401K transfer to UK
May 30th 2018, 9:51 pm
#1
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Joined: May 2018
Posts: 3
401K transfer to UK
I’m 50, used to work for a US company in various international locations, and I have a sizeable fund accumulated in a 401K in the US. With USD-GBP exchange rates near an all time low, now would appear to be a good time to transfer the money to the UK. I’ve read various posts and articles on the subject and have deduced the following which I believe to be true. I’m really looking for simple confirmation, experience of anybody that may have gone through this process and answer to simple questions at the end
· It isn’t possible to transfer directly, and tax free from a 401K to a UK SIPP
· I can withdraw from the 401K before 59 ½ and pay 10% tax to the US
· If I transfer to the UK I will be liable for tax in the US, but if I complete a W-8BEN to confirm I am resident in the UK, I will be taxed only in the UK due to double taxation treaty.
· How is the money treated when it is sent to the UK, and how is it then taxed? Ie. Is it treated as income and then subject to income tax rates?
· If the answer is that the funds are treated as income and taxed as such, I should be able to pay into my SIPP, subject to the £40K PA limit?
· I no longer have a US bank account and am wondering what would be the best method and most cost effective to transfer to the UK?
Thanks for any help, advice or experience offered
· It isn’t possible to transfer directly, and tax free from a 401K to a UK SIPP
· I can withdraw from the 401K before 59 ½ and pay 10% tax to the US
· If I transfer to the UK I will be liable for tax in the US, but if I complete a W-8BEN to confirm I am resident in the UK, I will be taxed only in the UK due to double taxation treaty.
· How is the money treated when it is sent to the UK, and how is it then taxed? Ie. Is it treated as income and then subject to income tax rates?
· If the answer is that the funds are treated as income and taxed as such, I should be able to pay into my SIPP, subject to the £40K PA limit?
· I no longer have a US bank account and am wondering what would be the best method and most cost effective to transfer to the UK?
Thanks for any help, advice or experience offered
May 31st 2018, 12:22 am
#2
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Joined: Nov 2016
Location: Rural BC
Posts: 256
Re: 401K transfer to UK
You'll have to check the tax treaty the UK has with the US to find out what is taxed and what is not.
Jun 2nd 2018, 1:22 am
#3
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Joined: Feb 2013
Location: Chicago
Posts: 470
Re: 401K transfer to UK
Just a couple response based on what I know:
· It isn’t possible to transfer directly, and tax free from a 401K to a UK SIPP
I doubt it, as your employer which holds the 401K on your behalf is required to withhold all appropriate IRS taxes and penalties before cashing it out and making funds available to you. Talk to your employer to see if there are any exceptions.
· I can withdraw from the 401K before 59 ½ and pay 10% tax to the US
Withdraw before 59 1/2 will require payment to the IRS that year of a 10% early distribution penalty tax and income tax (federal and state) on that amount based on your tax bracket. However, if you were at least 55 when you left your employer the penalty is not incurred. Also IRS rule 72(t) allows early 401k withdrawals if done in equal periodic payments. Check the IRS rule on that.
· How is the money treated when it is sent to the UK, and how is it then taxed? Ie. Is it treated as income and then subject to income tax rates?
The former 401K funds would not be taxed again in the UK, as you already paid those taxes in the US and the tax treaty prevents double taxation.
· I no longer have a US bank account and am wondering what would be the best method and most cost effective to transfer to the UK?
I recommend OFX as the most reliable and cost effective way to transfer funds (mostly based on my personal experience and from forum members here who suggested OFX). I wonder, though, in what form are your funds in the US without a bank account. I’d think you’d need one, at least as a holding place to cash out your 401K account and subsequent bank source (for OFX, for example) to transfer those funds to the UK.
· It isn’t possible to transfer directly, and tax free from a 401K to a UK SIPP
I doubt it, as your employer which holds the 401K on your behalf is required to withhold all appropriate IRS taxes and penalties before cashing it out and making funds available to you. Talk to your employer to see if there are any exceptions.
· I can withdraw from the 401K before 59 ½ and pay 10% tax to the US
Withdraw before 59 1/2 will require payment to the IRS that year of a 10% early distribution penalty tax and income tax (federal and state) on that amount based on your tax bracket. However, if you were at least 55 when you left your employer the penalty is not incurred. Also IRS rule 72(t) allows early 401k withdrawals if done in equal periodic payments. Check the IRS rule on that.
· How is the money treated when it is sent to the UK, and how is it then taxed? Ie. Is it treated as income and then subject to income tax rates?
The former 401K funds would not be taxed again in the UK, as you already paid those taxes in the US and the tax treaty prevents double taxation.
· I no longer have a US bank account and am wondering what would be the best method and most cost effective to transfer to the UK?
I recommend OFX as the most reliable and cost effective way to transfer funds (mostly based on my personal experience and from forum members here who suggested OFX). I wonder, though, in what form are your funds in the US without a bank account. I’d think you’d need one, at least as a holding place to cash out your 401K account and subsequent bank source (for OFX, for example) to transfer those funds to the UK.
Last edited by Richard8655; Jun 2nd 2018 at 1:40 am.
Jun 2nd 2018, 1:45 am
#4
Forum Regular
Joined: Nov 2016
Location: Rural BC
Posts: 256
Re: 401K transfer to UK
Transferwise allow a person to hold thier funds in the Transferwise borderless account in whatever denomination they decide while they open a bank account in the UK.
TRansferwise is a UK company regulated by the UK based in London.
If it a very large amount I would tend to have a few forex accounts just in case one went under.
TRansferwise is a UK company regulated by the UK based in London.
If it a very large amount I would tend to have a few forex accounts just in case one went under.
Jun 2nd 2018, 1:30 pm
#5
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Joined: May 2018
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Re: 401K transfer to UK
Thanks for your replies so far
I looked IRS 72T and it looks pretty complex, and probably not going to help me that much.
I was under the impression that I could provide a W8-BEN and claim non-resident alien (NRA) status, and avoid withholding tax in the US, and pay the tax in the UK. The bottom line is that tax is due somewhere.
Ultimate aim here is to potentially make use of the very favourable USD-GBP exchange rate we currently have. As with all tax affairs, it’s actually very complex and even more so considering exchange rate fluctuations. I’ve knocked up a spreadsheet to compare several variables (attached for others to make use…hopefully no mistakes...its' excel but I had to zip it)
· Various exchange rates
· waiting until I am 59.5 years old and avoiding the 10% early withdrawal penalty
· Paying US tax vs UK tax.
· Making multiple transfers over a 3 year period to avoid 45% UK tax band. This gets very complex, and assumes you have no other income in the UK.
From what I can tell at present
· Paying flat rate 30% USD withholding appears preferable to paying UK rates, which increase to 45% on values over £150K
· If I compare my current age, at current exchange rate of 1.34, to waiting until I was 59.5 and avoiding the 10% penalty, the exchange rate would need to be at 1.49 or lower for me to benefit from the additional 10%. Historically speaking, 1.49 is still relatively low, and we could easily be back up to 1.6 – 1.8 in the next 10 years, so the 10% saving isn’t attarctive
· It makes very little difference to the above even if the 401K grows significantly.
· Making multiple transfers over three years and paying only UK tax (if possible), could significantly increase the value if paying UK taxes, or marginally increase the value compared to US tax rate of 30%, IF
1. exchange rate remained favourable, and
2. I was paying no UK income tax. If I was paying UK income tax, this would reduce the lump sum I could transfer before reaching the 45% UK tax band
· Even waiting until I am 59.5 and making multiple transfers paying UK tax at only 40% rate, means I would require the USD-GBP rate to be below 1.54 in 10 year’s time. Possible, but still quite a risk compared to where we are now.
Options as I see them
· Take the hit and pay 10% penalty and US tax now while exchange rates are favourable.
· Use W8-BEN (if that is an option) and pay UK rates, but transfer during years when my income is below UK higher rate tax brackets. Ie. Wait until retirement. That’s probably very unlikely, even if I were to wait until retirement, as I also have a UK SIPP (similar to an IRA) which would be taxable at UK rates same as income. So either way I’d be paying higher rate tax in the UK
It would be great if I were able to transfer the 401K tax free into my SIPP in the UK, which is a very similar scheme to a 401K in that it is a tax deferred scheme until you withdraw, but we know that’s not possible. However, if I transfer my 401K, pay all taxes due, then I believe I should be able to use the funds to pay into my SIPP in the UK as savings, and claim the tax back at 20% rate, subject to £40K PA SIPP funding limit. I can then withdraw 25% tax free lump sum from the SIPP at 55 years.
My head hurts thinking about this, and I can understand why people like me simply keep putting this off. I’ve been avoiding tackling this transfer for 10 years…
I looked IRS 72T and it looks pretty complex, and probably not going to help me that much.
I was under the impression that I could provide a W8-BEN and claim non-resident alien (NRA) status, and avoid withholding tax in the US, and pay the tax in the UK. The bottom line is that tax is due somewhere.
Ultimate aim here is to potentially make use of the very favourable USD-GBP exchange rate we currently have. As with all tax affairs, it’s actually very complex and even more so considering exchange rate fluctuations. I’ve knocked up a spreadsheet to compare several variables (attached for others to make use…hopefully no mistakes...its' excel but I had to zip it)
· Various exchange rates
· waiting until I am 59.5 years old and avoiding the 10% early withdrawal penalty
· Paying US tax vs UK tax.
· Making multiple transfers over a 3 year period to avoid 45% UK tax band. This gets very complex, and assumes you have no other income in the UK.
From what I can tell at present
· Paying flat rate 30% USD withholding appears preferable to paying UK rates, which increase to 45% on values over £150K
· If I compare my current age, at current exchange rate of 1.34, to waiting until I was 59.5 and avoiding the 10% penalty, the exchange rate would need to be at 1.49 or lower for me to benefit from the additional 10%. Historically speaking, 1.49 is still relatively low, and we could easily be back up to 1.6 – 1.8 in the next 10 years, so the 10% saving isn’t attarctive
· It makes very little difference to the above even if the 401K grows significantly.
· Making multiple transfers over three years and paying only UK tax (if possible), could significantly increase the value if paying UK taxes, or marginally increase the value compared to US tax rate of 30%, IF
1. exchange rate remained favourable, and
2. I was paying no UK income tax. If I was paying UK income tax, this would reduce the lump sum I could transfer before reaching the 45% UK tax band
· Even waiting until I am 59.5 and making multiple transfers paying UK tax at only 40% rate, means I would require the USD-GBP rate to be below 1.54 in 10 year’s time. Possible, but still quite a risk compared to where we are now.
Options as I see them
· Take the hit and pay 10% penalty and US tax now while exchange rates are favourable.
· Use W8-BEN (if that is an option) and pay UK rates, but transfer during years when my income is below UK higher rate tax brackets. Ie. Wait until retirement. That’s probably very unlikely, even if I were to wait until retirement, as I also have a UK SIPP (similar to an IRA) which would be taxable at UK rates same as income. So either way I’d be paying higher rate tax in the UK
It would be great if I were able to transfer the 401K tax free into my SIPP in the UK, which is a very similar scheme to a 401K in that it is a tax deferred scheme until you withdraw, but we know that’s not possible. However, if I transfer my 401K, pay all taxes due, then I believe I should be able to use the funds to pay into my SIPP in the UK as savings, and claim the tax back at 20% rate, subject to £40K PA SIPP funding limit. I can then withdraw 25% tax free lump sum from the SIPP at 55 years.
My head hurts thinking about this, and I can understand why people like me simply keep putting this off. I’ve been avoiding tackling this transfer for 10 years…
Jun 4th 2018, 5:53 pm
#6
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Joined: May 2018
Posts: 3
Re: 401K transfer to UK
One more point on this sprung to mind, which is that when I was paying into this 401K, I was domiciled in the UK, but as I was working overseas and spending long periods of time outside of the UK, I was considered non-resident for tax purposes. ie. I paid no UK tax on my earnings.
Is this taken into consideration for tax purposes by either the US or the UK, or do they tax regardless of circumstances when the money was earned?
If they tax on the 401K regardless of when the money was earned, then in reality I may have been better off not paying into the 401K. At the time it appeared attractive due to my employer contribution which if I recall correctly was about 5% of earnings, perhaps more. However if everything takes a hit of between 37 - 46% depending on where I pay tax, then perhaps I'd have been better off simply paying into an offshore fund or transferring everything back to the UK at the time.
Is this taken into consideration for tax purposes by either the US or the UK, or do they tax regardless of circumstances when the money was earned?
If they tax on the 401K regardless of when the money was earned, then in reality I may have been better off not paying into the 401K. At the time it appeared attractive due to my employer contribution which if I recall correctly was about 5% of earnings, perhaps more. However if everything takes a hit of between 37 - 46% depending on where I pay tax, then perhaps I'd have been better off simply paying into an offshore fund or transferring everything back to the UK at the time.
Jun 4th 2018, 7:13 pm
#7
Lost in BE Cyberspace
Joined: Jul 2008
Location: Portlandia Metro
Posts: 7,425
Re: 401K transfer to UK
This article may help with what questions to ask.
https://www.accountancydaily.co/pens...-hmrc-confirms
Pensions held overseas fully taxable from April 2017, HMRC confirms
https://www.accountancydaily.co/pens...-hmrc-confirms
