Many people hold US retirement account’s from past employment in the US or through inheritance
Hundreds of thousands of people, including many in the UK, have US retirement assets, perhaps due to prior employment with a US employer or inherited accounts. Navigating these vexing planning issues often requires thoughtful planning both in the US and in the UK.
Do you own US Retirement Accounts like a 401(k) and IRA? Unsure what to do with them?
We get a significant number of people who are non-US citizens or non-US residents with a 401(k) or IRA, whether from their time working for a US-based employer or perhaps from an inheritance from a family member or relative living in America. What should you do with those funds when considering both the US and UK tax regimes?
Worked in the USA? You’ll have a Retirement Account like a 401k or IRA
As the world becomes more interconnected, more people find themselves contributing to pension assets in one country while living in another. For people who worked in the US and have since moved to the UK, it can be intimidating to try to manage these financial assets or you cannot get anyone to speak to you as a non-resident. Managing these retirement accounts raises challenges as people inside the US regard you as offshore. If you have worked in the USA, you may not be aware that you have a workplace pension. We can assist in tracking and taking control of your USA pension.
Can you have a 401K in the UK?
There is a UK equivalent. In UK terms, the equivalent of a 401k is the UK workplace pension or the SIPP (self-invested personal pension).
Can I keep my 401K in the US if I move abroad?
Moving permanently abroad: In general, a 401(k) or IRA can be maintained and controlled from any country in the world. But it could be more restrictive or costly depending on the account type, destination and local retirement account regulations.
Can I move my 401K offshore?
This is possible, but the taxation and options for where to move to are complex. It is wise to consider an RIA or just leave it where it is. Where the distribution is neither a lump sum nor regular payments, professional advice would always be needed.
What happens to 401K if I leave the USA?
A non-resident with a 401(k) cannot repatriate the account. Options are transferring it to an IRA or leaving the funds where they are until 59½, when he is permitted to take penalty-free withdrawals that will be taxed.
How is a US 401K taxed in the UK?
If you do opt to take the lump sum distribution, Article 17 of the UK/US Double Taxation Agreement will exempt most lump sum distributions from UK tax (but not from US tax). If you choose to take distributions through regular payments, they are taxable as pension income in the UK. These taxable payments are also excluded from US tax under Article 17 of the DTA, which makes managing your tax a bit simpler.
Tax Implications for UK Residents with US Retirement Accounts
If you live in the UK, you will get double taxed on distributions from your US account. The US will assert taxation rights, and the UK will assert taxation rights as well. If you don’t understand the timing and coordination of these systems, you can find a big chunk of funds taken in taxes. Knowledge of the UK/US Double Taxation Agreement (DTA) really becomes important.
US Pension Lump Sum Distributions: US and UK Taxation
If you elect to receive a lump sum distribution from your US retirement plan, Article 17 of the UK/US Double Taxation Agreement exempts most lump sum distributions from UK tax (but not from US tax).
US Pension Lump Sum Distributions: US and UK Taxation
If you opt to take distributions in the form of regular payments, these are subject to UK tax as pension income. On the bright side, regular payments are exempt from US tax under Article 17 of the DTA, making it easier to manage your tax liability.
What About Irregular or Partial Retirement Distributions from a US Pension when I live in the UK?
Matters get more complicated where the distribution is neither a lump sum nor regular payments. professional advice would always be needed here.
Rolling Over to a Roth IRA: A Smart Alternative
One option to mitigate tax liabilities is to roll your US retirement funds into a Roth IRA. A Roth IRA allows your investments to grow tax-free, and subsequent withdrawals are also exempt from UK tax. While this transaction is similar to taking a lump sum distribution, the key advantage is that you maintain tax-free growth.
Inherited IRAs: Unique Rules Apply
An inherited IRA (that’s not a Roth IRA) follows specific distribution rules. These differ depending on the relationship between the beneficiary and the original account holder.
Challenge with advice on US retirement account when no longer living in the USA
One of the main challenges is that these accounts are governed by US tax law and regulations, which is different from those in the UK. Another challenge is that US financial institutions are difficult to access from abroad, and often do not like to deal with non-residents because of administration rules. Edale, based in the UK, can help with financial advice on US pensions through an American adviser network. This is the same UK person who advises on UK assets covering those in the USA. Pensions in two different geographies but one point of advice from someone that knows your case.
Benefits of financial advice for your US pensions
A financial adviser can help workers with a history in multiple countries to manage their international pension assets. This is particularly important for those moving from the US to the UK or vice versa, as a financial adviser with experience in both US and UK financial regulations is invaluable. Financial advice that considers the complexities of the US-UK double taxation agreement, as well as ensures that the client meets all legal requirements, and provides professional advice on how to get the best out of their investments. Furthermore, if it is determined that the best option is to convert a 401k to a IRA for personal control, a financial adviser would be able to assist. The financial adviser is able to provide professional guidance on how to withdraw money in the most tax-efficient manner, legal access dates to retirement funds. Our advice is provided within the context of an agreed comprehensive financial plan that incorporates the long-term financial goals of you and your family, but adapts to encompass different circumstances that may occur during your life and career.
For those previously working in the USA, the real challenge is the responsibility of managing a 401k or IRA from overseas or having an adviser that covers the multiple jurisdictions and countries you may work or move. It can be done; it just takes working with a knowledgeable partner and confidence in a professional adviser. While an adviser may not be for all, they can often be valuable to talk to to ensure you are fully informed, so contact one and speak to see if they can hep you. The best way to prepare for your life in retire is to speak to someone about those faraway US pensions.