USA 401k Plan (IRA) - UK National

kangoora

Hi,

I worked in USA for a couple of years in early 2000's, my company went bust a few years ago (long after I left them in 2002) and now I'm trying to add up all my pensions etc. I suddenly remembered this fund (Yes, I know I'm an idiot ). I have now managed to track down my 401k and discovered I've got almost $18k in there, a nice surprise as I thought I'd lost it :clap:

Now looking for some advice, it only seems to have been active in this account since Dec 2013. I assume this was when it was transferred in from whatever holding account it was in while they sorted out the company bankruptcy. I've asked similar questions on a USA investment forum but was hoping some of the knowledgeable chaps on here might be able to help me out also.

It's in a Rollover Traditional IRA and I seem to be making about $0.75c/month and getting account charges of $3.50 month. It is all in Reich and Tang FDIC Insured Deposits, which look to be some sort of cash deposit fund paying appalling interest.

It's giving me a rollover option which I have no idea what that means?

I seem to have a couple of options now:

1. I could withdraw it all (paying federal tax penalties of 10% but I assume no state taxes as I'm UK resident) and put it into my UK Pension fund. This would seem to be the simplest but most expensive option.

2. I could leave it in there and, I assume, buy into some funds which might prove to be better value - although I have yet to fathom out how to do this within the providers website. I'm actually considering using this for some high risk funds if I do this based on the fact it's money I never expected to get.

I won't be employed by a US company again so will never join another matched 401k plan (my understanding is these act like a company pension scheme with matched contributions). If I do leave it in USA I wouldn't be drawing any money out until retirement.

Am I correct in assuming I would need to fill in a federal tax return each year even if my only US based income would be (hopefully) growth within the IRA?

The next question is a hopeful one, if I leave the fund in USA and upon retirement age draw out a monthly amount (which would almost certainly be under the lower limit for Federal taxes), could I get in effect, two tax free lower earnings limits - one on USA income and one on UK income? (probably need an international tax lawyer for this one )

Thanks for reading this

Your_Hero

You need to speak to an international tax adviser. US and Canadian tax laws are complex and do not necessarily recognise many tax-advantaged plans from the UK. I'm not going to be much help here, apologies. I suspect this is probably out of the depths of many other MSE posters too.

Spidernick

Overseas pension fund transfers are something of a minefield and ideally should be avoided. You would need specialist (and no doubt very expensive) advice if you wanted to go down that route. If you cashed it in there may be UK tax consequences in addition to the US 10% charge, even if you then put the net funds into a UK pension. I'm not sure how it works (a minefield as I say) but it would be wrong to assume that the UK wouldn't see it as taxable in some form.

I think rollover would just be into another 401K fund (there are a few different types, including a Roth one named after the Senator who introduced it, I believe), but am not 100% sure on that front or what the different types do.

I think a standard 401K is largely invested in stock, similar to UK pension schemes (but you'd need to check) so in the long term you would expect to get growth well above what you are getting now and hopefully more than enough to cover the charges if you could transfer into a different type of 401K (and it would make sense to do so from what you have said as a deposit account isn't worth having if the charges actually mean you lose money each month). The 401K scheme holders should be able to guide you on that front.

From my brief time doing US tax, I don't recall ever reporting 401K growth on a US tax return (only ISAs, which are tax free from a US perspective), but again I can't give a definitive answer on this. Once you start drawing the pension that might be a different scenario, but I think you're OK for now.

If you leave the funds to mature until retirement age then ordinarily you would pay tax on this where you were resident at the time (that's how most treaties work). As such, assuming you were in the UK (and are a UK domicile, although it probably wouldn't make a difference either way in this instance) then this would form part of your taxable income for the year if paid in the form of an annuity, so you wouldn't necessarily escape tax on this, depending on what other income you have. I've no idea how the new pension rules would apply to overseas pensions that are drawn down rather than paid in the form of an annuity and you would need an international tax expert for that!

Sorry about the ifs and buts, but hopefully that is of some help.

xylophone

http://www.expatfocus.com/c/mode=prnt/id=409/columnists/tom-zachystal/managing-us-pension-accounts-when-no-longer-resident-in-the-us/ might be worth a read?

EdSwippet

I too have a 401k from time spent working in the US. I'll assume below that you are not a US citizen and do not hold a green card, even an expired one, otherwise you have some ugly issues to confront.

IRAs and 401ks are protected from tax on growth by the US/UK tax treaty -- article 17, if you're interested -- so you should have no US or UK tax issues with it until you make withdrawals. Once you withdraw from it, again the tax treaty says that withdrawals are taxable only in the UK (send a W-8BEN to the provider to ensure they withhold no US tax). The treaty is silent on early withdrawals, but it seems likely that both the 10% US federal penalty and 'usual' income tax (probably UK) would apply.

Withdrawal before age 59.5 is financially unwise, but for a small-ish fund might be worth it to simplify your life. Also remember that if you leave it you have to start withdrawals from IRA and 401ks by age 70.5 (so-called 'required minimum distributions) -- you seem... forgetful, so maybe note that in your diary(!).

So the answers to your questions are: no, you don't fill out US tax returns for withdrawals, you just treat them as ordinary UK income (with a forex cost); and no, unfortunately you won't get two tax free allowances.

Also worth remembering that the US regularly chisels away at its compliance with treaties, often disregarding parts of them entirely for political or grandstanding purposes, and when they do individuals have no recourse. So just because this applies now, doesn't mean it will when you need it to.

With all that said, there may be a back-door way to convert your existing IRA into a Roth IRA for little or no tax on either side while converting, and then no tax to either side going forwards. It's a touch tricky to manage, though, and relies on the rollover to a Roth falling into an oddity in the US/UK treaty. Might be worth pursuing though, if you have the intestinal fortitude that is.

Disclaimer: this is not my day job, nothing like it. I'm just some random bloke on the internet.

kangoora

Thanks for the replies. I'm a uk citizen and never got my green card, was halfway thru the process when my company made all but 5 people redundant and I was given 2 months to exit USA as my company sponsored visa expired.

Looks like my best bet is to continue with it, transfer out of that appalling cash fund and then draw down from it when I hit 60 (8 years away). I can't be bothered arguing over $18k by trying the Roth option.

Still, I'm a little further forward now and need to do some further reading.

Thanks again

john2708_2

EdSwippet
any more details on the back door method of converting ira into roth?sans any taxes!
sounds too good to be true and you know what they say!