Lump Sum 401-k withdrawal
 

I am now UK resident and considering taking my entire 401-k (about $140k) as a lump sum. It's my understanding that if I withdraw the entire amount at once it will be taxable in the US rather than the UK under the DTA, whereas if I withdraw any amount less than 100% the withdrawn amount (90% of the withdrawn amount) will be taxable by the UK and not the US. Can anyone just confirm my understanding? Also, if I do withdraw 100% as a lump sum, should I notify HMRC of the withdrawal, or should I just keep a record in case a flag is raised when I transfer the funds to my UK account? Thanks very much for any help anyone can give with this.

Re: Lump Sum 401-k withdrawal
 

Are you at least 59½ or are you withdrawing it prematurely?

Re: Lump Sum 401-k withdrawal
 

No, I'm 64. I have a couple of good reasons to consider taking the lump sum, but I haven't decided yet.

Re: Lump Sum 401-k withdrawal
 

I believe the assumption is correct that lump sums from an IRA or 401k are only taxable in the US. I had a dual qualified tax accountant do my US and UK taxes this year for 2016/17 and for the lump sum conversion from my IRA it was taxed only by the US, but the amount was stated in the notes on my UK return, and that it was not taxable by HMRC due to the DTA.

Re: Lump Sum 401-k withdrawal
 

Thanks, that's reassuring. The tax on a larger lump sum 401k withdrawal will be high in any event but the US tax would be considerably lower, and can be mitigated somewhat by a decent exchange rate at the time of transfer. My biggest concern has been that HMRC would challenge this after the fact, given the larger amount, but the DTA seems quite clear that it is US taxable only. I appreciate your help.

Re: Lump Sum 401-k withdrawal
 

You are very welcome.

Good luck.

Re: Lump Sum 401-k withdrawal
 

Someone correct me if I am wrong, but didn't the rules change in the UK beginning this year (the 2017-2018 tax year)?

As I recall, the 10% break (90% taxable) was removed, and so was the UK tax break on lump sum withdrawals.

Re: Lump Sum 401-k withdrawal
 

I had also heard that about foreign pensions losing their 10% tax free component starting this current tax year.

https://www.gov.uk/government/public...al-information

Not clear to me if they still plan on taxing lump sums by changing the US/UK DTA (making foreign pensions 100% taxable is outside of any DTA)

https://www.gov.uk/hmrc-internal-man...nual/ptm114000

Re: Lump Sum 401-k withdrawal
 

Thanks for this, I wasn't aware that we are losing the 90% rule. That's significant for me since all of my pensions are US pensions. As you say that's not part of the DTA, but the rule that lump sum pension withdrawals are taxed by the originating country is part of the DTA. I'm trying to decipher the new wording regarding lump sum withdrawals and whether that effects pensions accumulated before 2017, I guess I'll hold off on doing anything until I'm very sure that I won't have a problem.

Actually this raises another question, whether US Social Security pensions are taxed at 90%/now 100%, or whether they are taxed at the same level that they would be taxed in the US. This is a different topic, and may be discussed in another thread, I'll look around.

Re: Lump Sum 401-k withdrawal
 

As far as I know, SS pensions are now 100% taxable. What would have been taxed in the US is not applicable, as the Treaty is specific that US SS is taxable only in the UK, so rules here apply.

I have assumed that lump sums from foreign pensions are now fully taxable in the UK. I took a lump sum from a small US pot before the end of the 2016/2017 tax year, as it was clear that the US would tax but the UK would not. Didn't want to risk the 20% UK hit. For the rest, I will take distributions as required by US rules on the IRAs, but no more lump sums. Would love to be able to take one more lump sum, and if I was absolutely sure that only the the US would have taxing rights, I would do it. The pot isn't large and the US tax would be (relatively) small.

Re: Lump Sum 401-k withdrawal
 

I will be very surprised if SS pensions are not taxed in the UK the same as the UK OAP, ie 100% of it will be taxed.

Re: Lump Sum 401-k withdrawal
 

Apologies in advance if this is a silly question. I have spent the afternoon reading the DTA (got something more exciting planned for the evening!!) In article 17 bullet 2 it says “...a lump-sum payment derived from a pension scheme...”. Does lump-sum mean the whole amount in the 401K or IRA? E.G. If I were to take $100,000 from an IRA and still have money remaining in the IRA would the $100,000 be considered a lump sum?

Re: Lump Sum 401-k withdrawal
 

The lump sum does not have to be the whole amount, which is why vadio and myself have been making lump sum withdrawals. The question that vadio has raised is whether this will be allowed going forward. The links and quotes I posted above are from the uk.gov site and confirm that the 90% of foreign pension rule has changed but I don’t see any change yet to the DTA.

I may be wrong but would like to see evidence that this lump sum rule has changed with respect to the US/UK DTA.

Re: Lump Sum 401-k withdrawal
 

Thank you durham_lad

Re: Lump Sum 401-k withdrawal
 

I asked HMRC a similar question last year (specifically for the case of no distribution in the previous or following tax years). HMRC's reply was:

"A partial distribution is not considered to be a lump sum payment it would be treated as a pension payment for UK tax purposes. As such any partial distributions need to be reported on your Self Assessment Tax return for the relevant year as per Paragraph 1, Article 17 of the UK/US Double Taxation Convention."

Re: Lump Sum 401-k withdrawal
 

This page was updated 25th May 2017 and looks to me like distributions from an IRA to a UK resident are taxable in the UK if they are taxable in the US, so that Roth IRA distributions are tax free in both countries but regular IRAs are taxable in the UK and one would use FTCs to claim against the US tax paid on the distributions.

The lump sum is taxable only in the US for a UK resident but it does not clarify if the lump sum has to be the entire amount of the IRA.

I really don’t know the definitive answer as it seems open to interpretation on lump sum taxation or what constitutes a lump sum payment.


https://www.gov.uk/hmrc-internal-man...elief/dt19876a

Re: Lump Sum 401-k withdrawal
 

The “lump sum” payment I made last year went directly from my IRA retirement account to my Roth retirement account so is this a different treatment than for a normal IRA distribution?

In the years leading up to us moving back to the UK I have been converting sums from my IRA to my Roth IRA ensuring that I only pay US taxes on the conversions. I was hoping to continue doing so while in the UK as I still have another 2 or 3 years of conversions planned.

Re: Lump Sum 401-k withdrawal
 

As I understand it, as far as the IRS is concerned, a lump sum is a withdrawal of the entire amount, and the language in the DTA closed what the IRS considered a loophole in prior treaties.

Whether the UK taxes it or not doesn't mean diddly to the IRS. You can claim a credit for tax paid here, but that's it. Further, the IRS doesn't give a monkey's how the UK defines a 'lump sum'.

My 2 withdrawals were made prior to the changes (part of Osborne's last budget as I remember). In each case, I reported to the IRS, but our taxable income was so low that no tax was due. What I am now trying to figure out is whether I can do some partial large withdrawals that somehow meet the UK definition of a lump sum, and pay no tax here. Unless something changes, DH and I could still be just under the taxable income threshold in the US as well, so I/we would be golden. Just haven't researched sufficiently or done the math at this point. NOTE: - will be grateful for any pointers/suggestions etc.

Re: Lump Sum 401-k withdrawal
 

Correct.

There is no definition of what a "lump sum" means in the US/UK tax treaty, either US definition, UK definition (more later), or something different. Also, the treaty must be read with the understanding that the 'saving clause' covers part of Article 17, so the part not covered by the savings clause must be read in isolation.

Correct.

Generally, in the UK, the tax free portion of any pension 'lump sum' is 25% of the total amount, not 100%. To alter slightly your above: "Further, HMRC doesn't give a monkey's how the US defines a 'lump sum'."

https://www.gov.uk/tax-on-pension

UK residence, US residence, UK only citizen, US only citizen, and US/UK dual citizen can all have varying effects where cross boarder taxation of pensions are concerned.

Re: Lump Sum 401-k withdrawal
 

Totally agree with all of the above. I've read somewhere that the UK only allows the 25% lump sum to be withdrawn every other year. I am considering taking a 25% 'lump' in tax year 2018/19 from one smallish pot as we would just scrape under the US taxable income threshold after exemptions etc. Oh wait - silly me - the Senate passed a bill under dark of night earlier this week that may change all that.....we middle folk may no longer get any exemptions, deductions, whatever.....

Re: Lump Sum 401-k withdrawal
 

Does that mean if you have an IRA of $100k you could take a lump sum of $25k leaving $75k then in 2 years take a lump sum of $18,750 both sums tax free in the UK?

If so then I can simply do this for me and my wife so every year one of us will be converting 25% of our IRAs to our Roth. I can live with that.

Re: Lump Sum 401-k withdrawal
 

That's what I am not sure about - whether a one-off, or a series of 'lump sums'. Would love to get someone to point me in the right direction on that.

Re: Lump Sum 401-k withdrawal
 

I'll start with my standard disclaimer: I know nothing about how US pensions of any type work.

(my understanding) Funds in an IRA have been placed there with no tax paid at that point. When the IRA is ultimately distributed as a normal monthly pension, tax is paid on the distribution(s) (or a lump sum).

(my understanding) When an IRA is "transitioned" into a ROTH, the deferred tax is paid on the separate, limited amount transitioned, resulting in the ROTH distributions being tax free. Amounts transitioned to a ROTH are limited yearly by IRS rules.

My question: is this IRA to Roth "transition" viewed as a separate taxable event by the IRS, or is the deferred tax paid seen by the IRS as a necessary part of the "transition", but not a stand alone taxable event? Is it part and parcel of the same pension rights, but transitioned to a new "place"; or is it a close out of one 'amount' of pension and the purchase of an equal amount in an all new pension?

If it is part of the transition, and not a separate event, does HMRC view this as a tax free transition in the US, and therefore a tax free event for HMRC purposes (a tax free distribution, which according to the treaty would be tax free in the UK to the amount that is tax free in the US)?

(IMHO) In a different scenario, if a partial lump sum is taken from the US IRA and placed into the taxpayers bank account which is not part of any pension scheme, tax will be due and none is tax free in the US (even if it ultimately goes into a new, separate pension fund). HMRC would see this as a taxable event in the US, and also a taxable event for the UK resident. The taxpayer would then take a stance that in the UK 25% of that amount [lump sum?] is tax free (which is in keeping with HMRC rules for partial UK lump sums).

(IMHO) Lump sums in the UK are not solely a 100% distribution of the pension. There can be partial lump sums, and 25% of each partial lump sum is tax free. It is not a case of taking 25% tax free on 100% of the entire pot on the first withdrawal, and then taking 25% tax free on 100% of the entire remaining funds on the second withdrawal, and on and on.

(IMHO) Generally, if the UK has imposed tax on the US taxable (event) pension distribution, the taxpayer will pay tax to HMRC first, and then claim FTCs for the UK tax on a US return (including 1040NR) via Form 1116, under the 'resourced by treaty' basket. An 8833 may also be filed.

In the past, there have been discussions both here and the other place regards grey areas/black holes in both IRS rules and the Treaty. Vadio may remember discussions on the inclusion of the UK State Pension for a UK resident on a US tax return. The spirit of the treaty can be interpreted one way, but the literal text of the treaty says the opposite. It's down to the individuals interpretation, and I've yet to hear of any problems for a taxpayer no matter which of the two ways they interpreted it.

Since lump sum is not defined in the treaty, it is a matter of interpretation. Doesn't matter if you're the IRS, a professional, or an individual (although the IRS interpretation, if there is one, usually wins).

Again, only my amateur opinion.

Re: Lump Sum 401-k withdrawal
 

The one thing of which I am certain, is that a plain old withdrawal of any amount from a traditional IRA or SEP-IRA is a taxable event in the US. By that I mean it's not transitioned or moved from one tax-deferred vehicle to another, but just goes into a checking or other account like income from any other source. So, no matter what, I report on my 1040. No way around it.

I know RMDs are income as far as the UK and the US are concerned. So, in another year, when I have to take them, I will report on both returns, resource using the applicable IRS form(s), and take a credit for UK tax paid.

The lump sum withdrawals I took were 100% of puny pots which were earning no interest. Again, reported on the 1040 and noted on the SA as an (assumed) non-taxable lump sum withdrawal. Didn't resource as no tax credits were generated, and the puny amounts didn't attract tax in the US given the other income reported on our joint return.

I am pretty sure I can take 25% of the slightly larger SEP-IRA next year, report on the 1040 and the SA, but attract no UK tax. After that? Still a lot of time to figure it out, or just make a decision and live with the consequences, whatever they may be. :fingerscrossed:

Sometimes DH moans that we would be better off if we didn't have any money to worry about. We don't have a lot, but we have what we have, and I would prefer to keep as large a share as possible. ;)

Re: Lump Sum 401-k withdrawal
 

I agree. Under UK PCLS flexibility rules, if this is a defined contribution pension and this is the first/initial draw down, 25% of the pension pot may be taken, on its own, as the 25% tax free segment of the pension for UK reporting, with all future draw downs being fully taxable (no part of a future draw down is tax free).

https://www.fidelity.co.uk/static/pd...om-pension.pdf
Page 3 of 6

https://www.pensionsadvisoryservice....-cash-lump-sum

Re: Lump Sum 401-k withdrawal
 

I suppose with a smallish pot like the one Vadio mentioned half of it could be rolled tax free into another IRA at a different brokerage then each pot could be withdrawn completely as lump sums tax free in the UK.

Until recently we had our IRAs and 401ks spread over 4 different brokerages and did tax free rollovers, IRA to IRA in 2 instances and 401k to IRA on the other 2 occasions.

Re: Lump Sum 401-k withdrawal
 

I am a Brit who will be taking my USC wife back to the UK next year. My research into the 401k issues led me to IRS form W-8BEN. (I am new here so can't yet post a link to it)

If my understanding is correct (usual disclaimer - I am not an expert) this means when resident in the UK a NON-USC can withdraw from the 401k without the IRS withholding 30%.

If you are a USC this does not apply. If you are still resident in the USA this does not apply.

Re: Lump Sum 401-k withdrawal
 

That's what can be expected from filing a W8-BEN, but sadly, some are finding it difficult. It all depends on who is issuing the pension. Some will send the amount to the UK without a US withholding, others insist on the withholding. Check with the issuer, but if they say they will not be withholding 30%, be sure to obtain that stance in writing.

All USCs, no matter where they live in the universe, are deemed to be resident in the US for tax purposes as long as they remain USCs. NON-USCs will be considered resident in the US if they file a MFJ return with a US Person. But non-US Persons, filing MFS with a USC spouse who files MFS, are not considered resident for tax purposes.

You don't say how long you've been in the US, and under what conditions, but be sure you check out of the US tax system properly!