, the entire amount is taxable as income. You will be allowed a $3650 exemption. If you are younger than 59.5 years of age, you will also be charged a 10% penalty.

The taxes you pay to the US can possibly be deducted on your UK return.

Roth IRAs

Estate Planning : What Happens if an IRA or 401k is Payable to the Estate Trust?

If you are covered by a pension plan at work such as a 401k, your traditional IRA contributions may or may not be deductible depending on the filing status and AGI. The IRS rules for IRA and retirement plan at work such as a 401k is found in the IRS Publication 17 page 118. 

 

If you are not covered by a retirement plan at work, your deductible traditional IRA contributions may still be limited if your spouse is covered by a retirement plan.