# US taxation of early 401k withdrawal for non-residents



## lzr (Dec 22, 2020)

If you are a tax advisor well versed with non-resident questions or know one, feel free to shamelessly advertise via direct message. 

I am interested in what would happen if I took an early withdrawal from my 401k, i.e. below the age of 59.5, while also a non-resident for US tax purposes living in Germany.

As far as I can tell, the general case is that there should be a 30% withholding tax, then I would need to file a non-resident tax return and the actual tax would be be based on the US income tax brackets plus a 10% penalty tax.

But being a resident of Germany, I assume the income tax treaty modifies things. It just just not clear to me, how. I think Article 18.1 of the tax treaty says that taxation of pensions is up to the country of residence.

Does that mean, the withholding tax rate should be set to 0? That is under the assumption that I disclose my residence in Germany through a form W-8BEN.
Does that also free me from the 10% early withdrawal penalty?
If the withholding is correct, does that free me from filing a US non-resident tax return?
Do I need to set up monthly distributions, or can I withdraw the entire account value at once? If I needed to set up monthly distributions, would it be okay to draw down the entire account within one calendar year?


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## guacamarlo (2 d ago)

Hi there, just wondering if you received any response/advice on this, as I recently posted a very similar query...


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## Bevdeforges (Nov 16, 2007)

lzr said:


> I am interested in what would happen if I took an early withdrawal from my 401k, i.e. below the age of 59.5, while also a non-resident for US tax purposes living in Germany.


I think this is the part that is confusing people and may be why you aren't getting any responses on this. It's not clear from your post if you are a US citizen, resident in Germany, or a non-citizen (i.e. an NRA) who simply lived and worked in the US long enough to set up and contribute to a 401K.


lzr said:


> As far as I can tell, the general case is that there should be a 30% withholding tax, then I would need to file a non-resident tax return and the actual tax would be be based on the US income tax brackets plus a 10% penalty tax.


You only file an NR tax return (1040 NR) if you are a non-resident alien - i.e. if you do NOT have US nationality. If you are a US citizen, currently resident in Germany, you file a regular 1040, which should include whatever you withdraw from your 401K - and I very much think you are likely to be hit with the 10% early withdrawal penalty. Now, whether the financial institute holding the 401K funds withholds 30% may depend on the internal policies of the particular financial institution - though generally speaking, if you are a US citizen, you can request that they withhold 0% - or in some cases, the internal policies require a minimum withholding of 10 or 15% if the money is being sent overseas.

Ultimately, because Germany taxes your US pensions (including 401K and traditional IRAs) if you have had US withholding taken, you may have to file a tax return for the US, declaring the withdrawal, with $0 as the "taxable amount" and then claim a refund by declaring the taxes withheld at the financial institution. (I don't believe the 10% penalty is refundable - but hey, claim it back and see what they do.)


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