YoungOne

Hello,


Given the hopeless political situation in the UK and recent collapse of the pound I am wondering if it makes sense to take advantage of the strong exchange rate to offset penalties that I will face for withdrawing my 401K early. Please could someone answer the following questions to help guide my decision making?


- I read somewhere that I will face a 10% penalty and then pay a flat 30% income tax regardless of the amount in the fund? It is surprising to me that is not a gradual tax based on the amount withdrawn - is this correct?
- Is it true that the tax treaties will avoid payment of double tax on the amount withdrawn?
- If I decide not to touch my 401K until retirement (60) and remain in the UK do have to continue to pay 30% US tax on all withdrawals regardless of the amount? This is inline with the first question related to gradual tax.


Thanks in advance for any responses provided.


Greg


P.S - I have already moved back to the UK and am planning to remain here for retirement.

Asg123

If you're thinking all this because of the exchange rate, I'd say forget it, wait until you're 59 1/2 and then decide.

Pulaski

I think that the 30% tax is withholding, and then it becomes part of your annual tax return, which could result in a partial refund, or an additional bill depending on your circumstances.

There is no definitive answer to much of what you ask, just a lot of opinions.

While I think that the slide in the value of the pound is an opportunity, you should consider that moving all your assets back to the UK would significantly diminish your diversification, which means more risk to your retirement income. So, personally, I would lean towards keeping your 401K in the US as a hedge against possible weak economic performance in the UK and Europe, ..... and your retirement savings in the UK become a hedge against weak economic performance in the US.

Aside from that, a common view, which I firmly agree with, is that it is unwise to use your retirement savings to try to make short term speculative gains. In a 401K or private pension, you are investing for the long term and it is easy to make expensive mistakes with long term ramifications if you try to make short term gains.

md95065

Indeed.

If the OP takes money out of his 401k, pays the 10% penalty and whatever income tax is due and moves the money to the UK at what he currently considers to be a favorable exchange rate, what is he going to do with the money then? My guess is that he isn't going to be able to find an investment vehicle which will continue to give him the tax deferred growth that he is currently getting from the 401k.

Of course, this assumes that the 401k currently offers good investment options - if it doesn't and it isn't too large a percentage of the OP's assets then yes, this might not be a bad time to cash it in ...

mrken30

You will pay tax on the withdrawl at some point in time. The tax rate just depends on how much you are earning. If you are earning more money in retirement you may pay less tax now. Most people earn less in retirement and therefore pay less tax on the withdrawl. A lot of 401k are called deferred income plans for that very reason.

It may be better just to adjust the 401k funds and include a UK ETF if you can, or roll over into an IRA that gives you the option of a UK ETF. Remember diversify your funds.

durham_lad

I agree with the above advice to not withdraw it.

I'll add an example to the tax situation, assuming that the 401k rules allow you to withdraw funds. Suppose you withdrew $100,000 in the 401k. You'd immediately lose $10,000 to the tax penalty. The remaining $90,000 will be added to your other sources of income for tax purposes and be treated just like interest income (i.e. unlike capital gains or stock dividends which are taxed at lower rates). That $90,000 will be taxed at your marginal tax rate, for example if you are single and your taxable income is $90,000 then adding another $90,000 will mean most of it is taxed at 28% for a US resident.

Forbes Welcome

However if you are UK resident and paying UK taxes then I suspect your withdrawal may give you a higher tax bill with much of it being taxed at 40%.

https://www.gov.uk/income-tax-rates/...and-allowances

nun

Don't do anything to your 401k because of currency fluctuations!


If you are a non US citizen and are still living in the UK when you reach 59.5 and take money out you will pay UK tax on 90% of the withdrawal amount. There will be no US tax and no US withholding as long as you file a W-8BEN.

FatFrank

Check if you 401K lets you take a loan out rather than a withdrawal (mine does.) That way you can "withdraw" the funds tax free, and repay yourself at the 401K scheme determined interest rate (3.5% with my scheme)

What I also like about this is that if any market downturn occurs, the 401K funds you "owe" are safe, and your 401K value will benefit from the interest that you charge yourself.

I love it!

mrken30

That sounds like a useful benefit. What company is your 401k with?

Pulaski

My 401k has the same sort of arrangement but I have to pay myself 5.5%. Also I have to be an employee, so if I leave my job the loan is immediately repayable (I think I have 90 days), or they are treated as a withdrawal. The maximum loan is $50,000 or 50% of the balance, whichever is LESS.

durham_lad

When I worked as a volunteer tax preparer in 2010/11 (first year of retirement, foolishly thought I might get bored) I saw 2 folks who had been laid off the previous year and were left with serious tax bills they could hardly afford to pay.

FatFrank

I have the same $50K or 50% limit.
3.5%, 5.5% I suppose it doesn't really matter too much as you are paying yourself the interest

I would have to check but I think my 401K recently changed its rules such that if I leave my jobs, I can still continue the payments in lieu of the full repayment due within 90 days IIRC.

Pulaski

Thanks. I will look into that. ..... The rules are underpinned by IRS regs, so maybe mine are similar.