georgiagal

What happens when we leave the US to our much invested 401K & SS that we'll never benefit from? Anyone had any experience with this?

fatbrit

How long have you been with the company?

georgiagal

5 years in US, 18 including UK.

Giantaxe

Well, the 401(K) is your money so you will always benefit from it. Not sure about SS; I think you have to have "x" qualifying quarters to get benefits. Perhaps the US/UK SS reciprocal agreement helps here if you don't otherwise qualify for benefits?

Bob

I think you need 10 qualifying...

fatbrit

For the 401k, if you actually hit the 5 year mark, you are vested with any company contributions.

Options:
1/ Leave it in the company scheme (IIRC they have to offer this for employees >5 years). Disadvantage is little control and still under US taxation.

2/ Roll it over into a traditional IRA. Have no idea what the tax consequences of this would be if you were no longer resident, either here or wherever you take residence. Ordinarily, the money can be taken out and is ordinarily taxable from age 59.5+. For this route, I'd roll it into an IRA balanced mutual fund account with low operating costs and just leave it to grow. Be careful the money basically has to route as a trustee to trustee xfer. Here you have control but are still under US taxation.

3/ Pull it out now. There's a whopping great tax penalty for doing this.

No idea whether there are any schemes set up to xfer without tax penalties, but knowing the US this seems unlikely as it would require knowledge there was a world outside America.

On the social security front your contributions were for nothing unless you are going to somewhere there is an agreement. There's certainly one between the US and UK but it is rather limited in scope.

Giantaxe

I think that's up to the employer. My current job vests the employer contribution after 1 year, and any employer contributions subsequent to that anniversary vest immediately.

fatbrit

All companies are different but they must take it to 100% within 5 years of employment to meet the rules. Seem to remember the only corporation I worked for was something like 1 yr - 0%, 2 yrs - 25%, 3 yrs - 50%, 4 yrs - 75%, 5 yrs - 100% for the 401k. They also had a cash fund which ran along the lines of: 0-5 yrs - 0%, 5 yrs+ - 100%.

Arizona Wurzel

Hi Georgiagal, To claim SS you have to have 40 quarters paid in at least (10 Years)If you retire at 62 years Uncle Sam will take 20%.Cannot help you on the UK bit.The 401K can be rolled over to whatever plan you more or less want.I rolled mine over to bonds with Wells Fargo.Not sure but i think you have to have 6 years vested in the 401K and if you withdraw before 59.5 years old you will be penalised at least 20% or more!!! as this money was placed into your 401K before taxes were taken out of your pay.Good luck.

fatbrit

P.S. On looking it up, there are actually two minimum vesting schedules for 401(k) plans: “five-year cliff” vesting or “seven-year graded”.

See: http://www.irs.gov/retirement/sponso...144502,00.html

BigDavyG

Indeed - many 401k's are vested immediately - it is the pension that they put the hold on.

fatbrit

Further thought: dunno whether it would be worth transferring it into an IRA for a year, then taking it out with the tax hit. Thought here is that you will not have so much US income and might get the hit in a lower tax bracket-- but I have no idea how they tax non-resident, non citizens. Just a thought, anyway. You need an experienced accountant on this one if the sums are significant. Dunno how your next country of residence would view such a "windfall" either.

Giantaxe

Not sure I understand the logic of this. Wouldn't the same apply if the money was left to grow tax free and then withdrawn at age 59 1/2 and beyond? So why give the US government money now rather than down the road?

fatbrit

Depends on whether...

they (or possibly their kids) are planning on living in the US ever again.

the US taxation for withdrawing it now, in a year or so's time or at pension time either as a lump sum or piecemeal.

the taxation in wherever they have residence for withdrawing it now, in a year or so's time or at pension time either as a lump sum or piecemeal.

their need for short term capital.

their current tax rate this year.

their prospective tax rate in their new country of residence if this money is taxable.

the amount of money is significant.

their predictions for US investments if leaving it

etc...

Too many imponderables....

Giantaxe

Maybe, but I think you're making it more complicated than it actually is. For example, their need for short term capital really isn't directly relevant with what they do with the account: they'd presumably have such a need (or not) regardless of moving. Secondly, predictions for US investments (and exchange rate fluctuations) really don't come into play because there are enough investment vehicles out there that they could invest entirely in Euro- , pound- (or whatever) dominated assets. Heck they could put all their money in a Gold ETF of they so desired

So, assuming they are moving back to the UK (or a country that taxes non-domestic income in a similar fashion), I think it rationally comes down to US tax implications of withdrawing now as opposed to withdrawing on retirement. And on that basis, I doubt they can "win" by withdrawing now: 10% penalty for early withdrawal plus whatever their marginal tax rate is (and being a non-resident alien when they do the transfer isn't going to help much because they don't get a standard deduction and, iirc, they'll get ordinary income taxed at 30%; they would avoid state tax if they timed it right though). For them to be better off withdrawing now, their marginal tax rate in retirement would have to be significantly higher than 10% plus their current marginal federal tax rate. And the further they are away from retirement, the higher that 'premium' would need to be due to the build up of tax-free gains in the account. Possible, certainly, but unlikely imo.