It can be confusing to handle your retirement savings as a US expat in the UK or as a Brit who worked in the US and is now living in the UK. Rolling a 401k into an IRA is one example of the US-UK complications. Understand the process, learn how to get started, know the tax implications, and what to do to ensure your financial future fits with your UK plans and pensions.
What Are The UK Pension Options Available To US Expats?
US expats can’t move their pensions overseas without paying a high tax bill (UK expats can move their pensions overseas, but these days, it’s often not worthwhile for Brits to do that). But there are still many very attractive onshore options, like rolling your 401k into an IRA.
Is There a 401k with an Old Employer?
A 401k is a retirement account you open in the US and, as an employee, contribute to a long-term investment directly from your salary. These accounts become dormant when you leave the employer. You can choose to keep it where it is or move it to another plan. A 401k does not generally come with any investment advice or guidance beyond basic literature. Generally, it has limited investment choices unless you worked for a very good company with a great plan (e.g., a Fortune 500 company).
Some companies may encourage employees to invest in the firm’s stock which can cause wealth concentration issues. Others can be financed with a variable annuity contract which offers extra insurance on the plan assets for as much as 3% per year! When you have moved outside the US, you can roll over your 401k to an IRA.
401k Rollover Options
Rollover to an IRA
IRA rollover: You can transfer multiple 401ks to an IRA. IRAs tend to be much less expensive. IRAs also have a much wider selection of investments, such as ETFs, mutual funds, stocks & shares, and bonds. There is also a chance to hire an investment advisor to help you choose where to put your long-sought pension money, so long as the advisor is regulated in the UK and has access to a US IRA provider (not a common setup available in the UK and also few advisers have the US UK experience).
Cash-Out Your 401k
Withdrawing the money from your 401(k) plan means your cash distribution will be taxed in the USA and UK. An additional taxable charge of 10% is made if you are under 59 and a half. Check your plan’s distribution rules and taxes on distributions before you make a decision or do anything.
What should you think about when rolling over 401k to an IRA?
As a US expat living in the UK, there are several advantages to rolling over your 401k into an IRA:
- More Investment Options: More investment options are available than in a 401k.
- Tax Efficiency: Adjust withdrawals to get maximum tax savings.
- Align US investments to those in the UK: Plan your investment according to other assets you hold, including those in the UK.
- Consolidation of Accounts: Streamline your retirement planning with advice on your whole pension arrangements.
- Guard against Heavy Taxation: Save yourself the hefty tax charge that goes along with moving a 401k into a UK pension.
Traditional IRA vs Roth IRA: The Differences
It is essential to know what the Traditional vs. Roth IRA are so you can make the right decision:
Traditional IRA:
- Income Tax Deferral: pays no taxes until taking withdrawals at retirement.
- Immediate Tax Benefit: No tax when rolling over.
- Tax on Retirement: Withdrawals are treated like ordinary income in the US.
- RMDs (Required Minimum Distributions): Start at age 73.
Roth IRA:
- Immediate Tax Charge: Taxes are paid upfront during the rollover.
- Tax-Free Retirement Income: withdrawals are exempt from taxes in the UK and US as they are considered paid when the rollover occurred.
- RMD free: Offers more freedom when it comes to retirement accounts.
- Tax-Free Growth: Investments grow tax-free, meaning you won’t owe taxes on the earnings as they accrue.
How to Rollover Your 401k to an IRA
- Find Out if You Are Entitled: Make sure you have left your current employer in the US and are eligible to roll over your 401k.
- Meet with a Cross-Border Financial Planner: Know how much tax you owe both in the United States and in the UK.
- Start the Rollover: Get advice, and if satisfied, the financial adviser will open your IRA and organise the 401k move /rollover.
- Monitor Your Investments: Keep track of your IRA performance and ongoing tax obligations with your financial adviser keeping an proactive eye and update for you.