Recommendation for UK Tax Adviser for USA 401k pension?

Simoncello

I lived and worked in the US for 5 years (1993-1998) and contributed to my (then) employer’s 401k. I left the US in 1998 and surrendered my Green Card in 2000. No 401k contributions were made after 1998. 

According to Fidelity (who hold my 401k) the terms of the plan dictate that I receive a 100% lump sum distribution at age 59.5 (in May 2023). I am happy with this, no objection…  I’d prefer a lump sum rather than drawdown. However, US withholding tax will be deducted at source and while I believe no UK tax may be due, I need definitive answers. 

I need to properly understand the US + UK tax liabilities. 

Any recommendations for tax advisers who have specialist knowledge of 401k’s and UK/US respective tax treatments?

PS - I’ve read several threads (see links below) suggesting there may not be any UK tax to pay if it’s a lump sum payment, but there’s no definitive info about how I can reduce (or avoid) US withholding tax, or what the correct way of handling the payout from a UK perspective is. 

I want to get proper, informed advice, as well as declare the taxes correctly in each country.

https://forums.moneysavingexpert.com/discussion/5859857/us-uk-tax-on-usa-pension-for-british-citizen-and-resident

https://forums.moneysavingexpert.com/discussion/6246304/retirement-funds-from-the-usa-access-and-taxes

Double tax on US pension incomr - Community Forum - GOV.UK

Marcon

Simoncello said:

I lived and worked in the US for 5 years (1993-1998) and contributed to my (then) employer’s 401k. I left the US in 1998 and surrendered my Green Card in 2000. No 401k contributions were made after 1998. 

According to Fidelity (who hold my 401k) the terms of my the plan dictate that I receive a 100% lump sum distribution at age 59.5 (in May 2023). I am happy with this, no objection…  I’d prefer a lump sum rather than drawdown. However, US withholding tax will be deducted at source and while I believe no UK tax may be due, I need definitive answers. 

I need to properly understand the US + UK tax liabilities. 

Any recommendations for tax advisers who have specialist knowledge of 401k’s and UK/US respective tax treatments?

PS - I’ve read several threads (see links below) suggesting there may not be any UK tax to pay if it’s a lump sum payment, but there’s no definitive info about how I can reduce (or avoid) US withholding tax, or what the correct way of handling the payout from a UK perspective is. 

I want to get proper, informed advice, as well as declare the taxes correctly in each country.

https://forums.moneysavingexpert.com/discussion/5859857/us-uk-tax-on-usa-pension-for-british-citizen-and-resident

https://forums.moneysavingexpert.com/discussion/6246304/retirement-funds-from-the-usa-access-and-taxes

Double tax on US pension incomr - Community Forum - GOV.UK

Any of the big UK accountancy firms will have someone able to assist; ditto the large employee benefit firms operating in both the UK and US.

bostonerimus

Your situation is pretty simple. I imagine that the 401k balance must be quite small as that's the only reason I can think of for Fidelity requiring a lump sum distribution. Your distribution is covered by the US/UK tax treaty Article 17, p. 2.

"2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State."

I don't think that you can claim reduced withholding for a lump sum distribution under the treaty and so Fidelity will just hold back 30% and then you'll have to file a 1040-NR to get your refund...hopefully. There is no UK tax liability. So take the distribution, hopefully Fidelity will be ok depositing it to a foreign bank, and file the 1040-NR, you presumably still have a SSN.

If you do an SA you could enter the pension on the foreign pages and apply a 0% tax rate and claim the treaty exemption and if you don't you could just write to HMRC telling them about the pension and claiming the exemption from UK tax.

Here are a couple of very knowledgeable UK/US tax professionals in case you need help.

http://www.americantaxreturns.co.uk/
https://www.britishamericantax.com/

Simoncello

Thanks.

My 401k pot is $292k (~ £237k) so not insubstantial...  

You can understand why I don't wish to give up 30% of that unless absolutely required.



Edit:
I just called Fidelity and received completely different information: I'm not required to take a 100% disbursement.

You can see why I want to use a US/UK tax specialist to make sure this is straight/properly(!) 

bostonerimus

Simoncello said:

Thanks.

My 401k pot is $292k (~ £237k) so not insubstantial...  

You can understand why I don't wish to give up 30% of that unless absolutely required.



Edit:
I just called Fidelity and received completely different information: I'm not required to take a 100% disbursement.

You can see why I want to use a US/UK tax specialist to make sure this is straight/properly(!) 

OK that sounds more sensible from Fidelity. Here is a nice IRS explanation of how distributions from a 401k are treated. Tax deferred contributions are considered Effectively Connected Income and so you'll pay tax at the usual US rates, not the 30% flat rate, but any investment growth will be taxed at 30%. You still can't avoid the 30% withholding if you do the lump sum, but you might get a bit back after filing the 1040-NR.

https://www.irs.gov/pub/irs-utl/deferred-compensation-nra.pdf

If you choose to take periodic payments then the UK will tax you and you'd file a W-8BEN with Fidelity and claim 0% withholding and tax treaty exemption from US tax.

Simoncello

Many thanks Bostonerimus that's great info and I have read through it. 

Your answer, and the info in the document, suggest that the employee contributions I made to the 401k - and the growth on those contributions - are taxed at different rates...   the employee contributions being considered ECI and taxed at prevailing US tax rates, and the growth on those contributions taxed at 30%. Is the para circled in the picture below what you are referring to? 

And so this suggests that the employee contributions and the growth itself are taxed at different rates, correct? 

So if I understand this correctly, the entire distribution, when paid out, will have 30% withholding. If I then file form 1040-NR I should receive a refund of the difference between the 30% withholding and the actual tax due on the ECI portion only (i.e. my contributions). Is that correct?

 

bostonerimus

Simoncello said:

Many thanks Bostonerimus that's great info and I have read through it. 

Your answer, and the info in the document, suggest that the employee contributions I made to the 401k - and the growth on those contributions - are taxed at different rates...   the employee contributions being considered ECI and taxed at prevailing US tax rates, and the growth on those contributions taxed at 30%. Is the para circled in the picture below what you are referring to? 

And so this suggests that the employee contributions and the growth itself are taxed at different rates, correct? 

So if I understand this correctly, the entire distribution, when paid out, will have 30% withholding. If I then file form 1040-NR I should receive a refund of the difference between the 30% withholding and the actual tax due on the ECI portion only (i.e. my contributions). Is that correct?

 

Yes, that's my understanding and how I read the document.

You sould also post your question on a more specialist expat site where you'll get more help.

https://britishexpats.com/forum/usa-57/

https://talk.uk-yankee.com/index.php?board=11.0

EdSwippet

Simoncello said:

Your answer, and the info in the document, suggest that the employee contributions I made to the 401k - and the growth on those contributions - are taxed at different rates...   the employee contributions being considered ECI and taxed at prevailing US tax rates, and the growth on those contributions taxed at 30%. Is the para circled in the picture below what you are referring to? 

And so this suggests that the employee contributions and the growth itself are taxed at different rates, correct? 

So if I understand this correctly, the entire distribution, when paid out, will have 30% withholding. If I then file form 1040-NR I should receive a refund of the difference between the 30% withholding and the actual tax due on the ECI portion only (i.e. my contributions). Is that correct?

I wonder about this. Article 25 of the US/UK treaty reads (I've added country interpolations):

1. Nationals of a Contracting State (the UK) shall not be subjected in the other Contracting State (the US) to any taxation or any requirement connected therewith that is more burdensome than the taxation and connected requirements to which nationals of that other State (the US) in the same circumstances, particularly with respect to taxation on worldwide income, are or may be subjected.

A US citizen living in the UK would only pay lower ECI rates on the entire 401k withdrawal. No splitting into ECI and higher-taxed FDAP elements for them. Reading round the appalling way this sentence is constructed, it would seem that a UK citizen should be taxed by the US in the same way, then; that is, all ECI.

(Of course, the US also disallows the 'standard deduction' for anyone who is not a US citizen or resident, so there's that as well ...)

bostonerimus

Being a US citizen I'd never really looked into how NRA distributions are taxed by the IRS. I was surprised to see the distinction between tax deferred earned income and growth and dividends given how a US citizen just has them lumped together as income when withdrawals are made. 

ritchie12

Simoncello said:

I lived and worked in the US for 5 years (1993-1998) and contributed to my (then) employer’s 401k. I left the US in 1998 and surrendered my Green Card in 2000. No 401k contributions were made after 1998. 

According to Fidelity (who hold my 401k) the terms of the plan dictate that I receive a 100% lump sum distribution at age 59.5 (in May 2023). I am happy with this, no objection…  I’d prefer a lump sum rather than drawdown. However, US withholding tax will be deducted at source and while I believe no UK tax may be due, I need definitive answers. 

Hi,

Thanks for asking this question, and thanks to the others who have posted great advice. I am in a similar position, and have a Rollover IRA with Fidelity. I was under the impression that the earliest I could make any withdrawals was between the age of 59.5 to 73, and after 73 it was mandatory. I was hoping to keep the account active for as long as possible.... Did Fidelity tell you that you had to make a complete lump sum withdrawal at 59.5 and effectively close the account?

Simoncello

Hi Ritchie12,

Yes, initially a Fidelity representative told me that I had to make a 100% lump sum withdrawal at age 59.5 as those were the "terms of the plan".

However, that turned out to be bum info: I spoke to a different Fidelity agent last week who said no, those are not the terms of the plan, and a 100% lump sum withdrawal is not mandatory. Tbh, it's immaterial to me... I fully intend to take 100% lump sum in any case. 

My original question was "Any recommendations for tax advisers who have specialist knowledge of 401k’s and UK/US respective tax treatments?" and I got a couple of links in this thread.

I just wanted recommendations rather than me randomly picking a firm/individual from a Google search.