Pam

Hi, very new to this site!
Have been offered a role in the USA, but as both my husband and I are in our 50's, retirement planning will be part of our decision making process. I know the UK tax implications on our Pensions, however I want to know if we can move the whole fund from UK to USA fund (which I believe is a 401k?). Or is there an alternative to consider?

Glasgow Girl

Unfortunately you cannot move pension funds in either direction between the US and the UK. You can however keep the funds in the UK and they will continue to grow on the normal tax deferred basis, and so long as you report them as required to the IRS on an FBAR and Form 8938 there will be no major issues retaining those funds.

You can only contribute to a 401K via your employment and within set limits, but you could also independently contribute to an IRA which is very similar to a 401K, or to a Roth IRA which again is similar. The difference being that an IRA and 401K are funded with tax deferred dollars and taxed at withdrawal, whereas the Roth IRA is funded with after tax dollars and tax free at withdrawal. All of them grow tax free. Both types of IRAs are subject to limits and you cannot fund huge amounts each year (about $6,000 annually, $7,000 if over 50) but you could withdraw funds from your UK account and use those over time to fund an IRA, and/or indirectly use those funds to meet your day to day expenses perhaps then enabling you to contribute the maximum to your 401K if you could not otherwise do so. That would indirectly transfer the funds into a US style retirement vehicle, but you may well max those opportunities out with your new US income in which case you would be best leaving the UK funds where they are, and maxing out your US opportunities.

Why do you want to move them over? We may be able to help further if we know your motivation to do so, or your concerns.

One other thing, run for the hills if anyone approaches you about QROPS. That would be the worst financial decision you could make in your lifetime, so bad I won’t even go into why.

Pulaski

Glasgow Girl has covered most of it, but I would reiterate - don't touch QROPS with a barge pole - you will forego the UK pension fund protections, which IMO are the gold standard of pension fund protections (better than the US), and you will open yourself to significantly higher fees than on pension investments in the UK.

So, that said, no you can't move UK pension invrestments to the US (reason: see my previous comment about protections in the UK being better, and the UK won't allow pension investments to be moved to a regulatory regime with lesser protections, such as the US, or almost anywhere that isn't the UK unless they meet the QROPS standard, which is rare and getting rarer), and IMO it wouldn't be a good idea even if you could move them.

There is no disadvantage in having overseas pension funds, and I firmly believe that there is diversification value in having funds invested under a different managers, under different regulators, and under different legal jurisdictions.

Pam

Thanks guys, this is very interesting.
I am actually living in Australia (and have been for 16 years), so I have a Superannuation fund here too. I just thought it would be good to amalgamate them all so that there is only one fund fee and it will be located in the same country that I live in.
If I leave them both where they are until retirement, do you know what the tax implications are in US? My AU fund will be completely tax free income here, and does not even contribute to taxable earnings. And obviously, in the UK there is a tax free amount each year. But will these be taxable in the US?

Pulaski

For the reasons stated above (diversification of risk), I would avoid even trying to amalgamate substantial pension funds, or moving them internationally. For smaller balances there may be practical benefits to rolling them into larger pension accounts.
If you become resident in the US then your pension income, and indeed your global income, will be subject to income tax in the US, but that would be the same if you lived in the UK. Generally (unless the pension is linked to government service, and you are not a US citizen) your pensions will be paid without deduction of tax in the country where they are paid and taxed only in the US.

I don't know anything about Australian superannuation, but I suspect that it would be taxed as income in the US. The status of lump sums drawn from UK pensions is debatable, but the general consensus is that the tax free lump sum in the UK would be taxable in the US - there is a minority that disagrees. You might be interested to read this thread devoted to discussions about matters of pensions in the US.

Pam

Wow - so I have already been taxed on my AU Super fund at source, but will the be taxed again once I take an income! Well, that's not good

Glasgow Girl

Are you a US citizen, or do you intend to come one? Are you looking to live here permanently as a green card holder or as a USC? What country will you retire in? The answers to those questions will open up some options, and close others.

Pulaski

Sorry, I didn't know that funds going into a super fund are taxed - as I said (post #5 above), I am not familiar with Australian superannuation ...... The general principal of taxation in the US (in common with most countries) is that global income is taxed for someone tax-resident in the US, but if superannuation was already taxed then perhaps (I do not know, you will need to check) Australian superannuation is treated like a Roth IRA (personal pension fund that has already had tax paid on the funds) so income from a Roth account is not taxed again.

durham_lad

Have a look at the tax treaty between the US and Australia and see what it says about distributions from retirement funds (ie SuperAnnuation funds). For the US-UK treaty is says that if withdrawals from a retirement fund are tax free in the source country then they are tax free in the country you are living. For me it means my Roth IRA distributions are tax free in both countries (I am currently living in the UK and and a USC). Also, both the UK OAP and US SS (State pensions) are only taxed in the UK which is where I'm living.

So, it all depends on where you will be living when you start drawing down your pensions and the tax treaties between the countries.

Glasgow Girl

Unfortunately the tax treaty between Australia and the UK is not as generous nor as detailed as that between the UK and the US, that is why the answers to the questions posed earlier regarding USC or GC status, country of residence when retired /drawing the funds are very relevant.

durham_lad

I wonder if a specific question on the Australia forum about taxation of Superannuation distributions for someone living in the UK may prove fruitful.

Pulaski

Or the "Moving Back to the UK" forum. ... The information might give a clue, but probably wouldn't be definitive.

Pam

No, not a US Citizen, and at this stage no idea where we will retire as it depends on whether our adult children would follow us to US or not. An opportunity has just come up with my US employer, where we have the opportunity to move to US for a permanent role. Due to our age, we are just trying to make sure that we consider all paths.

Glasgow Girl

So, unfortunately IRS taxation of Australian Superannuation is very complicated, dependent upon who made what contributions (employer or employee and in what proportion), and compounded by the fact that the tax treaty ignores this particular type of account. Most tax professionals believe that SuperAnn is taxed as ordinary income therefore at your highest marginal tax rate although a case can be made that only the growth is taxed and not the original contributions especially if they were made with post tax funds. I say a case can be made because there is no clear guidance on this and the best you can do is to take a clear and rational position, and be prepared to defend it if the IRS audit you. Now, there are a minority of very aggressive tax professionals who believe SuperAnn is not taxable at all by the IRS, similar to how a few of them espouse that the 25% tax free UK lump sum is not taxable by the IRS and surprise, surprise, they are the same people. You could use those firms when the time comes but you will pay an arm and a leg for their services which could be more than the tax you save!

If you can withdraw those funds before you become subject to IRS taxes when you move here, or withdraw after you escape IRS taxation if you retire somewhere other than the US, that would be your best bet because otherwise you should probably plan on the IRS taxing at least a portion of it. However, If you become a US citizen or Green Card holder then you will have to pay IRS taxes no matter where you live, so you should probably think long and hard about becoming US citizens if you have a lot at stake. If you are a Green Card holder you would need to renounce it before escaping the clutches of the IRS. The bottom line being that if you plan on retiring in the US permanently you are likely to be paying some tax on your SuperAnn, but if you retire elsewhere the IRS will have no claim on if although you will have to contend with taxation in whatever country you end up in.

Also be aware that Australian SuperAnn will need to be reported to the IRS annually, and once again it is not clear cut what particular forms you need to report it on. It could be treated as a Foreign Grantor Trust which requires much more complex reporting than if it is just treated as a regular foreign retirement account. You may need professional help deciding upon how you handle that.

I rarely advise using a tax professional because unless they are a true and reputable international tax consultant (and they are all extremely expensive) they frequently know very little more than you find can find out online by yourself, and some of them don’t even know that. However, in some situations, particularly when it is not clear cut (as in your case) I would advise finding out everything you can about your specific situation, work out all your options, select the one you think benefits you the most, and document why you believe your approach is reasonable and rational. Then I would find a local tax preparer that will agree with your rational, have them file your taxes, and if you ever get audited you can stand behind the fact that you had professional advice which goes a long way if the IRS ever questions your position. The chances of being audited are quite small, US taxation law on SuperAnn is silent, and that may well be a viable option because it is hard for the IRS to argue you made the wrong call when there is no rule book.

Overall, probably not what you want to hear but as you say you are weighing your options on the move and at least the crystal ball may be a little clearer.

On your UK retirement assets, I might look at rolling them into a SIPP which you can use as a tax deferred piggy bank, taking withdrawals when you need to or when it is most tax advantageous to do so. A J Bell are the only ones who will deal with US residents and are a decent option so that might be something to look into whatever you decide. If you stay in Oz you may have other firms that will work with you, but most of them will not touch US residents because of the multitude of laws on foreign accounts.

Pam

Thanks so much, this is so helpful. The US taxation seems to be a minefield!! It is all relatively straight forward here in Oz, I know exactly what tax i do and do not have to pay on both Oz and UK pensions!