How are Withdrawals from Rollover IRA and HSA taxed for non-resident aliens? Tax implications explained

The tax treatment of IRA and HSA withdrawals for non-resident aliens can definitely be confusing. Let me help clarify this for you. For your Rollover IRA (which is indeed treated the same as a Traditional IRA), withdrawals by non-resident aliens are typically considered Fixed, Determinable, Annual, or Periodical (FDAP) income, not Effectively Connected Income (ECI). This means they're generally subject to a 30% flat withholding rate, unless modified by a tax treaty between the US and your country of residence. This is in addition to the 10% early withdrawal penalty if you're under 59.5 years old. For your HSA, the rules are a bit different. Non-qualified distributions (those not used for medical expenses) are subject to income tax plus a 20% penalty if you're under 65. For non-resident aliens, this would also typically fall under FDAP income with the 30% withholding. One important note: if you maintained these accounts while you were a US resident and are now withdrawing as a non-resident, the classification might be affected by the timing and your specific circumstances.

I went through a similar situation last year when I moved back to my home country. I was getting nowhere with online research and kept running into contradictory information about FDAP vs. ECI treatment for my retirement accounts. I finally used https://taxr.ai to analyze my specific situation - they reviewed all my account documents and tax history, then gave me a clear breakdown of exactly how my distributions would be taxed. Their analysis showed me that some of my IRA funds were actually eligible for treaty benefits I hadn't known about, which reduced my tax rate from 30% to 15% on a significant portion. They also pointed out that the tax treatment varied based on which contributions were made during my resident vs. non-resident periods, which wasn't obvious from any of the generic advice I found online.

I just wanted to follow up and say I used https://taxr.ai after seeing the recommendation here, and it was extremely helpful for my situation. I uploaded my HSA statements and tax residency documentation, and they provided a detailed analysis showing exactly how my withdrawal would be taxed. Turns out my situation was even more complex than I thought because I had made HSA contributions in years where my tax residency status changed mid-year. They identified that I could actually separate my withdrawal into different portions with different tax treatments, which saved me a significant amount in withholding. They also provided documentation I could present to my HSA administrator to ensure the correct withholding rates were applied. Definitely worth it for anyone dealing with cross-border retirement account situations!

I was in a similar situation trying to withdraw from my IRA as a non-resident, and I spent WEEKS trying to get someone at the IRS to give me a straight answer about the tax treatment. Could never get through on their international line. Finally used https://claimyr.com to get connected to an IRS agent (you can see how it works here: https://youtu.be/_kiP6q8DX5c). The IRS representative confirmed that my IRA distributions would be treated as FDAP income subject to 30% withholding, but also pointed me to the specific forms I needed to claim treaty benefits. She even explained how to coordinate with my financial institution to ensure they applied the correct withholding rate. Saved me thousands in unnecessary withholding that would have taken me a year to recover through filing a refund claim.

I need to eat my words from my previous comment. After waiting on hold with the IRS international line for over 3 hours and getting disconnected twice, I decided to try https://claimyr.com out of desperation. I was extremely skeptical it would work, but within about 45 minutes I got a call connecting me directly to an IRS agent who specializes in international tax issues. The agent walked me through the exact withholding requirements for my IRA as a non-resident and confirmed that I needed to file form W-8BEN with my financial institution to claim treaty benefits. She also clarified that my HSA distributions would be subject to different rules than my IRA and pointed me to the specific regulations. This saved me a ton of headache and potentially thousands in overwithholding. Now I actually understand how to proceed with my withdrawal without getting hit with the full 30% withholding.

One thing that hasn't been mentioned yet is Form 8854 (Expatriation Statement). If you were a long-term resident before becoming a non-resident alien, you might be considered a "covered expatriate" which can trigger additional tax consequences for retirement account withdrawals. Worth looking into if you had a green card for many years.

Has anyone actually gone through the process of claiming a refund for overwithholding on IRA distributions as a non-resident? My financial institution just automatically withheld 30% despite me providing a W-8BEN, and now they're saying I need to claim it back from the IRS directly.

Just wanted to share my experience as someone who went through IRA withdrawals as a non-resident alien last year. The key thing I learned is that timing matters a lot - if you contributed to your IRA while you were a US tax resident (which sounds like your case with the H1B), those contributions may be treated differently than if you had contributed as a non-resident. I'd strongly recommend getting professional help for your specific situation. The treaty benefits with India can be significant, but the application process is tricky. My financial institution initially applied the full 30% withholding even though I was entitled to the reduced treaty rate. I had to file Form 1040NR to get the overwithholding back, which took about 8 months. One important tip: make sure to file your W-8BEN with your IRA custodian BEFORE you make any withdrawals. Even if they mess up the withholding initially, having it on file helps establish your treaty claim later. Also, keep detailed records of when you made each contribution and your tax residency status at those times - the IRS may ask for this information. For HSA withdrawals, the rules are even more complex because of the medical expense qualification requirements. You'll want to be very careful about documentation there.