401K funds

debbie_lou

Daughter born british has dual british/usa nationality (holds both passports). Has worked in the states for 30 years wants to come back to the UK. How does she transfer her 401K to the UK. she wants to take a monthly amount not the full pot. Is it as simple as opening a UK bank account and transferring the money every month? where would the tax be paid and what other costs would she incur. Intends to live with parents to start with. Also has a house to sell so would need that money transferred as well to buy something over here. Has anyone successfully done this and if so do you need to use a special financial advisor. Hope someone can help
Regards
June her mum

DairyQueen

She cannot transfer her 401k and she needs to be aware of how onerous IRS rules are for US expats. Her UK citizenship will count for nought as it's the US citizenship that ensures they will snare her.

The IRS requires that she pay tax on her worldwide income in the US. It also requires that she complete a US tax return each year and files an FBAR (Report of Foreign Bank and Financial Accounts) if she even holds a UK bank account.

There is a double-tax treaty in place between the UK and US so she shouldn't have to pay tax on her income twice. A relief as HMRC also requires that UK citizens pay income tax on worldwide income in the UK. Her tax residency status will also need to be determined as she may be defined as 'non-domiciled'.  

Also, be aware that financial services companies are wary of opening investment accounts for 'US Persons':

'The Foreign Account Tax Compliance Act (FATCA) was signed into law by President Obama in 2010, and came fully into force in 2014.

Under FATCA, non-US banks and other “foreign financial institutions” are obliged to report to the IRS – as provided for by inter-governmental agreements signed by the governments of the various jurisdictions in which the relevant financial institutions are located, and the US government – on the assets held by their American clients.

Firms that fail to do this face potentially significant penalties, which is why some have decided that it would be more cost-efficient for them to avoid having any American clients at all, rather than having them but going through the costly hassle of complying with the regulations on their behalf.'

This means she may have trouble opening an account with investment platforms who deal funds and shares (the mainstay of SIPPs, ISAs, etc)

No doubt she has paid US federal tax and is therefore entitled to a US state pension ('social security') in due course.

She will receive her US income in $s and so there is an associated exchange rate risk.

I would strongly advise that she seeks advice from a tax specialist in this area as the IRS impose nasty penalties on expats who fail to file correctly, and there are exemptions she may be able to claim on any non-US income.

All-in-all US citizens have a very tough time tax-and-investment-wise if they dare live outside US borders. 

xylophone

Hope someone can help

https://forums.moneysavingexpert.com/profile/EdSwippet

Above poster is a mine of information on matters relating to the US/IRS.
You might try a PM?

EdSwippet

The outline is as DairyQueen has already laid out. US pensions cannot be transferred intact to the UK (no QROPS), so she will have to withdraw money directly from it in USD, then get that (somehow) to the UK.

If your daughter is younger than age 59.5, there may be a 10% early withdrawal penalty on 401k and IRA withdrawals. There is an exception if over 55 for 401ks if you leave the company after age 55, and a 72(t) plan can also help if below these ages. Also, a one-off potential CARES act window for 2020 only. Options below age 59.5 (or 55) are however severely limited.

Under the US/UK tax treaty, pensions are ordinarily(*) taxable only to country of residence (so UK in this case), article 17 para 1(a), but the US reserves a special horrible 'saving clause' that overrides this for US citizens, article 1 para 4. In this case, your daughter will be liable to tax on 401k withdrawals to both countries, but should get a US foreign tax credit for tax paid to the UK. The end result is that she pays the higher rate of the two countries and gets the lower tax-free allowance of the two, but no actual double-tax. Still, no picnic. US tax filing for US expats is complex, expensive if using a paid preparer, and huge penalties for minor paperwork infractions are rife.

(*) Note however a special 'lump sum' clause, article 17 para 2, which reverses the ordinary treatment, so that a full withdrawal would be taxable only to the US and not the UK. Drawing out a complete IRA or 401k in one go is not often tax-efficient, though.

As for getting the money to the UK, it is unlikely that the 401k provider will want anything to do with forex. The best bet is probably to have them wire or ACH it to a US bank, and from there you can either wire it to a forex specialist (Xe, Moneycorp) or (maybe better) transit it through Transferwise or Revolut. If you're lucky, the 401k provider might be persuaded to deal with Transferwise or Revolut directly, but this is often a battle with them. However, household name banks, both in the UK and the US, rarely if ever give a decent forex rate, so persisting a bit to get the best forex from some specialist provider is usually worth it.

Same applies to money from any house sale; try to avoid the forex offered by big-name banks. This might be trickier than for smaller pension withdrawals. IIRC, Transferwise has some limits on USD conversions. Others might also. You'll want to check this before going too far with it.

Finally, if absolutely no plans to return to the US to live, ever, your daughter might want to consider renouncing US citizenship. This would terminate all the future tax and investment problems she will otherwise encounter as a US citizen living in the UK. Not for everybody of course, but maybe worth considering.

xylophone

Not for everybody of course, but maybe worth considering.

Having read the posts from DQ and Ed, I can see why.......

DairyQueen

xylophone said:

Not for everybody of course, but maybe worth considering.

Having read the posts from DQ and Ed, I can see why.......

A very welcome side effect of voluntarily relinquishing my green card was the removal of the IRS from my life. 

kangoora

As part of looking into something similar I found an article (someone like Bloomberg so not a random blogger) that says over 5,000 US citizens ex-pats a year are renouncing US citizenship and the numbers are going up - mainly because of the taxation rules and complexity.

To the OP: When I went there and returned the company paid one of the big 4 accountancy firms to deal with my taxes. I can't remember which one (it was 20 years ago) but that would be extremely expensive although they were very good. I doubt getting an international tax specialist is going to be cheap even if not employed by the big 4.