BelindaBelinda

Hello! I am a 30 year-old British citizen, just arrived in Washington state to begin a two year contract on a J-1 visa. I have been offered a generous pension plan by my employer but am unsure of the value of it as a non-US citizen.

I might be offered a new contract in two years and I might want to stay in the US forever... or I might go back to the UK. I have no idea!

Can anyone advise me on the value of this potential non-UK pension stash? What are the tax implications on return to the UK or withdrawing in the UK when I am 60? Should I pay into this or stay well clear?!

Any help much appreciated - thank you.

Pulaski

Pensions are always worth saving for. No exceptions.

Is this a 401k? ..... It is likely that your employer may match at least part of what you put in, so that is free money! (The match might start one year after your contract starts.

BelindaBelinda

Hi - and thank you for your quick reply! It is a 403 (b) ...does that change things?! I think I have to leave it in the plan until I am 59 1/2. Do you know what the tax situation would be on it if I want to withdraw it as a UK resident at that stage?? Or if it is possible to transfer it to a UK plan if/when I leave here in two years?

Pulaski

I am not familiar with 403(b) schemes, but generally speaking pensions cannot be transferred internationally. Some US schemes allow the fund to be cashed out if you switch jobs, but I don't know if that applies to a 403(b)..
..... Just checked, and apparently you can cash out when switching jobs, so that is an option, though the tax penalty is stiff your usual tax rate plus 10%, which commonly means around 35%, which sounds bad, but could still be worth it with an employer match. That said, holding it to retirement would certainly be the best alternative.
When you leave or switch jobs you can also move it to an independent manager, which is commonly considered to be a good idea.

Give it a few hours and some of our financially astute members will no doubt be along to chip in their 2¢.

AdobePinon

A 403(b) is similar to a 401(k) for tax and withdrawal purposes, although I don't know if it is treated identically.

An early withdrawal would most likely be subject to income tax and a 10% penalty. It may be worth it, depending on what the employer match and non-match look like. There may be ways of avoiding (or reclaiming) the base income tax on withdrawals if you take the cash out in a tax year after you leave the US, and keep the US-sourced income low enough in a given year - but this is just speculation - you'd need to get some real advice.

If you move to another employer in the US, you can usually roll the 403(b) over into whatever plan the new employer has (assuming they have one).

Also, I don't know what the consequences may be if you are claiming the tax treaty deal as part of the J-1.

AdobePinon

A minor note: 403(b) and 401(k) plans are not usually called pensions. They are retirement accounts, or 'defined contribution plans' where you attempt to build up a stash of cash for retirement through paying in a certain amount per paycheck. A pension is usually a 'defined benefit plan', where you get a rate of retirement income prescribed by factors such as your retirement age, years of service, maximum salary, etc, regardless of how much money you paid in.

theOAP

My 2 cents (and it's not really worth that much).

Being able to join a pension plan that has a reasonable employer match is always a good move.

For a US pension plan:
If you're a Brit living in the US with a US pension plan; no problems tax wise. If you move back to the UK, with careful planning, a US pension is no major problem for UK tax.

For tax problems, the worst possible scenario is being a US Person (taxable by the US) with a UK personal pension plan or UK defined contribution pension plan.

terminalvelociraptor

In the UK, the word 'pension' is still tends to be used to describe both Defined Benefit (a.k.a. Final salary schemes and similar) and Defined Contributions (Such as Stakeholder Pensions, Group Pension Plans, etc), as well as state retirement benefits such as the State Pension, State Second Pension, Pension Credit etc. It all ends up lumped in with the one word 'Pension'. I think the US way probably makes a little more sense, as i dont think many of the older generation realise quite what a different beast modern pensions are compared to the generous schemes they were often party to.

robin1234

Is it with TIAA-CREF by any chance? They are very reputable and have been managing retirement accounts for folks who work in colleges and universities since 1918. As others have said, with the tax deferral and the employer match, it's always worthwhile. If I were you, I'd do it, then let it sleep till you are fifty nine and a half or older, then take the distribution as retirement income..

I know about 403(b)s because I worked at a college .. I've heard of 401(k)s but know nothing about them, since I never worked in the for profit sector.

nxsfan

Something I have wondered about. As I understand it, withdrawals before 65 are assessed a 10% penalty and the money you take out is treated as income, and hence the tax you pay on it is dependent on your earnings for that year.

So, what happens if I take the money out when I am no longer a tax resident of the US?

robin1234

Remember that the distribution is treated as income whenever you take it out, at age 40 or at age 70 (for instance.). That's because the original amounts invested were tax deferred.

The age for penalty free withdrawal is fifty-nine and a half, not 65.

nun

YES!!!!

A 403b is the non-profit version of a 401k. I'd take it to get the tax deferral and employer match.

If you return to the UK the US/UK treaty will keep it free of tax in the UK and the US until you take withdrawals from it at 59.5. Also (if you are a UK tax resident) you can keep it free of UK tax forever by rolling it into a ROTH and taking withdrawals from that rather than taking withdrawals from it directly. As UK tax income tax rates tend to be higher than those in the US this could be advantageous if you ever move back to the UK. For people with large IRA, 401k, 403b accumulations living in the UK the ROTH rollover strategy can save you a lot of tax.

Hotscot

Just to clarify Nun..I have 401k's, wife has 257 and 403b since she's a teacher.
Before we go live in the UK. Roll them into a Roth, and pay the necessary taxes then this will still be tax advantaged being resident in the UK?
The UK won't tax Roth withdrawals?

nun

I think you mean 457, not 257. Actually for UK taxes it doesn't matter whether you do the rollover while you are in the US or when you move back to the UK as HMRC treats any rollover to a ROTH as being UK tax free under Article 18.1 of the US/UK tax treaty. All gains and withdrawals from ROTHs are free of US tax and also free of UK tax for UK residents under Article 17.1(b).

So you can do partial IRA and 401k to ROTH rollovers to control your US tax bracket and pay no UK tax whether you are US or UK resident. Many people rollover amounts up to the top of the US 15% tax bracket. Be careful with the 457. That is slightly different from the 401k and 403b as it is not explicitly covered in the treaty and is deferred compensation rather than a US qualified retirement account. If you can give up the penalty free withdrawal before 59.5 feature of the 457 it's safest to roll it over to an IRA before you move to the UK.

robin1234

In terms of the difference in treatment of 403b vs. 457, there seems to be an odd discrepancy - maybe this is just a quirk of my employer, or my scheme, so I will describe..

I worked at a university. Both the defined contribution retirement account (with employer match) and the supplementary, voluntary retirement account (without employer match) are administered by TIAA-CREF and are both categorized as 403b.

My wife worked in a prison, a state employee, and got a state defined benefit pension. Her additional, voluntary deferred contribution plan is a 457 plan. As I see it, it is just like my supplementary retirement account. And yet, because it is a 457, treated quite differently in the tax treaty..