US Pension (401k) when living in the UK

Understanding 401(k) Plans: Key Insights for US and UK Expats

A 401(k) is America’s most commonly used defined contribution retirement plan. A defined contribution plan allows employees to save for their retirement through tax-deferred contributions. That means that an employee can transfer a fixed portion of their salary (before taxes) into the 401(k) plan while the employer is also contributing, so it’s usually a win-win situation. The real key to this type of retirement plan lies in its flexibility and in the control it provides to individual employees, who can make personal decisions to suit their retirement goals.

What Defines a 401(k) as a Defined Contribution Plan?

In a defined contribution, like the 401(k), workers contribute to a retirement account, often supported with additional contributions from the employer. Payments to retirees under a defined contribution plan are not guaranteed: Your eventual benefit is contingent on investment performance, with accumulation of the plan based on contributions, investment product selected, and market conditions. So ensuring you are invested in the right areas that link to your financial situation and circumstances are critical as they influence the pot you have for retirement.

401(k) vs. UK Defined Contribution Plans

In the UK, we have the equivalent of the defined contribution plan, where employees and employers put money into a retirement fund. There are some nuances in the US and the UK. In the US, 401(k) plans are the mainstay of employer-sponsored retirement savings, enabling employees to choose from an extensive menu of investments. In the UK, while defined contribution plans such as SIPPs (Self-Invested Personal Pensions) and QROPS (Qualifying Recognised Overseas Pension Schemes) also offer flexibility in terms of generating robust returns and a huge choice of investment vehicles, similar to IRAs in the US.

US Pensions Contribution Limits and Flexibility

Workers can put a maximum amount into their 401(k) plans, plus a catch-up style contribution that older people can make. There is also an additional employer contribution, which can help increase the total amount of money that can go into one’s plan . 401(k) plans become the most critical retirement savings accounts from a dollar standpoint.

Category	2024	2023	2022	2021	2020
DB 415(b)(1)(A)	275000	265000	245000	230000	230000
DC 415(c)(1)(A)	69000	66000	61000	58000	57000
Maximum Deferral 401(k) & 402(g)(1)	23000	22500	20500	19500	19500
Over 50 Catch-up Contribution	7500	7500	6500	6500	6500
403(b)	23000	22500	20500	19500	19500
SIMPLE	16000	15500	14000	13500	13500
SIMPLE Over 50 Catch-up Contribution	3500	3500	3000	3000	3000
457 1(B)	23000	22500	20500	19500	19500
Highly Compensated Definition Limits Under IRC 414(q)	155000	150000	135000	130000	130000
Annual Comp Limit 401(a)(17), 404(l), 408(k)(3)(C)	N/A	N/A	N/A	N/A	N/A
Taxable Wage Base	345000	330000	305000	290000	285000
Excess Distribution Threshold 401(a)(17)	168600	160200	147000	142800	137700
Excess Distribution Threshold 401(a)(17), 404(l), 408(k)(3)(C)	N/A	N/A	N/A	N/A	N/A

UK Pensions Contribution Limits and Flexibility

By contrast, the table for the UK pension contribution limits is below. It includes details such as the annual allowance, lifetime allowance, personal contribution limit, tapered annual allowance, and the Money Purchase Annual Allowance (MPAA).

Category	2024	2023	2022	2021	2020
Annual Allowance	£60,000	£40,000	£40,000	£40,000	£40,000
Lifetime Allowance	N/A	N/A	£1,073,100	£1,073,100	£1,073,100
Personal Contribution Limit	100% of earnings	100% of earnings	100% of earnings	100% of earnings	100% of earnings
Tapered Annual Allowance	£10,000 – £60,000	£4,000 – £40,000	£4,000 – £40,000	£4,000-£40,000	£4,000 – £40,000
Money Purchase Annual Allowance (MPAA)	£10,000	4,000	£4,000	£4,000	£4,000

Rollover Options: Flexibility and Considerations

When changing jobs or leaving employment, 401(k) holders can roll over their funds into an IRA (Individual Retirement Account) or another 401(k) plan, continuing their tax-deferred growth and, in many cases, also broadening their investment options. British expats returning to the UK have some unique challenges. Rules prohibit a direct transfer of their 401(k) funds into a UK pension scheme. Nevertheless, it is still possible for them to manage their funds effectively, using a combination of IRAs and SIPPs, in ways that maximise tax benefits and broaden investment opportunities.

Managing 401(k) Plans as a British Expat

A British citizen working in the US and funding a 401(k) might incur some costs, time and onerous tax considerations when deciding what to do with her retirement money upon a return to the UK. Various questions to consider include:

• Rollover rights: Before moving back to the UK, expats can roll over their 401(k) into an IRA to take advantage of the tax-deferred status (and avoid penalties that would be incurred with an early withdrawal) and get more flexibility to take out money in the event of an emergency medical issue, for college tuition, or to purchase your first home.

• Cashing Out: If you receive a distribution before you are 59½ years old, you’ll be hit hard with a 10 per cent penalty, plus income tax on every penny you get your hands on. If possible, another option is to wait to remove money from the pot until after you’ve moved overseas and are no longer earning US income.

• Get professional help: thanks to the complicated interactions of the US and UK tax regimes, maximising the usage of your retirement funds while minimising tax payments requires expert advice. Consulting a financial broker with experience in cross-border taxation can help.

International Considerations: Moving Your 401(k) Abroad

You cannot transfers a US pension to another jurisdiction. Current law precludes direct IRS-approved transfers of 401(k) plans to foreign pension plans because foreign pension arrangements do not satisfy the US Internal Revenue Code qualification requirements for tax-qualified retirement plans. A 401(k) cannot be rolled or transferred into any type of non-US plan, including UK pensions, Australian superannuation or Canadian RRSPs.

One possibility is to roll your 401(k) into a US-based IRA (Individual Retirement Account). IRAs have more flexibility and wider investment choices. Once rolled over to an IRA, the money is yours – you can manage it or take withdrawals according to the rules of the country in which you now live. If you withdraw funds from the IRA, you can transfer them to an account abroad, but you’ll still have to pay tax on them under US rules and, in many cases, under local rules too.

U.S. Taxes: Money withdrawn from the 401(k) is taxable in the U.S. and will incur an extra 10 per cent penalty if you take it out early (before age 59½). Foreign Taxes: the amount distributed overseas may be subject to taxation in the receiving country, a U.S. tax treaty with the country of residence may prevent double taxation.

Cross-border pension advice is complex and burdensome with tax. If you want to transfer your pension to another country or request withdrawal for your U.S. pension, you may need to consult with a financial planner or tax professional who is familiar with international and U.S. tax laws to formulate a strategy to minimise your tax burden or to make your financial goal achievable.

What to do with your 401k after leaving the USA?

An expat with pension assets in the US and UK needs a suitable adviser who is qualified in both the UK and the US. Distributions from a 401(k) plan can’t be rolled over into a UK pension. Getting an adviser to help with US and UK pensions is possible. Some overseas groups do it from offices abroad and use local financial licenses from parent companies. Ideally you want to optimise the retirement savings with an adviser that is resident in the UK or US. With pensions in multiple jurisdictions try to balance financial decisions with support from an adviser. Once again, consulting a financial adviser well-versed in the intricacies of each pension scheme to develop a plan tailored to your needs is encouraged.

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