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US to UK, 401K vs IRA choices (not near retirement), UK Cit.

US to UK, 401K vs IRA choices (not near retirement), UK Cit.

Old Feb 6th 2018, 5:48 pm
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Default US to UK, 401K vs IRA choices (not near retirement), UK Cit.

Me = 40 yo; UK citizen, no green card; no plans to return to US to work. I will keep US bank account open, maintain a US phone number and adresss (either mailbox or c/o a friend).

Moving back to U.K. in a month from NY.

I have a employer savings and investment plan (like a 401K) with Vanguard. They say i can keep this investment open; and that the individual fund charges for the funds i selected are lower than rolling over to a traditional IRA.
It has 80k in it, would love to cash it out but get that the penalties mean I’m better off leaving it there for the next 20 years (sigh).

But a lot of what I’ve read suggests most people rollover to an (traditional) IRA. Should I? What are the administrative or tax advantages of doing so? Is one easier to deal with with the IRS and HMRC?

One future possibility is that i might take a year sabbatical at some point, and could potentially take out around say $20k and accept the 10% penalty plus any additional tax. Or i could cash out some this year as because i’ll only have been working briefly in this US tax year so any drawdown would still be in a reasonably low tax bracket.

So if anyone has experience doing this with either type of plan would be interested in how that works, or not. And if i take some cash out early in future with penalty am i filing a US tax return or is it all dealt with via HMRC? Anything else i should consider or do?

Thanks so much.
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Old Feb 7th 2018, 10:11 am
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Default Re: US to UK, 401K vs IRA choices (not near retirement), UK Cit.

I moved back to the UK last September and had just over 100K in my 401k.
Like you I looked at options but in the end took the hit and cashed out - I think it was only a 10% penalty (this was withheld when cashed out). This will be classed as income also so I will have to pay further tax at the end of the tax year.

But for me it was worth it - I used the money to buy a house (together with some redundancy monies) in the UK for cash since I no longer had a UK credit rating after being away for 7-years. The peace of mind of moving back contracting without a mortgage was priceless ;o)

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Old Feb 7th 2018, 12:14 pm
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Default Re: US to UK, 401K vs IRA choices (not near retirement), UK Cit.

When people in the US rollover their 401k to an IRA, it is generally because their 401k has relatively poor investment options, with high expense ratios (fees). If you have a 401k with Vanguard as the custodian, there is no need to roll it out.

And this is pension money. Cashing it out is just getting smaller short-term gain instead of more tax-advantaged money. Financially, it's just a bad idea, even ignoring the penalties.
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Old Feb 7th 2018, 12:38 pm
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Default Re: US to UK, 401K vs IRA choices (not near retirement), UK Cit.

Originally Posted by corsaro View Post
I moved back to the UK last September and had just over 100K in my 401k.
Like you I looked at options but in the end took the hit and cashed out - I think it was only a 10% penalty (this was withheld when cashed out). This will be classed as income also so I will have to pay further tax at the end of the tax year.
Thanks. I also wanted to use it to pay some of my mortgage off, that was originally why i decided to contribute to the 401k as i thought of it like a savings plan that I’d pay tax on later. The investment return average is well above any mortgage interest though.

Are you going to be paying tax on it in the US? Or will you try and use the DTA and pay in the U.K.?

How did you deal with the partial year re your US tax return? I was looking back at past returns and realized i had a partial year when i arrived but didn’t declare my U.K. salary for the 2 months i was in the U.K. (as obviously it didn’t show on my W2 and i had no clue what i was doing when i did my first return); trying to work out how to plan for my 2018 return now though...
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Old Feb 7th 2018, 12:39 pm
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Default Re: US to UK, 401K vs IRA choices (not near retirement), UK Cit.

Originally Posted by Owen778 View Post
When people in the US rollover their 401k to an IRA, it is generally because their 401k has relatively poor investment options, with high expense ratios (fees). If you have a 401k with Vanguard as the custodian, there is no need to roll it out.

And this is pension money. Cashing it out is just getting smaller short-term gain instead of more tax-advantaged money. Financially, it's just a bad idea, even ignoring the penalties.
Thank you, this is good to know re Vanguard.
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Old Feb 7th 2018, 2:21 pm
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Default Re: US to UK, 401K vs IRA choices (not near retirement), UK Cit.

I think that if you cashed it all out it will be taxed only in the USA as it is a lump sum.

My son is in a similar situation except that he rolled his 401k over to a Vanguard IRA last year and that was a tax free event in both countries (he is dual UK/US citizen). For him it is ~$90k and he plans this year to convert it all to a Roth IRA so he will only pay US taxes on the conversion as it is a lump sum withdrawal/conversion. After 5 years that rolled over principal should be available for tax free withdrawal but any gains will be subject to the 10% penalty early withdrawal. Personally I think he should leave it where it is as he can't invest it in stock funds in the UK because of PFIC considerations, and he owns his house here, no mortgage, so no real need for having it. He also has an existing Roth IRA of ~$20k. (he is in his mid-30s)

Just food for thought.
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