NOLA

Hi there,

My wife is a US citizen but has been living in the UK for the past 8 years. She also recently became a UK citizen.

She would like to close her $20k 401(k) and move the funds over to the UK. From a UK tax perspective it's a good time to move the money as she isn't currently working and therefore would have to pay very minimal, if any, UK income tax.

My question is about what the penalty would be to withdrawing funds from her 401(k). I understand that there would be a 10% early withdrawal penalty but would there be any additional with withholding tax levied? She is not currently paying any tax in the US as her earnings are nil.

I'm sorry if this has been covered in earlier posts. I couldn't find a response to this specific question.

Many thanks, ben

Hotscot

I think you'll owe 10% plus the tax that would have been paid on 20k. So a significant hit perhaps?

Is she younger than 70.5?

durham_lad

That would be my understanding as well assuming she is under age 59.5. (no 10% penalty after that)

Once she gets to age 70.5 she is required to start withdrawals and there are tax penalties for failing to do so.

PS
Although she is now a UK citizen she is still required to file a US tax return each year as a US citizen.

NOLA

Thank you very much. She is 37 years old, so it looks as though she would pay 10% penalty plus 20% US tax.

Owen778

Personally, I'd just stick it in an index fund inside the 401k and leave it there, unless you're desperate for the money.

UK tax reporting of foreign assets is much less onerous than that for the US, so it shouldn't be a big hassle for you.

Hotscot

Agreed.
Nice nest egg for later.

(You can Google for 401k hardship withdrawals but I would not recommend unless it's an emergency.)

durham_lad

I think it is more complicated than that. Hopefully someone more knowledgeable than me will come along but as a US Citizen she is liable on her worldwide income and still has to file US taxes as well as UK taxes.

durham_lad

Good idea, the UK won't tax anything inside a 401k or IRA until it is withdrawn.

Hotscot

Complicated in what way?

She may, or may not, be required to submit a US tax return.

durham_lad

She is a US citizen living (and working?) in the UK so she should be filing US tax returns each year as well as paying UK taxes. Distributions from US retirement plans, such as an IRA or 401k have to be reported and taxed as income in the UK as well as reported and taxed in the US. The double taxation agreement means that she can claim a tax credit on her US taxes for taxes paid in the UK.

durham_lad

If she withdraws $20k from her 401k then that is above the threshold for reporting for a US tax return is it not?

Hotscot

I thought it depended on income.

durham_lad

Withdrawing $20k from a 401k is taxable income.

Hotscot

On this specific occasion yes but does she still need to submit returns every year, as you said, if she's below the income limit? Just clarifying.

durham_lad

If her income is below the IRS limit then I believe she won't have to file taxes in the US, but she is still subject to FBAR, and file to the US Treasury through FINCEN if her foreign accounts exceed the $10k threshold at any point in a year.

ETA
If she cashes out the 401k and transferred it to a bank account of hers in the UK then she would need an FBAR filing as well.