The UK resident’s guide to moving a 401(k)

You’ve worked in the USA and saved into an employer’s 401(k). You’ve moved abroad and are now back living in the UK. Now in the UK, you’ve a question: what do I do about my old 401(k)? Expats face distinct challenges when considering 401(k) rollovers. 

If you’ve been rifling through your paperwork and asking that very question, fear not. In this article, we’re going to explain everything you need to know. 401(k)s and why you should consider moving yours.

What is a 401(k)?

It’s a retirement savings vehicle offered by your employer in the US. It allows workers to save and invest pre-tax dollars before they are taxed. Some employers also match employee contributions, topping up the account. When you leave a job, the account is more or less left to stagnate.

You could leave it there, but there are several very good reasons for cleaning house and moving a 401(k):

• Better consolidation: It’s likely that you’ve worked for more than one employer. It’s a pain, but keeping a whole range of old $401(k)$s from different times and places can quickly become a headache. Combining your retirement savings makes your portfolio more manageable.
• Optimised Tax Position: rollover strategies can optimise tax efficiency across both U.S. and UK tax regimes, potentially reducing your overall tax burden. Edale are experts at tax efficient access to US pensions.
• More investment opportunities: Employer-sponsored retirement accounts have a limited range of investments. Moving to an IRA gives you access to a veritable cornucopia of investment funds and opportunities.
• Cheaper fees: Some old $401(k)$s have high administration fees, which nibble away at your investment returns. Consolidating them into a low-cost IRA can be a much more attractive option.
• UK resident services: You are, after all, no longer a US resident. Working with a former employer’s plan administrator can be a challenge. A US firm with experience of dealing with expats will be able to give you much smoother service.
• Clean break: rollovers eliminate ties to former employers, providing greater control over your retirement assets while living abroad.

Key jargon you should know when moving a 401(k)

The financial services sector can be impenetrable in terms of its jargon. The key thing you need to know about moving a 401(k) is a relatively simple term: “rollover.”

A rollover is the act of moving your retirement savings from one “qualified account” into another – in this case from your old 401(k) into an IRA (Individual Retirement Arrangement). The key point is that a rollover is not a taxable event, providing it is done correctly. The funds keep their tax-advantaged status. In order to rollover, you will most likely be moving the funds into an IRA. This is a retirement account that you open and administer yourself, separate to any employer-sponsored schemes.

There are two main types:

• Traditional IRA: You fund this account with pre-tax money. The savings grow tax-deferred and you pay income tax when you take money out during retirement. This is where a pre-tax 401(k) will typically end up.
• Roth IRA: You fund a Roth with post-tax money, but your investments grow tax-free. You also make tax-free qualified withdrawals in retirement. It’s possible to move a pre-tax 401(k) into a Roth IRA (technically called a “Roth conversion”) but you’d pay income tax on the amount converted.

It’s important to know the difference between a Direct Rollover and an Indirect Rollover.

• Direct Rollover: In this case, the money is transferred directly from your old 401(k) plan administrator to your new IRA provider. You never touch the money yourself. This is the easiest and most straightforward method.
• Indirect Rollover: The administrator from your old 401(k) will send you a cheque. You then have 60 days to deposit the cheque into your new retirement account. This is considered riskier. The old provider is legally required to withhold 20% for tax. If you fail to deposit the full amount (you will have to cover the 20% shortfall from your own pocket) within 60 days, the whole amount may be treated as a taxable distribution and subject to penalties.

Your options for moving a 401(k)

So, you’ve decided to stop procrastinating and take control of your old 401(k). Now what? In short, you have four main options.

• Leave It: The easiest option, of course, is to do nothing. However, as noted above, you will be stuck with the plan’s investment options and fees. It can also be challenging to manage your 401(k) from abroad.
• Roll it into a New Employer’s 401(k): If you find a new job in the US that offers a 401(k), you can potentially roll your old plan into that one. However, this is not a practical solution for most people living and working in the UK.
• Roll it Over into an IRA: This is generally the most popular and flexible option for expats. You open a US-based IRA and instruct your old 401(k) plan administrator to transfer the funds to it. This will give you more control, better investment options and ease of management.
• Cash it Out: Do not do this! It is generally considered a last resort and you should avoid it if possible. Cashing out a 401(k) forces the full balance to be treated as ordinary income and taxed at your income tax rate. If you are under the age of 59.5, you will also be subject to a 10% early withdrawal penalty by the IRS. This can be a significant blow to your retirement savings.

Moving a 401(k) while living in the UK

Moving a 401(k) when you live in the UK? This is the question that many US expats ask. It’s crucial to understand that the pension systems in the US and UK are not directly compatible. You generally cannot roll a 401(k) into a UK pension scheme like a SIPP (Self-Invested Personal Pension). The IRS will treat this as an equivalent of cashing out, subjecting you to a potentially large tax bill and penalties.

The best and most common course of action for a UK resident, then, is to arrange for a direct rollover of the funds from the 401(k) into a US-based Traditional IRA. The main obstacle you may hit, though, is finding a US brokerage firm that will allow you to open an IRA as a non-resident. Some are understandably reluctant to do so, as it involves navigating a regulatory minefield. However, plenty of large, international firms are set up to service accounts for US citizens working overseas. It’s just a matter of doing your research and finding the right one.

On the tax side, the US and UK have a tax treaty which will help. Growth within a US-based IRA account will remain tax-deferred for both the US and UK. The tax treaty also ensures you are not double-taxed on the same money when you take distributions in retirement. However, tax law in both countries is complicated and subject to change, so it’s strongly advised to work with a tax advisor who specialises in US-UK issues.

Step-by-step instructions on moving a 401(k) to an IRA

A simplified list of the process.

1. Pick an IRA provider: Do your research. Find US brokerage firms that will allow you to open an IRA as an expat living in the UK. Compare their fees, investment options and customer service.
2. Open a new IRA: Fill out the application paperwork and open a Traditional IRA with your chosen provider. This is usually done online.
3. Contact your old 401(k) provider: You should have their contact details on an old account statement somewhere. Get in touch and tell them you want to begin the process of rolling the funds over to an IRA.
4. Fill out the Rollover paperwork: They should provide you with a distribution request form. On that form, make sure to unambiguously select the “Direct Rollover” option. You will need to give the account number and name of your new IRA provider.
5. Wait for the transfer: Your old plan administrator will either transfer the funds to your new IRA provider electronically, or will send a cheque directly to them. This can take a few weeks.
6. Invest your funds: The final step is to log in to your new IRA and invest your money. The funds are unlikely to be in any investment vehicles just yet, instead sitting in a cash or money market settlement fund. Now is the time to take control of your money and direct it into investments that will suit your retirement plans.

Don’t leave a 401(k) behind. Arranging for a rollover is a simple and effective way to take control of your financial future.

By moving your old 401(k) to an IRA, you can ensure that your money continues to work hard for you, no matter where in the world you call home.

Financial advisors with cross-border expertise play a crucial role for expats navigating 401(k) rollovers. A qualified advisor will understand both U.S. retirement account rules and UK tax implications, helping create an integrated strategy that optimizes benefits under the US-UK tax treaty. Advisors can identify the most advantageous rollover options based on your specific situation, whether that means an IRA, Roth conversion, or maintaining the 401(k).