US 401K Withdrawals and Tax Treatment
Withdrawals from 401(k)s or |IRAS are taxed the same way for residents and non-residents. The US-UK tax treaty is designed to prevent you from being taxed twice on your pension income. You claim Foreign Tax Credits with the tax authority to prevent being taxed twice.
US tax rates on USA pensions
Federal income tax rates will remain the same in the 2024 and 2025 tax years at 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the income limits for tax brackets and filing statuses receive minor changes each year in accordance with inflation rates. The United States operates with seven federal income tax brackets which have rates ranging from 10% up to 37%. People earning enough to place in the 37% tax bracket face a top marginal rate of 37% but not all their taxable income will be taxed at this rate. Your top marginal tax rate reaches 37%.
2025 Federal Tax Brackets
| Rate | Single | Married, Filing Jointly | Married, Filing Separately | Head of Household |
|---|---|---|---|---|
| 10% | $0 – $11,925 | $0 – $23,850 | $0 – $11,925 | $0 – $17,000 |
| 12% | $11,925 – $48,475 | $23,850 – $96,950 | $11,925 – $48,475 | $17,000 – $64,850 |
| 22% | $48,475 – $103,350 | $96,950 – $206,700 | $48,475 – $103,350 | $64,850 – $103,350 |
| 24% | $103,350 – $197,300 | $206,700 – $394,600 | $103,350 – $197,300 | $103,350 – $197,300 |
| 32% | $197,300 – $250,525 | $394,600 – $501,050 | $197,300 – $250,525 | $197,300 – $250,500 |
| 35% | $250,525 – $626,350 | $501,050 – $751,600 | $250,525 – $375,800 | $250,500 – $626,350 |
| 37% | $626,350+ | $751,600+ | $375,800+ | $626,350+ |
UK tax rates on USA pensions
The United Kingdom maintains its progressive taxation approach for pension income during the 2025/26 tax year. Your pension income undergoes taxation through multiple bands instead of a uniform rate so that while the maximum rate hits 45%, only the portion exceeding the highest limit is taxed at that rate. The tiered tax system enables the majority of pensioners to pay less than the highest marginal tax rate.
HMRC projections indicate that taxpayers will continue to enjoy about £12,570 of their income without incurring tax obligations. Income above this allowance is taxed at increasing rates: The basic rate of 20% applies to income between £12,571 and £50,270 while the higher rate of 40% applies to earnings between £50,271 and £125,140 with any income exceeding £125,140 taxed at an additional rate of 45%. Scotland has additional bands and different rates.
| Band | Tax Rate | Income Range (Approx.) |
|---|---|---|
| Personal Allowance | 0% | £0 – £12,570 |
| Basic Rate | 20% | £12,571 – £50,270 |
| Higher Rate | 40% | £50,271 – £125,140 |
| Additional Rate | 45% | £125,141 and above |
Below is a summary table of the Scottish income tax bands for the 2025/26 tax year, based on current HMRC guidance and projections:
| Band | Tax Rate | Income Range (Approx.) |
|---|---|---|
| Personal Allowance | 0% | £0 – £12,570 |
| Starter Rate | 19% | £12,571 – £14,732 |
| Basic Rate | 20% | £14,733 – £25,688 |
| Intermediate Rate | 21% | £25,689 – £43,662 |
| Higher Rate | 42% | £43,663 – £125,140 |
| Additional Rate | 47% | £125,141 and above |
USA pension withdrawals and distribution planning are an area of complication that needs some planning. The rules are complex and reading the treaties doesn’t highlight the realities.
Lawrie Chandler, Financial and Wealth Expert for Americans in the UK
Free IFA Appointment for US Person
A Financial Investment Advisor for US Citizens in the UK
No periodic withdrawals or complications for regular distribution from 401k
Some 401k schemes have rules that create complications for members when they want to access their retirement savings:
- Some custodians impose a fee for processing the distribution. Real-world data shows that if the distribution request is submitted online, the fee might be as low as $25. However, if you prefer to complete the request using paper forms, the fee could be closer to $100. These fees are an additional cost to consider on top of any tax liabilities, and they can affect your overall net proceeds.
- 401(k) retirement plans may prohibit routine periodic withdrawals thus retirees usually end up taking lump sum distributions. If systematic withdrawal setup is not possible users will encounter both increased tax obligations and admin each time they want a payment. People who rely on consistent income streams will find this arrangement especially difficult. Financial experts frequently suggest moving parts of your 401(k) funds to an IRA because the IRA allows more withdrawal options and potentially reduces distribution fee effects.
401k and IRA Retirement withdrawal strategies
A well-defined and planned in advance IRA or 401(k) withdrawal plan maintains your income stability across your retirement years.
The first step to a successful withdrawal strategy is knowing the rules, since you can usually start penalty-free IRA + 401(k) withdrawals at age 59½. Making early withdrawals from your 401(k) leads to a 10% penalty, while you must withdraw funds once you reach RMD age (73 currently, but increasing to 75 by 2033), regardless of whether you require the income. Understanding these rules enables you to prevent unnecessary penalties while organizing your withdrawals to optimize your retirement income.
Multiple strategies exist to help you plan your 401(k) withdrawals. The 4% rule allows retirees to withdraw 4% of their savings during the first year of retirement followed by inflation-adjusted withdrawals each subsequent year. With $1 million saved for retirement, you’d start by taking out $40,000 in your initial year and then increase this amount by 2% each following year. This straightforward approach yields steady income yet fails to consider market volatility and rising interest rates which might result in early exhaustion of savings during economic downturns.
You can use fixed-dollar withdrawals that withdraw the same amount each year or fixed-percentage withdrawals that remove a constant percentage of your portfolio annually. Fixed-dollar withdrawals provide easily predictable income that helps streamline budget planning but struggle to match the rising costs brought by inflation through time. Fixed-percentage withdrawals respond to your portfolio value which can protect your principal during positive investment periods yet result in fluctuating annual income.
Systematic withdrawal plans enable investors to generate income without touching their principal because they only allow the withdrawal of investment earnings like dividends and interest. This strategy protects your savings from being exhausted too fast yet results in income fluctuations that depend on market conditions. The “buckets” strategy for retirement savings divides funds across three distinct categories: cash for immediate expenses along with fixed income assets for stability and equities which drive growth. This investment approach provides immediate access to funds alongside potential future growth but demands ongoing management and periodic portfolio adjustments.
Withdrawal strategies have distinct pros and cons, making the best option dependent on your financial condition, risk preferences, and long-term objectives. Tax considerations are essential because traditional 401(k) withdrawals face ordinary income taxation, while Roth 401(k) distributions typically remain tax-free. Professionals can guide you toward the most tax-efficient withdrawal strategy that fits your specific situation.
Our 401(k) Withdrawal Strategy Calculator visualizes and compares various strategies. You can enter your portfolio value and test different withdrawal percentages and strategies to evaluate your potential income flow over time. Access the calculator on this page by clicking here.
The proper withdrawal strategy will significantly influence your retirement financial security, so investigate your options and get professional advice if required.
Scenario calculator for accessing US Pensions distributions
This tool is designed to illustrate tax implications of different strategies for accessing your investment portfolio, which is valued in US dollars. It uses live exchange rates to convert your portfolio value into British pounds. The calculator computes tax liabilities under both the US progressive tax system and the UK tax system (for England, 2024/25). It covers various options, including a regular lump sum withdrawal, regular annual withdrawals, a Roth IRA conversion (where tax is paid upfront and future withdrawals are tax free), and a 401k rollover to Roth IRA spread over up to three tax years. Additionally, the calculator shows the immediate out-of-pocket cash cost—the sum of the US withholding tax and the UK tax payable (with UK tax converted to USD)—expressed as an absolute amount and as a percentage of your portfolio value. Note that while an IRS refund may eventually be received (currently taking about a year to be paid), the cash outlay occurs immediately at the time of distribution.
US vs UK Tax Calculator
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Get advice on what’s best in your situation on 401k / IRA distribution
Your 401(k) or IRA distribution methods should be customised based on your specific financial status along with your tax categorization and future objectives. You should consult with a reliable financial advisor or tax professional who can provide customised guidance through the intricate decisions of retirement savings management. A professional advisor can help you choose between lump sum payments, regular withdrawals, or rollover strategies to maximise your income stream while reducing tax liability and matching your retirement objectives. This is optimal planning for someone in the 50s but also applies when RMDs are near of generally planning for retirement. The sooner the better is our advice as there are more options for you to consider. Book a session or get in touch.