US Pension Assets advised by UK Financial Adviser

Pensions built up over a working life could mean there are UK and US pots to consider. If living in the UK with US pensions, then complexities make getting advice a normal course of action, but it’s not something that all advisers have knowledge of or can advise.

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 near impossible, 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.

I’ve moved from the USA permanently. What to do with my 401k?

Nearly always, we recommend just leaving it there until retirement age, rolling it up tax-free.

Can a non-US citizen inherit a 401K?

Yes, a non-U.S. citizen can inherit a 401(k), but they must meet tax requirements. A non-U.S. citizen inheriting a 401(k) must obtain a U.S. Individual Taxpayer Identification Number (ITIN) using Form W-7 to meet IRS tax reporting requirements. There may be complications as a Non-resident Alien, or NRA, as some product providers do not allow people living outside America to have a 401k with them.

What is the UK equivalent of a 401K?

In simple terms, in the UK, the workplace pension or personal pension is the equivalent of a 401k.

Is a Traditional IRA or ROTH IRA taxable in the UK?

Benefits paid from a Roth Individual Retirement Account to a UK resident are not taxable in the United States or in the United Kingdom. Traditional IRAs are treated differently: Withdrawals pay income tax, and any interest earned inside the IRA is taxable in the UK under foreign interest. The gross interest would be declared in the self-assessment tax return using the supplementary page SA106.

Can I transfer my 401K to my UK pension?

You cannot transfer a 401k outside the USA as the IRS does not recognise other overseas pension schemes. You will need to leave your scheme in the USA but can have someone advise it. Edale supports consolidations and rollovers to advise US-based pensions from its UK offices.

What happens if I withdraw my 401(k) early while living in the UK?

You can take out 401(k) funds up to the age of 59.5, but the IRS has an early withdrawal penalty of 10%, on top of regular income tax, when you make the distribution. Non US residents are usually charged a 30% withholding tax. A cash lump sum distribution from a US 401(k) is not taxed by HMRC (if reported correctly) if you live in the UK, but it could be income under UK law if you make a partial distribution.

How do pension distributions affect my UK and US tax brackets?

Distributions from either a US 401(k) or a UK pension are taxable income and can increase your overall taxable income, which could push you into a higher tax band:

In the US:

  • Withdrawals from your 401(k) are added to your taxable income and taxed at the marginal federal rate.
  • Also, State taxes may apply depending on where you live in the US.

In the UK:

  • Partial distribution from a US 401(k) or UK pension are treated as income, and subject to UK income taxation.
  • If you are liable for tax in both countries, foreign tax credits will often help reduce the amount due.

You can stay in lower tax brackets in both countries if you plan ahead with the timing of withdrawals and distribution amounts. Financial advice for US UK citizens can help.

I worked and left the USA can I get my 401k early?

Yes, after leaving the US you can take your 401(k) money earlier but there are significant consequences (typically we advise to leave them invested until retirement):

  • US Tax Implications: 10% IRS penalty for early withdrawals (before 59.5) unless you have certain exemptions like financial hardship or medical costs. The IRS taxes the distribution as ordinary income.
  • UK Tax Implications: If you are a UK resident and the lump sum distribution isn’t usually taxed by HMRC, but partial distributions might be. Usually, you will get a foreign tax credit for the US taxes you paid.
  • Practical Considerations: Some 401(k) plans may ask you to withdraw it to another eligible account (i.e., an IRA). Talk with a financial planner and/or a tax professional who has experience of early US pension withdrawals.

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-free withdrawal from US 401k in UK

Dual US and UK taxpayers can use the US-UK double taxation treaty to prevent double taxation and tax-free access to 401k. Internet threads can cause confusion so use a professional for clarity of your circumstances.

To save on US/UK taxes, the order of pension distributions can be advised. Consult an advisor to find out what counts as a lump sum. A guide table below is shown.

Plan locationWhat is received?UK Tax (HMRC)US Tax (IRS)
USLump sumNoneTaxed
USPartial distribution(s)Taxed as residentTaxed but claim foreign tax credit
UK25% lump sumNoneNone
UKPartial dsitributionTaxed as residentTaxed but claim foreign tax credit
US and UK Tax treatment of 401k withdrawals/ distributions

Do I owe taxes in the UK tax if I receive a lump sum payment from my US 401(k)?

If you cash out your 401(k) in the US you will not be taxed in the UK, if done in reporting correctly. The cash lump sum is going to be subject to US tax from the IRS. That you’ll report in your US tax returns or face non-resident withholding tax at 30%.

When taking a partial distribution from a US 401(k) do I pay tax on the part I take in the UK?

Partial payments from a US plan are subject to UK tax as you are a UK citizen. And they are also taxed by the IRS but you may qualify for a foreign tax credit so that you don’t pay twice.

Is there US tax payable on the 25% lump sum of a UK pension?

If reported correctly, the 25% lump sum from a UK pension is not subject to tax by HMRC (UK) or IRS (US). You won’t pay any US or UK tax on that 25% if you are reporting correctly in the USA.

How much money am I charged to withdraw from a UK pension in case I’m a US citizen?

HMRC taxes partial distributions from a UK pension as resident income and the IRS taxes that distribution in the US but allows you to claim a foreign tax credit. This avoids double taxation.

5. Should I use foreign tax credits on pension distributions to limit US and UK taxes?

Yes. You will be taxed twice. Use foreign tax credits to not be double-taxed. Whether you are withdrawing lump sums or part of your distributions from a US or UK plan, check with a professional as they need to be reported correctly.

Can I avoid all taxes when withdrawing from my US 401(k) if I live abroad?

Not entirely. A lump sum paid through a US plan isn’t subject to UK tax, but the IRS does tax it. You will have double taxation and reporting for partial distributions, but foreign tax credits reduce double taxation. The UK 25% tax-free cash lump sum can be tax-free in the USA if reported correctly.

Why is the 25% UK pension lump sum tax-free in the UK and the US?

The first 25% of a pension lump sum is exempt from tax in the UK. The IRS accepts this treatment in general, so no US tax is applied to that amount. Thus, it is tax-exempt in both countries as long as it is reporting correctly to the IRS.

How is “taxed as resident” different from “taxed but claim foreign tax credit”?

“Taxed as resident” is where the local tax department (HMRC in the UK) considers your withdrawal to be regular income in the local tax system. Taxed but claim foreign tax credit” – the IRS might tax the same distribution in the US, but you can deduct foreign tax credits from what you’ve already paid in the UK and save yourself some money on taxes.

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 an 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.

Our expat work means for US / UK residents we are frequently a recommended IFA for US citizens in the UK

Lawrie Chandler, Financial and Wealth Expert for Americans in the UK
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