401k cashing out problems
May 29th 2017, 1:37 pm
#1
Just Joined
Thread Starter
Joined: May 2017
Posts: 11
401k cashing out problems
Hi,
I have a US 401k that I need to start cashing out. I've found that you can't take out partial withdrawals. And, since I'm a UK citizen and not a US citizen (but have US SSN), I can't open an IRA to do a roll over On the distribution form there is an option for an annuity - don't know if this even a possibility.
I completed the W 8BEN form, but now think I'll get hammered with UK tax if I have to cash out the whole 401k.
Does anyone know of any other solution - a long shot at this stage!
thank Rob
I have a US 401k that I need to start cashing out. I've found that you can't take out partial withdrawals. And, since I'm a UK citizen and not a US citizen (but have US SSN), I can't open an IRA to do a roll over On the distribution form there is an option for an annuity - don't know if this even a possibility.
I completed the W 8BEN form, but now think I'll get hammered with UK tax if I have to cash out the whole 401k.
Does anyone know of any other solution - a long shot at this stage!
thank Rob
May 30th 2017, 2:39 am
#2
BE Enthusiast
Joined: Oct 2006
Posts: 603
Re: 401k cashing out problems
Please don't take this as gospel because I'm only just trying to figure out things like 401k myself but from what I've understood I think you only owe tax on a 401k withdrawal to the US since that is the country where you earned the money and where you deferred paying tax on it at the time.
May 31st 2017, 12:31 pm
#3
BE Forum Addict
Joined: Aug 2013
Location: Eee Bah Gum
Posts: 4,128
Re: 401k cashing out problems
Please don't take this as gospel because I'm only just trying to figure out things like 401k myself but from what I've understood I think you only owe tax on a 401k withdrawal to the US since that is the country where you earned the money and where you deferred paying tax on it at the time.
Not sure about lump sums though, hopefully someone will come along with much more knowledge but a lump sum may only be taxable in the US.
The annuity option may be worth exploring if a big tax hit on withdrawing the whole sum is on cards.
May 31st 2017, 1:01 pm
#4
BE Enthusiast
Joined: Oct 2006
Posts: 603
Re: 401k cashing out problems
Unfortunately I think 401ks are treated like IRAs and withdrawals are taxed, as are other US pensions.
Not sure about lump sums though, hopefully someone will come along with much more knowledge but a lump sum may only be taxable in the US.
The annuity option may be worth exploring if a big tax hit on withdrawing the whole sum is on cards.
Not sure about lump sums though, hopefully someone will come along with much more knowledge but a lump sum may only be taxable in the US.
The annuity option may be worth exploring if a big tax hit on withdrawing the whole sum is on cards.
(In addition there are various rules and penalties that relate to personal circumstances, individual plan, the 401k owner's age, whether they are retired etc.)
The tax is due to the USA whether the owner of the 401k is a US citizen or not and whether they are living in the US at the time or not.
I think the concern/question of the OP was whether they would have to pay tax to the UK on their 401k withdrawal "but now think I'll get hammered with UK tax if I have to cash out the whole 401k" and from what I understand the answer to that is no. They do have to pay the tax due on it to the USA (since that is where it was earned and where tax payment was deferred) but they do not pay tax on it to the UK.
May 31st 2017, 1:08 pm
#5
Just Joined
Thread Starter
Joined: May 2017
Posts: 11
Re: 401k cashing out problems
I don't think I can make partial withdrawals though. If I could I'd be quite happy, but when I asked, computer said NO!
May 31st 2017, 7:00 pm
#6
BE Forum Addict
Joined: Aug 2013
Location: Eee Bah Gum
Posts: 4,128
Re: 401k cashing out problems
If you do take it all as a lump sum I think it will only be taxable in the US. That might still be a big tax hit. I would call the provider and ask about Annuity options, then run the numbers and do your own calculations.
Jun 21st 2017, 10:52 pm
#7
BE Enthusiast
Joined: Feb 2013
Location: Chicago
Posts: 470
Re: 401k cashing out problems
An option is simply keep the 401k account or roll over to IRA until you need the money, and allow it to grow (assuming funds are in investment vehicles). The US has a pretty good long term stock market outlook.
Last edited by Richard8655; Jun 22nd 2017 at 12:31 am.
Jun 22nd 2017, 3:18 am
#8
BE Forum Addict
Joined: Aug 2004
Posts: 4,754
Re: 401k cashing out problems
Generally 401k withdrawals are taxed by the IRS as income. However, this is a situation where the treaty can be used to modify the IRS code for a UK resident and non US citizen. If the OP takes out the 401k in a single payment, ie a lump sum, then it will only be taxable in the US...no UK tax at all. If the OP takes the money out in a series of payments then it is only taxable in the UK, although the US pension administrator will probably withhold 30% tax which will have to be claimed back on a 1040NR. This often happened even if a W-8BEN has been filed. If the OP converts the 401k to an annuity the there will probably be no withholding and again tax will only be due in the UK.
It is very difficult to open an IRA account without a US residential address. You might want to talk to the UK branch of Charles Schwab if you want to open an IRA and see if they can help.
It is very difficult to open an IRA account without a US residential address. You might want to talk to the UK branch of Charles Schwab if you want to open an IRA and see if they can help.
Jun 22nd 2017, 3:23 am
#9
BE Forum Addict
Joined: Aug 2004
Posts: 4,754
Re: 401k cashing out problems
Yes money withdrawn from a 401k is taxable in the USA. There is no difference whether it is a lump sum withdrawal or multiple smaller withdrawals made over several years beyond the fact that the rate of taxation is dependent on which tax bracket the amount withdrawn (combined with other annual income) puts you in that year. A large withdrawal might shift someone into a higher tax rate then their regular annual income alone puts them in. For that reason, depending on personal financial situation, it can be better to make smaller withdrawals over several years.
(In addition there are various rules and penalties that relate to personal circumstances, individual plan, the 401k owner's age, whether they are retired etc.)
The tax is due to the USA whether the owner of the 401k is a US citizen or not and whether they are living in the US at the time or not.
I think the concern/question of the OP was whether they would have to pay tax to the UK on their 401k withdrawal "but now think I'll get hammered with UK tax if I have to cash out the whole 401k" and from what I understand the answer to that is no. They do have to pay the tax due on it to the USA (since that is where it was earned and where tax payment was deferred) but they do not pay tax on it to the UK.
(In addition there are various rules and penalties that relate to personal circumstances, individual plan, the 401k owner's age, whether they are retired etc.)
The tax is due to the USA whether the owner of the 401k is a US citizen or not and whether they are living in the US at the time or not.
I think the concern/question of the OP was whether they would have to pay tax to the UK on their 401k withdrawal "but now think I'll get hammered with UK tax if I have to cash out the whole 401k" and from what I understand the answer to that is no. They do have to pay the tax due on it to the USA (since that is where it was earned and where tax payment was deferred) but they do not pay tax on it to the UK.
Jun 23rd 2017, 8:33 pm
#10
Forum Regular
Joined: May 2017
Posts: 41
Re: 401k cashing out problems
You might also check the withdrawal options for your 401K plan, they may be similar to the Federal Thrift Savings Plan, where a Full Withdrawal can be taken as:
(a) a single lump sum.
(b) an annuity.
(c) a series of monthly withdrawals.
Option (a) and you get dinged for tax on the full amount, as discussed above.
Option (b) and you get a laughably low effective interest rate, at the mo - under 2% and definitely lower than inflation.
Option (c) is best, as you can set the amount of monthly withdrawals to amortize over your lifetime, the unwithdrawn balance stays vested and accumulating according to your investment mix, you can change the monthly withdrawal amount once a year, to account for inflation, you can keep the withdrawal until 70 1/2, when Required Minimum Distributions kick in.
(a) a single lump sum.
(b) an annuity.
(c) a series of monthly withdrawals.
Option (a) and you get dinged for tax on the full amount, as discussed above.
Option (b) and you get a laughably low effective interest rate, at the mo - under 2% and definitely lower than inflation.
Option (c) is best, as you can set the amount of monthly withdrawals to amortize over your lifetime, the unwithdrawn balance stays vested and accumulating according to your investment mix, you can change the monthly withdrawal amount once a year, to account for inflation, you can keep the withdrawal until 70 1/2, when Required Minimum Distributions kick in.
Jun 29th 2017, 1:48 pm
#11
Just Joined
Thread Starter
Joined: May 2017
Posts: 11
Re: 401k cashing out problems
Been talking to Schwab. The annuity is not an option. I can not make partial withdrawals - you can only take out the whole sum. I can not open an IRA since I don;t have a US address. I have filed a 8 WBEN document, which means I don't pay US tax on the distribution.
So anyone living/working in the US with a 401k, and thinking of returning to the UK should open an IRA before they leave. That was my mistake.
So anyone living/working in the US with a 401k, and thinking of returning to the UK should open an IRA before they leave. That was my mistake.
Jun 29th 2017, 3:28 pm
#12
BE Forum Addict
Joined: Aug 2013
Location: Eee Bah Gum
Posts: 4,128
Re: 401k cashing out problems
Been talking to Schwab. The annuity is not an option. I can not make partial withdrawals - you can only take out the whole sum. I can not open an IRA since I don;t have a US address. I have filed a 8 WBEN document, which means I don't pay US tax on the distribution.
So anyone living/working in the US with a 401k, and thinking of returning to the UK should open an IRA before they leave. That was my mistake.
So anyone living/working in the US with a 401k, and thinking of returning to the UK should open an IRA before they leave. That was my mistake.
Jun 29th 2017, 4:44 pm
#13
Lost in BE Cyberspace
Joined: Jul 2008
Location: Portlandia Metro
Posts: 7,425
Re: 401k cashing out problems
Maybe someone could create a "leaving the US" wiki
Jul 2nd 2017, 2:10 pm
#14
BE Enthusiast
Joined: Oct 2006
Posts: 603
Re: 401k cashing out problems
I haven't read it yet but I presume from your post that what it says is that a UK citizen would pay the tax owed on a 401k withdrawal to the UK not the USA - even though it was in the US that the tax was deferred.
However, a dual US/UK citizen would pay the taxes due on it to the US.
I got that there isn't double taxation on it but thought that it would get paid to the US as that was where it was deferred.
Is that right?
I'm dual UK/US so was advised that we'd pay to the US not the UK.
However, a dual US/UK citizen would pay the taxes due on it to the US.
I got that there isn't double taxation on it but thought that it would get paid to the US as that was where it was deferred.
Is that right?
I'm dual UK/US so was advised that we'd pay to the US not the UK.
Jul 2nd 2017, 3:13 pm
#15
BE Forum Addict
Joined: Aug 2013
Location: Eee Bah Gum
Posts: 4,128
Re: 401k cashing out problems
I haven't read it yet but I presume from your post that what it says is that a UK citizen would pay the tax owed on a 401k withdrawal to the UK not the USA - even though it was in the US that the tax was deferred.
However, a dual US/UK citizen would pay the taxes due on it to the US.
I got that there isn't double taxation on it but thought that it would get paid to the US as that was where it was deferred.
Is that right?
I'm dual UK/US so was advised that we'd pay to the US not the UK.
However, a dual US/UK citizen would pay the taxes due on it to the US.
I got that there isn't double taxation on it but thought that it would get paid to the US as that was where it was deferred.
Is that right?
I'm dual UK/US so was advised that we'd pay to the US not the UK.
https://www.treasury.gov/resource-ce...ts/teus-uk.pdf
This article deals with the taxation of private (i.e., non-government service) pensions and annuities, social security benefits, alimony and child support payments.
Paragraph 1 provides as a general rule, in subparagraph (a), that the State of residence of the beneficial owner has the exclusive right to tax pensions and other similar remuneration. For this purpose, a payment is treated as a pension or other similar remuneration if it is a payment under a pension scheme, as defined in sub-paragraph (o) of paragraph 1 of Article 3 (General
Definitions). While the term "pension" generally would include both periodic and lump-sum payments, paragraph 2 of the Article provides specific rules to deal with lump-sum payments, so they are not subject to the general rule of paragraph 1.
However, the State of residence, under subparagraph (b), must exempt from tax any amount of such pensions or other similar remuneration that would be exempt from tax in the State in which the pension scheme is established if the recipient were a resident of that State.
Thus, for example, a distribution from a U.S. "Roth IRA" to a U.K. resident would be exempt from tax in the United Kingdom to the same extent the distribution would be exempt from tax in the United States if it were distributed to a U.S. resident. The same is true with respect to distributions from a traditional IRA to the extent that the distribution represents a return of nondeductible contributions. Similarly, if the distribution were not subject to tax when it was “rolled over” into another U.S. IRA (but not, for example, to a U.K. pension scheme), then the distribution would be exempt from tax in the United Kingdom.
Paragraph 1 provides as a general rule, in subparagraph (a), that the State of residence of the beneficial owner has the exclusive right to tax pensions and other similar remuneration. For this purpose, a payment is treated as a pension or other similar remuneration if it is a payment under a pension scheme, as defined in sub-paragraph (o) of paragraph 1 of Article 3 (General
Definitions). While the term "pension" generally would include both periodic and lump-sum payments, paragraph 2 of the Article provides specific rules to deal with lump-sum payments, so they are not subject to the general rule of paragraph 1.
However, the State of residence, under subparagraph (b), must exempt from tax any amount of such pensions or other similar remuneration that would be exempt from tax in the State in which the pension scheme is established if the recipient were a resident of that State.
Thus, for example, a distribution from a U.S. "Roth IRA" to a U.K. resident would be exempt from tax in the United Kingdom to the same extent the distribution would be exempt from tax in the United States if it were distributed to a U.S. resident. The same is true with respect to distributions from a traditional IRA to the extent that the distribution represents a return of nondeductible contributions. Similarly, if the distribution were not subject to tax when it was “rolled over” into another U.S. IRA (but not, for example, to a U.K. pension scheme), then the distribution would be exempt from tax in the United Kingdom.
