US 401(k) pension

ginger_jon

Hello, is there anyone else out there who has worked in the US for a while and built a 401(k) style pension fund, then returned to the UK and started drawing from it? I lives in the US for 10.5 years and as I left my employer, a university, after age 55 it seems I can start drawing from it (however much I want) without the penalty that normally applies if you withdraw before hitting 59.5 years. Thanks to a helpful earlier thread, and after discussion with one of the administrators of my funds (TIAA-CREF) I understand that I need to file a W-8BEN form in order to not pay US tax (I relinquished my green card when I left too). However, I've been in touch with a local tax consultant with a US connection who is suggesting I would still need US tax advice because it isn't clear whether or not I would have to pay state income tax (in this case Indiana) even if the US-UK tax treaty exempts me from federal income tax payments. Has anyone had to pay state tax on withdrawals?

EdSwippet

ginger_jon wrote: »

However, I've been in touch with a local tax consultant with a US connection who is suggesting I would still need US tax advice because it isn't clear whether or not I would have to pay state income tax (in this case Indiana) even if the US-UK tax treaty exempts me from federal income tax payments.

This sounds like nonsense to me. From the IT-40PNR instructions:

Note. If you were a full-year nonresident and your only income from Indiana sources was from pensions, interest and/or dividends (which were not a basic part of the business in Indiana) and/or unemployment compensation, you are not required to file an Indiana income tax return.

401k and IRA withdrawals are relatively simple, tax-wise. They're fully taxable to the UK as ordinary income (albeit with some fiddling about to get numbers in GBP rather than USD), and non-taxable to the US under the US/UK tax treaty. If you still decide to use a tax consultant though, I'd suggest not using this one. :-)

OldMusicGuy

I've done this about 2 years ago. From my research at the time, periodic 401k withdrawals were subject to UK tax but not US tax, whereas lump sum 401k withdrawals were subject to US tax but not UK tax. I made a full lump sum withdrawal and paid US tax but no state tax as I had no taxable income in the state in which I had previously lived. I didn't pay any UK tax.

The only problem was that my pension provider hit me with 40% withholding tax which I had to wait to claim back through my US tax return, which had to be submitted as a paper return because the online filing system didn't accommodate expat returns at that time. That was a right pain.

ginger_jon

Thanks Ed. It did seem over zealous to me to worry about state tax.

ginger_jon

Thanks for that. How do the tax authorities determine if you're taking a lump sum (does that mean withdrawing the whole amount) or just a regular withdrawal - do the latter have to be set up as monthly payments?

OldMusicGuy

ginger_jon wrote: »

Thanks for that. How do the tax authorities determine if you're taking a lump sum (does that mean withdrawing the whole amount) or just a regular withdrawal - do the latter have to be set up as monthly payments?

It's a bit of a grey area. If you take everything as a single lump sum then that's pretty clearly a lump sum withdrawal and is subject to US tax. Monthly withdrawals are clearly periodic, so would be taxed in the UK. The grey area (or maybe "gray" area) was that if you took a single, partial withdrawal in one year, then nothing for another year, then another single partial withdrawal for a different amount in the following year, these may count as lump sum withdrawals rather than periodic. However, from the reading I did, it seemed like this latter path was open to some interpretation and so I didn't want to risk it.

Bottom line - if you are making a full withdrawal you can confidently treat it as a lump sum withdrawal for UK and US tax purposes. If you plan on doing anything else and trying to call it "lump sum" withdrawals, employ a US tax specialist.

My 401k wasn't that big in total (around $40K) so the tax was quite low, partly thanks to Mr Trump. If your 401k pushes you into higher US tax brackets it may be worth taking proper advice.

bostonerimus

First off are you sure you have a 401k. There are other retirement wrappers that have different rules from a 401k that might allow earlier withdrawals so you need to get specific ie is it a 401k, 403b, 401a or 457b also what type of TIAA-CREF funds do you have; withdrawals from TIAA-Traditional will be different from their other funds. It seems that TIAA are saying you qualify for penalty free withdrawals before age 59.5 under the "rule of 55" as you left the university after age 55 but before age 59.5 so that sounds sensible.

You will need to double check your residency status wrt US state and Federal taxes so make sure you have officially renounced LPR and filed I-407 with the State Dept and an 8854 with the IRS. The state tax issue needs to be checked at the state level as some states do not recognize US Federal tax treaties, but generally speaking they do not tax pensions of non-residents.

You will find that lump sums are taxed differently from periodic payments under the treaty and even though you file a W8-BEN you might still be subject to withholding a will have to file a US tax return to claim the withholding back. This will depend on TIAA-CREF's policy so you need to hammer home the tax treaty and that there should be no tax, but more importantly no withholding either.

bostonerimus

OldMusicGuy wrote: »

It's a bit of a grey area. If you take everything as a single lump sum then that's pretty clearly a lump sum withdrawal and is subject to US tax. Monthly withdrawals are clearly periodic, so would be taxed in the UK. The grey area (or maybe "gray" area) was that if you took a single, partial withdrawal in one year, then nothing for another year, then another single partial withdrawal for a different amount in the following year, these may count as lump sum withdrawals rather than periodic. However, from the reading I did, it seemed like this latter path was open to some interpretation and so I didn't want to risk it.

.

This gets worse when you have to deal with both HMRC and IRA as "lump sum" is not defined in the treaty and it is interpreted diffeently in the US and UK. In the UK people are use to taking a "tax free lump sum" from their pensions which is 25% of the total so a "lump sum" can be less than the total of an account...the IRS sees a "lump sum" withdrawal as everything in the account ie a 100% withdrawal.

OldMusicGuy

bostonerimus wrote: »

This gets worse when you have to deal with both HMRC and IRA as "lump sum" is not defined in the treaty and it is interpreted diffeently in the US and UK.

Which is exactly why I described it as a grey/gray area;) All of the commentary I read said that anything other than a 100% full withdrawal might not be interpreted as a "lump sum", even though there were possible ways to try to get round that (in the manner I suggested). Hence my advice not to try to make anything other than a full 100% lump sum withdrawal and try to get it taxed in the US as a lump sum without speaking with a US tax specialist.

bostonerimus

OldMusicGuy wrote: »

Which is exactly why I described it as a grey/gray area;) All of the commentary I read said that anything other than a 100% full withdrawal might not be interpreted as a "lump sum", even though there were possible ways to try to get round that (in the manner I suggested). Hence my advice not to try to make anything other than a full 100% lump sum withdrawal and try to get it taxed in the US as a lump sum without speaking with a US tax specialist.

Yes that's the safest thing to do. As the OP was a long term US resident they should make sure the I-407 and the 8854 are filed.

ginger_jon

Sorry for my slow responses and thanks - I had other things on my mind. This has been really helpful. We did sort out our taxes with an adviser before we left, so we did file our 1040-C and 8854, as well as returning our green cards to INS. I was using 401(k) as a generic to cover a 457(B) and a tax-deferred 403 (B) as well as another one that is just referred to as a retirement plan by TIAA-CREFF, but we don't have TIAA-CREFF Traditional Holdings. I'm thinking that it would reduce the danger of HMRC/IRS treating withdrawals as lump sums if I take out a Lifetime Annuity? But we might still want a lump sum to pay off the mortgage. I've contacted the tax advisor we last used in the US and hope they'll still work with us to clarify that.

Another related question - do those TIAA-CREFF funds count as assets or savings in the UK benefit system? I know they're not transferable to a UK pension and can see why the DWP would treat them as available income or resources above the 16k threshold, but at the same time if we do have to start withdrawing from TIAA-CREFF that's less money when we do reach retirement age. (I've also posted this questionin the benefits forum).