401K early withdrawal by non-resident
Hello
I was working in the US until July 1st of this year (and since 2003). Ever since I have been living and working in the UK. I had earned about $46000 gross in my previous company in the US in those 6 months. I have about $20000 in my 401K account. I was planning to transfer all my 401K balances, but when I called Fidelity and explained my situation, the customer service rep said I could avoid the 20% withholding and the 10% penalty if I filled in the Form 8BEN for foreign beneficiaries. Now, after a lot more "forms-reading" and Google searches I have still not got all my questions answered. I really hope the experts on this forum will help me
1. I had lived in the USA this year for exactly 182 days and will be in the UK for the remaining 183 days. Can I claim to be a non-resident alien for using the foreign beneficiary form to not withhold 20% off my 401K return ? I believe I can claim to be a non-resident because I was a resident of another country after July 1st. UK-USA seem to have a treaty and it appears there would be 0% withholding on pensions and annuities according to page 37 of publication 515 (http://www.irs.gov/pub/irs-pdf/p515.pdf). I am not sure if I am perhaps interpreting the treaty wrongly
2. Even if the US source (Fidelity) does not withhold tax will I end up paying that when I file tax returns in 2007 for year 2006 ? I don't know if I should file tax return as a dual status alien or a resident alien by virtue of the substantial presence test.
3. Will I have to pay tax in UK for the 401K transfer for funds ? It is really money being transferred from my bank account in USA to bank account in UK. So there is no way the UK tax department would know its 401K money.
I believe if I do not do any of the things above and ask for early withdrawal from the 401K, I could lose as much as $9000 of my $20000 401K fund in taxes and penalties. Would I benefit by withdrawing the money in 2007 instead ? I would prefer to do that only if the money saved is at least $1000, other wise I may have to bite the bullet and take it out now.
I really am at the mercy of the internet because being in the UK I cannot even approach a US tax advisor. I appreciate the help so much.
Cheers,
Rajiv