Helen1234

Hi guys, this is one question from my friend. I do not know whether any of you have experienced something similar before. I have one friend she worked in UK, US and HK. So, she has the pesnion from US 401K, HK MPF and UK employer pension. Now, she moves back to UK to work. She doesnt have the US citizenship.

1. Before her retirement, she doesnt take out any distribution from any of the pension. I believe there is nothing to report to US, UK or HK tax authorisity. is it correct?

2. When she starts taking out the distribution, dose she only need to report the tax to HMRC or does she rneed to report to US, UK and HK tax authority separatedly and then use the credit to report the tax in the HMRC?

Thanks,

H

EHM

Disclosure: I am not a tax expert, just someone dealing with their own US / UK tax situation. Your friend's 401k will likely be taxed at source ie any distributions will be net of an applicable rate of US federal/state income tax (I believe federal withholdings will be a flat 30% since your friend is non-resident.) Regular distributions from the 401k will be subject to UK taxes under the US-UK double taxation agreement therefore your friend would need to report to HMRC and pay the appropriate level of UK taxes, then claim credits back from the US. The US-UK rules are different if it's a lump sum distirbution vs periodic withdrawals. The US-UK double taxation agreement sets out which country has first rights to tax pensions, which then determines which country to get credits from.
Again - I am not a tax expert, strongly encourage your friend to try to find one given they are dealing with three different tax environments. Hopefully someone much more experienced than me will jump in and offer more intelligent feedback. You could also seach some of the other threads on this site for more discussion on tax treatment for 401k and other employer pensions.

durham_lad

For sure when she takes 401k distributions they will have 30% withholding by law and she will have to file a non-resident US return to reclaim some or all of it back. Lump sum distributions will only be taxed by the USA.

dunroving

UK citizen and resident here, I used to live in the States, but I'm not a PR (Green Card holder), and am classified as a Non-resident alien (NRA) for US tax purposes. I have no idea about the Hong Kong side of things, but can tell you the following:

I receive monthly payments from my US 403b (similar to 401k), and these are not taxed in the US - I declare and pay tax to HMRC. I have to complete a W-8BEN every 3 years to prevent taxes being taken out at the US side. Initially, my provider took out US Federal taxes and I claimed back, but eventually got it sorted out and now I pay no taxes to the IRS.

Depending on how long your fiend lived in the US, she may be able to claim US Social Security pension (like a "state pension".) If she has at least 10 years (40 "quarters") of contributions, she definitely qualifies. If she has fewer than 10 years SSA contributions, she may be able to use UK national insurance contributions to qualify for a US SSA pension. Lots of threads in here on the latter subject.

Helen1234

many thanks. EHM. That is helpful

1. I assume what you mean is that before taking the distribution, my friend does not need to report any thing nor pay any tax, right?

2. I do not know whether my understanding is correct. If we say US has 30% flat tax and UK has 40% tax for example and my friend can take 1000 USD per month. I beleive my friend will receive 700 USD because US will take the tax directly. Then, my friend needs to pay 400 USD to HMRC (and ask IRS to give 300 back) or actually only report 300 tax credit to the HMRC and pay extra 100 USD ?

H

Helen1234

Many thanks. That is super helpful.

1. I believe you dont report or pay any tax to any tax authority before taking the distribution, right?
2. Do you need to report the tax to IRS every year after receiving the pension or just fill in the w8en to the pension provider?
3. My friend only worked in the US for a few years, but work in the UK for longer time. I think it is quite far away from the 10 years in the US. Is it still ok to UK insurance contribution for US SSA? Can she use US's contribution for UK state pension?

H

Helen1234

Hi Durham lad

1. I believe before the distribution, you do not need to report or pay any tax to the HMRC or IRS, right?

2. Since UK tax is usually higher than US one, does my friend really need to pay both UK and US tax? I thought she can just pay the difference between UK and US tax to the HMRC, right?

H

durham_lad

Correct that there is no reporting required or taxes to HMRC before distributions.

She will normally have to pay taxes to both countries and use foreign tax credits to end up only paying the higher of the 2 amounts. Since she will be residing outside of the US then a mandatory 30% of her 401k distributions will be withheld for US taxes so she is going to have a US tax return to get all or some of those taxes refunded.

dunroving

Sorry for the non-reply. I didn't receive an alert.
1. That is correct.
2. No, I fill in a W-8BEN every three years and that's it. The only time I have had to file taxes was when TIAA mistakenly made deductions early on, and I had to claim it back from the IRS. At other times when TIAA made a mistake, they corrected it themselves after I pointed out the error (including last month, because they failed to process my W-8BEN). I *think* the times I had to file a tax return were because TIAA made the deductions close to the end of the tax year and couldn't refund the amount once a new tax year started.
3. Yes to both - BUT .. it doesn't mean she'll get a higher pension in either country. It simply allows her to achieve the minimum number of years to qualify for anything. To illustrate, imagine she would have been eligible for $6,000 per annum from US SSA if she had 10 years' contributions, but she only made 6 years' contributions. Normally, she wouldn't qualify for any US SSA in that situation. However, if she has at least 4 years' UK NICs, she can use this to achieve the minimum 10 years' contribution requirement in the US. But she would still only receive 6/10ths of $6,000, so $3,600. But at least she would get something.

EHM

Until such time as your friend is ready/able to take distributions, there is no reporting requirement to either HMRC or IRS. Before taking any distributions, your friend should investigate whether they can/should submit a W8-BEN to the provider - that should trigger the provider to apply the provisions of the UK-US tax treaty to any distributions, resulting in 0% withheld in the US (like dunroving's situation.) This wasn't on my radar because I was a green card holder, about to expatriate, and a different set of rules will apply to me...... Another option your friend might want to investigate is the pros/cons of taking a lump sum distribution from their 401k and moving 100% of the funds to the UK and whatever kind of account makes sense for them here. Per the UK-US treaty, pension lump sums are only taxed in the US, so lower rates would be applied. They should do (or have a financial adviser do) some anaysis to determine whether this would be a better long term option than taking regular distributions.

dunroving

Another option is to withdraw several smaller amounts until it's all gone - this situation doesn't count as a "lump sum" - though they would need to convince the provider of that. I tried (unsuccessfully) with TIAA but after I submitted a tax return to the IRS, the deducted amounts were refunded. After I did that, subsequent withdrawals were not taxed by TIAA, up until the point where I had withdrawn the lot. I used these sums to live on while at the same time maximising my UK pension contributions, thereby ostensibly "transferring" my US pension to my UK pension. Takes a bit of planning, but worth the OP considering. All legal and above board.

Helen1234

many thanks, Durham

1. I think you mean no report requirement for both IRS and hmrc before receiving the distribution, right?

2. If the UK tax is higher than US tax, I think there is no need for my friend to do the tax return to IRS, but use the tax credit from IRS to avoid the part of the UK tax and pay the difference, right? Just like US citizens can use their US tax return to claim the tax credit in the UK or directly use their UK tax to avoid paying US tax? I really think it doesnt make sense to pay the full UK tax again and then claim the US tax back because probably more than 70% money are used to pay tax firstly and wait for the 30% money back.

Helen1234

For 1, many thanks. So, I assume you mean no need to think about it for both IRS and HMRC before the distribution, right?

For 2, do you mean every 3 year, you submit the w-8EN to the pension provider TIAA?

For 3. this is brilliant. But you cannot claim the money from both UK and US, right? What I mean is if you claim the pension from both side, even with a portion, it will be higher?

The other thing my friend wants me to ask is that whether the provider can send the money to the UK bank account? My friend wants to close her US bank account soon since you mention that there is no need to report the tax to IRS even within the distribution. Or she needs to keep it for some other reasons?

Helen1234

that is super helpful. many thanks. I will let my friend know it.

Helen1234

Did you try it after 65 years old? I guess extra 10% tax will be on it before 65 years old. Can you do the tax return to IRS within UK bank account? I heard IRS and tax software only accepts US bank account?

H