hatstand2011

(I know there are quite a few threads on this but I am struggling to figure this out still)

Background: UK citizen/taxpayer, 46 years old

I was living and working in the States about 10 years ago but am now living in the UK on a permanent basis.

I have a 401k in the States that is worth about $175k and have just been leaving it invested and grow in value.

As I understand it, I can start making withdrawals (without penalty but subject to US federal income tax) when I am 59 1/2.

I have some people talking about transferring to a Roth and then being able to take the whole lot tax free later on when they reach retirement age, but this seems to only be an option to do whilst still living in the USA?

My question is, is there anything I should be doing now? Or should I leave it in the 401k and wait until I am 59 1/2?

Many thanks

durham_lad

If you don’t already have an IRA to do a Roth conversion into then I doubt you will be able to open one now. I started doing annual IRA to Roth conversions 6 years before moving back and then completed the Roth conversions with lump sum conversions every other year, taxed only in the USA. I am a dual US/UK citizen so don’t know what you will be able to do as a UK citizen.

Are you able to manage your 401k remotely? When you are ready to begin withdrawals will your 401k provider be able to pay into a UK bank account, or are you keeping a US bank account to receive payments?

hatstand2011

Thanks - as you say, I suspect I am stuck with the 401k. Not a big deal but was interested to see if I had an alternatives.

I'm able to manage it all through Charles Schwab online, just have it all in a cheap (0.02% p.a.) S&P500 index fund, the registered address I have with them is a UK address and it doesn't seem to have caused any issues at all.

I was thinking of setting up a USD account with Barclays when I am close to retirement age to receive the funds. I will check with Schwab closer to the time if this is OK but that's still quite a bit away.

durham_lad

I think you are in good shape and your plan for a USD account is a good one. I would ask Schwab if a Roth IRA is a possibility. Depending on your tax bracket when you have retired a Roth may not be a big deal, just look ahead and estimate your income once OAP, SS and RMDs from the 401k add to any other income you have because the HMRC tax rate jumps from 20% to 40% the moment you cross £50,270. If that is likely to be an issue then you can start drawing down the 401k once you can access it penalty free.

https://www.gov.uk/income-tax-rates

kateg60

Did you do this because you worked out your all retirement income would put you in a higher tax bracket in the UK? Did you consult with a tax advisor initially to plan your retirement strategy. I am struggling to plan out numbers and cost/benefit as I am not retired or drawing any pensions for a 3 more years, but when they all kick in in 10 years I may be at a higher tax bracket depending on exchange rates and current laws. I'm not sure whether to convert to Roth so withdrawals from TIAA 403b will be tax free or just pay tax as I likely won't withdraw 50k pounds annually, but also don't want pay tax on withdrawals in US and income in the UK.

Pulaski

Well these days you aren't compelled to turn all your retirement savings into income streams as soon as you retire, you you have the option to hold some accounts (except to the extent that you may at some point have "required minimum distributions") until you need them in future or to leave to your heirs. Given the current inflationary outlook, it may prove to be rather useful to have an untapped retirement account to start drawing ten years after you retire, when inflation may have pushed up your personal allowance the tax bands.

durham_lad

I didn’t consult with a tax advisor but have been using tax and retirement planning tools 25 years before we actually retired. (Sad git that I am).

Once we had retired, our tax bracket and taxes immediately dropped dramatically. We were still living in the USA at this point and could estimate what taxes we would be paying year by year, and how that would increase a lot once we both started drawing SS and OAP. Plus we had quite large tax deferred 401k/IRA accounts and the IRS has clearly defined tables showing what mandatory percentage you had to withdraw each year once you are age 72. (That percentage increases every year). I would use my copy of Turbotax to calculate how much to convert into a Roth while keeping the effective tax rate low. Once we knew we were moving to England I could see that by the time the mandatory withdrawals started they would be taxed at 40% so by doing Roth conversions ahead of time was going to be a good tax strategy.

Everyone’s situation is different of course.

kateg60

Right, so a quick check of numbers means by the time RMD kicks in I will be way over lower tax bracket and just about there with all pensions, ouch. Guess I will be making some changes in the next few years. Can't do it this year as I sold my house and have massive capital gains.

I have the Roth already at least; I think you mentioned you are able to do a Roth conversion post-retirement while in the UK?? Thanks for your help.

durham_lad

Yes, I continued to do lump sum Roth conversions while in the UK. One last thing, you will get an option to withhold taxes on the conversion. I prefer to not withhold and pay the extra tax from savings. This effectively adds more to the retirement account.

Expatrian

FWIW, it’s possible to make penalty-free 401k withdrawals at 55. Search “401k Rule of 55” - there are some limitations.

durham_lad

Good point. It is also known as Rule 72t distributions and also applies to IRAs

https://www.investopedia.com/terms/r/rule72t.asp

kateg60

Did anyone have their mutual fund account closed because the bank/provider does not serve expats. Even if I can keep my account as an expat, my understanding is I may have to move money from mutual funds to ETF's; is this accurate?

durham_lad

You need to check with your brokerage about their policies regarding overseas customers. We have had more than one member report that their 401k provider announced that they needed to move their funds, and if they didn’t already have a US brokerage already open that they could roll their 401k into that would mean receiving the funds as a check or cash transfer including all the taxes that would entail.

If you have mutual funds inside a retirement account like a 401k or IRA then no problems at all. If you have mutual funds in taxable accounts then HMRC will treat all dividends and capital gain distributions as regular income so you lose those much lower tax advantages. If it is a fund such as an ETF that “reports into” HMRC then stock fund dividends and capital gains get the much lower tax rates of those funds.

https://www.gov.uk/government/public...eporting-funds

minhan

Hi,

I would like to know whether you're able to convert your IRA to Roth? We already moved back to UK and debating whether to pay the penalty & taxes to cash out the lum sump. I read another post that i won't pay UK tax if I take a lum sump (just US tax). Plan to split the $ to ISA and withdraw tax free later. We still have 9 more years to reach no-penalty option.

I'm glad to find someone in similar situation as us.

Please share.

durham_lad

If you convert the whole IRA as a lump sum you will only pay US taxes plus the exchange rates are very much in your favor so almost certainly worth doing now even though there is a 10% penalty for early withdrawal. Since you plan on moving it to the UK immediately there is no advantage to converting it to a Roth first, just cash it out.

Note that if you are a US citizen you should avoid a Stocks and Shares ISA.