401k's

cariadj1

I have a 401k which was part of a QDRO after my divorce.
I am a dual Nationality British/American, living in the UK.
I want to know how I can take it out and bring it to the UK so I can buy a house.
Does anyone know of any financial companies over here who deal with this type of
thing???
I did contact the pension company Vanguard but they keep transferring me all over
the place until I am totally confused. It seem no one person can deal with my problem,
I think they don't want me to take it out of their hands or the US?
I have contacted a number of financial advisers over here but they are all stumped.
It seems that either I pay a 40% tax hit if I try to transfer it to the UK or have to wait until
my ex is of pensionable age???
Any help would be greatly appreciated.

atush

this may have been covered a bit (well not the divorce part) about 6m- a year ago.

While waiting for someone who has the answers, try a search of the forum using either 401K, USA etc

In the mean time, did you work there, and do you have 10 years/40 quarters contributions for a Soc Sec pension?

EdSwippet

I'll take a stab at a couple of points that may get you started. This is not an exhaustive treatment, I am not a tax professional, and this could be wildly wrong so check it carefully before committing.

I have a 401k which was part of a QDRO after my divorce.

It appears that a QDRO 401k is exempt from the 10% early withdrawal penalty. That leaves you with just UK and US federal tax to contend with, and it doesn't look like your ex's age (or yours, for that matter) comes into things.

I'll assume no state tax entanglements -- some states are 'sticky', but let's hope yours is not one of them. I'll also assume that this is a pre-tax 401k and not a Roth or otherwise anything exotic.

I am a dual Nationality British/American, living in the UK.

For how US and UK tax interact here, check out the US/UK tax treaty.

If you withdraw piecemeal read article 17 para 1(a). This says that withdrawals are taxable only to the country where you live (so UK tax to pay, and nothing to the US). But... article 1 para 4 is where the US overrides this with its notorious 'savings clause', meaning that withdrawals are taxable to both the UK and the US, with credits so that you aren't double-taxed. Where the 'savings clause' does apply you wind up paying the higher rate overall, probably the UK's. Worth noting that in the UK only 90% of a foreign pension is UK taxable, and 10% is UK tax exempt.

If you withdraw a single lump sum, read article 17 para 2. This says that the entire thing is taxable only to the US.

Taxed at what rate? You'd add this withdrawal to whatever other earnings you have for the year, and that gets you the rate. Worst case it could be 45% marginal in the UK, versus around 39.6% in the US. Best case it's your only income for the year and is a small 401k holding, so sits in the 0% US federal band and within the UK's £10k annual tax allowance. Likely case is somewhere between, but as a rule-of-thumb losing 20-40% to tax seems most probable, whether you withdraw now or later. As with all pensions, withdrawing piecemeal rather than a single lump sum would generally be more tax-efficient.

If some of this detail seems totally weird, well, that's because it is. Logic is in extremely short supply in both US and UK tax laws, and almost entirely absent at the intersection. Vanguard's vacillation is not really surprising, since they don't (and can't) know all the nuances here. It'll be up to you to sort out the details, and then just make the withdrawal (or not) and cope with the subsequent tax fallout. Somewhat unsatisfactory for sure, but unfortunately that's the nature of cross-border pensions.

Again, finally, check all of this carefully before acting on it. Tax treaties are both porous and malleable, and interpreting them is a black art and very easy to get wrong. Even professionals in the area regularly disagree on interpretations.