I worked in the US as a legal alien from July 2007 - June 2009.
I have since returned to my homeland, Australia. I am 30 yrs old.

I have some money in a 401k that I would like to cash out.
I assume if I cashed out, then it would be viewed as "Pensions and Annuities" Income tax code 14?

I would normally need to pay 30% Withholding, and then I would fill in a tax return at the end of the year to claim some back seeing as this would be my only income for 2010 and effective tax would be less than the 30%.

But I have just read Publication 515, and according to Table 1, as an Australian national, I can fill in a W-8BEN and not have any tax withheld. Can you confirm this is correct? And I am reading the document correctly?

If so, I assume I would then still fill in a US tax return at the end of the year and would pay all my effective tax then?
Or would I somehow include the money as foreign earned income in my Australian tax return, and pay it to the Australian government who would reimburse the IRS?

I assume this was a traditional 401K and not the new Roth 401K. If any taxes are owed, you must pay them to the IRS, NOT the Australian government.

IRS Pub 515 denotes that pensions have a ZERO tax rate, but a 401K distribution is not considered to be exclusively a pension, but also deferred compensation. However, having reviewed the U.S.-Australia Tax Treaty and the technical explanations thereto, the treaty clearly states that annuities are taxable ONLY in the home state of the resident (in your case, Australia), and I see no explicit exception for a 401K distribution.

For this reason, I must conclude that you can submit Form W-8BEN and claim ZERO tax withholding, thus receiving the entire 401K distribution without any money being sent to the IRS by the 401K custodian.

Once received, you MAY want to file Form 1040NR to show NO income tax liability and claim the treaty exemption on the pension distribution, but that would be done only to prevent future reaction by the IRS to the inevitable Form 1099-R that the custodian would send to the IRS.

Great. Am confirming it with the IRS, but that was how I interpreted it as well...
Appreciate you taking the time to answer.

Glad to help; contact me at [email protected] if you need help filing the Forms 1040NR and 8833.

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Originally Posted by ascrimmy

great. Am confirming it with the IRS, but that was how I interpreted it as well...
appreciate you taking the time to answer.

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Hi ascrimmy, I am in the same situation. I have been back in Aust for 2 years but just couldn't figure out what to do to get the process started. How did you go? Any success? Many Thx!

You need to be at least 62 years old for the U.S. to consider the distibution as a pension.

What happens if you're on an E3 and still in the USA working? Vanguard are telling me I can submit the W8BEN form, but I'm wondering if it will indeed attract tax given I'm assuming my tax status versus ASCRIMMY who was obviously residing in Australia at the time this question was asked.

If you withdraw the money while IN the U.S. and under the E-3 visa, then, In my opinion, you WOULD be liable for the 10% Early withdrawal penlty plus the normal federal, state and local income taxes.

Intltax : "You need to be at least 62 years old for the U.S. to consider the distibution as a pension. "

So if you are over 62 it is covered by a treaty that deals with pensions? I noticed a tax ruling you referenced in another thread that said (the ruling said) a lump sum payment was zero tax under article 18. The preamble to the ruling said the guy was over 55 implying that was where the line is drawn?

In any case if a person was of an age where the US did not consider recovering their 401k to be a pension what would they consider it to be? Income?

Thanks

In some cases, age 55 CAN be used to avoid the 10% Early Withdrawal Penalty from 401Ks,