Slalomdude

Would this make sense ?
So my DB pension will put me in the higher tax bracket in the UK. Any 401k withdrawals would therefore be taxed in the UK at 40%. I am thinking of taking a very large chunk before I become a UK tax resident on April 1. I will be moving back to UK in mid January but will not qualify as a UK tax payer until the new tax year in April. The effective tax rate I would pay on the withdrawal in the US would be 20%. Doing this would same me about $80k. Only downside I can see is that I could only reinvest it in savings accounts in UK banks as I don’t believe UK investments will be available to me as a US citizen.
Would love some feedback, thanks

Pulaski

With limited investment options in the UK for US citizens, and generally lower returns on equity investments in the UK compared to the US, you are going to progressively lose that $80k tax saving by accepting lower investment returns on the money you take to the UK. ..... That said, had you considered taking the cash and investing it in the US?

On the flip side, by taking USD and remitting it to the UK now, you would lock in the relatively advantageous exchange rate for buying GBP with USD.

durham_lad

What I did was to convert a large chunk of my 401k into a Roth IRA paying US taxes on it. The Roth IRA is then tax free in both the UK and USA. Make sure the brokerage accepts overseas customers and you can easily manage it from the UK. I did the same with my wife’s 401k and my son did the same with his. We chose Vanguard to do this with since we had been customers for many years but I’m sure the other big brokerages do the same. Vanguard has our UK address and uses our UK mobile phones for verification codes etc. We also have Wise USD “bank” accounts linked to our Roth accounts so it is very easy to move the distributions to our UK bank.

We are all US/UK citizens living in the UK. We actually started the process the year I retired and converted some to a Roth every year over a 10 year period so we are now 100% Roth IRA and have just started tax free withdrawals (we’re old). Each year I would play with the tax software to determine how much tax we would be paying and the most tax we paid on a conversion was 16%. If we had not done this then the mandatory required minimum distributions at age 72 would be taxed at 40%.

Slalomdude

Unfortunately my employer does not offer Roth conversions. The best I could do was change my contributions from traditional to 401k. I did this three years ago when i decided to early retire back in the UK. This portion will obviously be tax free but it is still only a small portion of my total 401.
I am considering converting a large chunk to a Roth IRA once I stop working in January. Unfortunately it will tie it up till I am 59.5 in 4 years. ( I have a small Roth IRA I opened 10 years ago but stupidly stopped contributing to it.)

I really need to talk to a company who knows tax implications in both countries. I have accounts with HSBC in both US and UK and they offer investments so I am going to call them to see what services that can offer.

durham_lad

My employer, and my son’s also did not offer Roth conversions but the moment you leave, whether by retiring or simply quitting as my son did they cannot stop you from rolling your 401k to an IRA in another brokerage. The rolling of the IRA is a non-taxable event and should be straightforward. With my son and my wife it was done entirely online, with myself it was a bit of a pain because the rules of the 401k said it could only be distributed via a paper check sent to the address on record. I worked with Vanguard to tell me who to make the check out to ensure it went into the new IRA account I had created, then when I received the check I immediately sent it via FedEx to Vanguard.

Once the IRA is established it is then very easy to convert chunks of it to a Roth IRA within the same brokerage.

Pulaski

Without knowing the specifics about HSBC investments, I would generally avoid investments offered by retail banks as they generally have poor performance compared to funds offered even by large retail stockbrokers and firms like Fidelity and Vanguard (I am not recommending those to firms, I just mentioned them as examples).

Slalomdude

Thank you, good information .

Slalomdude

[QUOTE=durham_lad;13229293

Once the IRA is established it is then very easy to convert chunks of it to a Roth IRA within the same brokerage.[/QUOTE]

My issue is that I will leaving my employer in January and will become a UK tax resident in April. After April I will be subject to 40% tax on conversions if my taxable income exceeds £51k correct ?

durham_lad

Between January and April is plenty of time to do a rollover to a IRA and then convert the big chunk you mentioned. After that there is lots of discussion on HMRC taxable lump sums - what is periodic distributions and what is a lump sum. For example you could wait a year or two then convert another lump sum claiming that it is tax free in the UK and only taxable in the USA. I am not a tax expert so you will need to do your own research.

Slalomdude

Based on what I have read on HRMC forums , their agents are not all on the same page regarding if a lump sum payout is taxable in US and also UK. Just leaves me scratching my head!
On a side note, if I talk to say Vanguard, do they typically have tax advisors on staff or do I need to seek out one for myself.

durham_lad

Vanguard will not give any tax advice, just investment advice.

On the lump sum question I have seen the following on the HMRC site but that may still refer to a 100% payout from an IRA or 401k



https://www.gov.uk/hmrc-internal-man...relief/dt19853

countrygirl33

Hi Durham Lad,

I have moved back to UK and still have my 403b and IRA with Schwab in the US . So from what you said, I could start transferring my RMDs from USA accounts into a USA Roth which would not incur the 40% UK tax when I move the money from the USA Roth to my HSBC UK bank?

durham_lad

You will need to confirm this but I don’t believe you can do what you suggest. You can do conversions from an IRA into a Roth at any time but the purpose of RMDs is to reduce the amount in IRA accounts, paying tax on those withdrawals in the process. (Each year on your birthday the RMD percentage increases so the older you are the higher the required distribution)

You can certainly take your RMD and also do a Roth conversion, using cash from the RMD to pay the tax owed on the conversion.

https://www.apsitaxes.com/blog/does-...n-count-as-rmd

spouse of scouse

Your knowledge of this stuff is really admirable Durham Lad, as is your willingness to help others. Good on you!

countrygirl33

Thanks for your response Durham Lad. I guess I'm thinking if I did the conversions from my IRA into a USA Roth first and pay the US approx 30% tax then when I transfer the money to the UK , it would be recorded on my UK tax as Roth money and no further tax due to the UK , or am I not understanding it correctly ? It is hard trying to find a UK accountant here in North of UK that understands USA tax .