401k now what?
 

I think this has probably been asked before but any advice given would be much appreciated. I am a British citizen in his late 40's and returned back to the UK in 2019 after living in New Jersey for a couple of years. I have an employee 401k plan with Vanguard which when I checked recently is worth just under $70k. I don't intend to return to the US and have no immediate urgency to withdraw the funds. Happy to wait until my retirement. Do I leave them sitting there or should I be converting them into a ROTH IRA over a couple of years.
I have some residual US income from company stock options of around $10k per year for the next three years. Other than that I have no other US income. Ideally I want to keep it as simple as possible? Any thoughts or recommendations will be very helpful.

Re: 401k now what?
 

I believe that as a non US citizen and non US resident you are only subject to US taxes on your US income. Therefore, as you mentioned, if you convert to a ROTH over a series of years and keep the annual amount you convert below the annual standard deduction then you could likely achieve the conversion tax free. To that extent you have nothing to lose by doing that, no matter what happens to future tax law and treaties.

I also believe that under the current US/UK tax treaty, the resident country (UK) has the right to tax retirement distributions but also provisions that if the distribution is not taxable in the source country (USA) then it is not taxable by the resident country (UK). Therefore receiving distributions from a 401K would be taxable in the UK but not taxable from a ROTH. In your case, if this is correct then you could convert to a ROTH tax free, grow it tax free and receive the proceeds tax free so long as the tax laws do not change between now and then. It does not get any better than that. I recall something about the distribution only being tax free if it is a single lump sum so you should likely cash it in 100% when the time comes.

You would need to take your other US income into consideration but if that is a capital gain then you would pay the regular capital gains on that but still be able to convert the full amount of you standard deduction tax free, and in any case it could well be beneficial to convert as much as you can up to the limit of the 12% tax bracket (or whatever becomes the lower tax brackets in the future). Or, just take you time and convert it all tax free in smaller increments over more years. It will grow tax free in your 401K so taking longer to do the conversion will not impact the end game.

Re: 401k now what?
 

As this process would take several years, it may be worthwhile transferring your 401k to a Traditional IRA before you return to the UK (this is a non taxable event and there would be no tax liability) Then open a ROTH with the same provider as the new Trad IRA. You will then only be dealing with one provider once you return and the yearly conversions should be easier too. I believe you should find other posts recommending IRA providers who will work with you once you are in the UK.

Re: 401k now what?
 

He returned to the UK in 2019.

Re: 401k now what?
 

Our son was in a similar position when he returned to the UK in 2017. He converted his 401k to a Roth IRA over 2 years where it now will sit growing tax free until he can draw from it tax free and penalty free in 25 years or so. Roth withdrawals are tax free in both the US and UK. Lump sum IRA to Roth conversions are taxable only in the USA.

PS

This thread might better if it is in the “Moving back to the UK” forum since the OP has moved back and is asking about a situation many of us have found ourselves in.

Re: 401k now what?
 

A non-resident alien cannot claim the standard deduction.

https://www.irs.gov/individuals/inte...uring-your-tax

I have not found a definition of 'lump sum' in the tax treaty or by HMRC. According to the link below 'A lump-sum distribution is the distribution or payment within a single tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, or stock bonus plans).'

https://www.irs.gov/taxtopics/tc412

If HMRC opened an enquiry, I would not feel confident trying to convince them that the distributions or rollovers were each a 'lump sum' if I had ticked the ‘Partial’ box on the distribution request forms instead of the 'Lump Sum' or 'Total Vested Balance' box.

This is just my opinion.

Re: 401k now what?
 

The link you provide is the IRS definition of a lump sum for purposes of IRS taxation, which doesn't apply here as the IRS is going to tax the lump sum.

What is important is what HMRC define as a lump sum and according to article 17 of the US-UK treaty lump sums are only taxed in the USA.

The above article is quoted in the white space of my HMRC SA tax return for where I declare the lump sum conversion. I have my returns done by a dual qualified tax firm in London. If I'm ever audited by HMRC I'll be sure to report back.