Author Topic: 401k Contributions as UK Employee Possible?  (Read 1576 times)

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Offline ES

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401k Contributions as UK Employee Possible?
« on: January 21, 2014, 05:28:41 PM »
I've been living in the UK for the past few years and have taken advantage of my UK employer's stakeholder pension plan.  As a UK employee, I do not have access to a US 401k plan and can only contribute a max of $5.5k to my traditional IRA per year (which I roll-over into my ROTH IRA). 

As a sanity check, am I correct in my understanding that there are really no alternative ways to contribute money into a US 401k plan or similar?  (I've read about 401k plans for self-employed folks but not sure if that helps...)  Basically, the question is whether there if there is any way for someone in my situation to contribute to a US retirement plan besides the $5.5k annual contribution.

Alternatively, I will continue contributing to the UK pension and hope for a kind GBPUSD fx down the road....

Thanks!

Offline nun

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Re: 401k Contributions as UK Employee Possible?
« Reply #1 on: January 21, 2014, 08:07:34 PM »
Unless you work for a US company in the UK and they allow you access to their US 401k plan there is no way for you to contribute to a 401k plan while in the UK.

Why do you put money into an IRA and then rollover to a ROTH rather than going directly into the ROTH?

Offline ES

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Re: 401k Contributions as UK Employee Possible?
« Reply #2 on: January 21, 2014, 09:46:14 PM »
Thanks for the sanity check!

Not eligible to contribute directly to a ROTH, so need to go through the traditional / immediate conversion route. 

Not necessarily for everyone...http://www.forbes.com/sites/josephsteinberg/2012/12/12/warning-about-roth-ira-conversions-often-misunderstood-irs-rule-can-cost-you-money-and-aggravation/

Offline nun

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Re: 401k Contributions as UK Employee Possible?
« Reply #3 on: January 21, 2014, 11:43:23 PM »
Ok, so "backdoor ROTH" is required in your circumstances.

You might have some interesting tax planning opportunities so talking to a professional might be beneficial. FYI your rollovers will only be taxable in the US and withdrawals from the ROTH that meet the US rules will be tax free in both the US and the UK. This might also be useful as you are contributing to an IRA with foreign source income.

http://www.ukustax.com/wp-content/uploads/2012/03/Roth-Article-28-Oct-10.pdf

Offline ES

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Re: 401k Contributions as UK Employee Possible?
« Reply #4 on: January 21, 2014, 11:59:28 PM »
Thanks you for that article- I (unfortunately?) converted alll my traditional IRA/410k accounts to ROTH before even considering to move abroad.  (Hopefully the gains have offset the taxes that I already paid!)

Offline guya

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Re: 401k Contributions as UK Employee Possible?
« Reply #5 on: January 22, 2014, 08:39:58 AM »
But assuming you have not elected into the treaty on your US tax returns; you'll have basis in the employer's pension plan equal to the vested accrued benefit.

You'll still have to decide if you want to elect into the treaty on your UK returns to avoid current taxation on income in the IRAs.

Offline ES

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Re: 401k Contributions as UK Employee Possible?
« Reply #6 on: January 22, 2014, 10:19:57 AM »
My tax adviser in the UK has filed Form 8833 for me each year, deducting UK pension contributions under 18(5) of the UK/US treaty (deductions limited to those permitted under an equivalent US plan).  Sorry if I'm missing something else here? 

Offline guya

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Re: 401k Contributions as UK Employee Possible?
« Reply #7 on: January 22, 2014, 05:50:16 PM »
My tax adviser in the UK has filed Form 8833 for me each year, deducting UK pension contributions under 18(5) of the UK/US treaty (deductions limited to those permitted under an equivalent US plan).  Sorry if I'm missing something else here? 
So you have elected for a position that gives you the lowest basis for US tax purposes on retirement. This is an unconventional choice if you are planning on retiring in the US.  Did you provide the tax adviser with details of your own and your employer's contributions each year?

Offline nun

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Re: 401k Contributions as UK Employee Possible?
« Reply #8 on: January 25, 2014, 04:17:26 AM »
So you have elected for a position that gives you the lowest basis for US tax purposes on retirement. This is an unconventional choice if you are planning on retiring in the US.  Did you provide the tax adviser with details of your own and your employer's contributions each year?

I agree with Guya here. From your posts it seems that you are quite highly compensated and so could have substantial FTCs to apply against US tax. If you plan to retire in the US it might be prudent to pay US tax on your UK pension contributions as they go in, but use the FTCs to cover that US tax, thus building up a US tax free basis in the UK pension at no cost to you.

Offline ES

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Re: 401k Contributions as UK Employee Possible?
« Reply #9 on: January 27, 2014, 09:53:37 AM »
Thanks, all!  This board is really incredible.

I do track all contributions to my UK pension, especially in respect of which contributions I've treated as tax deductible for US purposes and which are not.  I understand that the pension will grow tax free, and non-deductible contributions will give rise to a non-taxable distribution in the future (similar to a ROTH IRA) and the deductible portion will be taxable upon distribution (similar to a traditional IRA).

One question about future distributions -- I'm a bit unclear how the US rules treat a "mixed" account.  I understand that the UK will tax the entire pension if I am still resident in the UK at that time, so let's assume I have left the UK and have no excess FTCs.  As there are two contribution "buckets" in the UK pension, when I receive a distribution in the future, do the US rules treat the fact that the pension has both deductible and non-deductible contributions on (1) a pro rata basis based on initial contribution percentages or (2) a waterfall based on the initial contribution amount (i.e., nontaxable money distributed first, then taxed on remaining). 

(2) seems inequitable given that if the account was comprised 100% of nondeductible contributions, the entire pension would be treated as tax free upon distribution. 

That being said, I plan to discuss with my adviser whether it makes sense to re-file the previous 2 years to treat all UK pension contributions as non-deductible.

Offline politicfool

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Re: 401k Contributions as UK Employee Possible?
« Reply #10 on: January 27, 2014, 11:09:33 AM »
Remember that you'll also have growth within the pension, all of which will be taxable, so ensure you include that in the same bucket as the deductible contributions. Your pension operates similarly to a traditional IRA containing nondeductible contributions, which is not the same thing as a Roth IRA.

The IRS provides guidance for figuring the taxable amount of traditional IRA distributions and figuring the taxable amount of 401k distributions. In both cases they use a pro rata method.
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Offline ES

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Re: 401k Contributions as UK Employee Possible?
« Reply #11 on: January 27, 2014, 11:46:47 AM »
Your pension operates similarly to a traditional IRA containing nondeductible contributions, which is not the same thing as a Roth IRA.

This explains a lot of my confusion.  Makes more sense now -- and am also less worried about re-filing previous years, since the growth is taxable in any event.

What are the group's thoughts about not treating the pension as a pension for US tax purposes during the time I live in the UK -- and paying US tax on the UK pension gains each year -- thereby building up the US tax basis in the UK pension with my excess FTCs.   

If I were to leave the UK (and have no more FTCs), I would start claiming treaty benefits (and have a larger tax basis in the pension).  Not sure if this is a tested approach?

Offline guya

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Re: 401k Contributions as UK Employee Possible?
« Reply #12 on: January 27, 2014, 07:11:10 PM »
I think it be more helpful to us if you asked these questions to your existing tax adviser and reported back on her or his answers so that we can debate if her or his answers are reasonable positions.

Offline ES

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Re: 401k Contributions as UK Employee Possible?
« Reply #13 on: January 28, 2014, 10:50:28 AM »
In respect of this question, my adviser does not think this works, due to the different nature of the FTCs in play here (passive vs active income mismatch). 

Offline nun

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Re: 401k Contributions as UK Employee Possible?
« Reply #14 on: January 28, 2014, 06:26:58 PM »

What are the group's thoughts about not treating the pension as a pension for US tax purposes during the time I live in the UK -- and paying US tax on the UK pension gains each year -- thereby building up the US tax basis in the UK pension with my excess FTCs.   

If I were to leave the UK (and have no more FTCs), I would start claiming treaty benefits (and have a larger tax basis in the pension).  Not sure if this is a tested approach?


You'd have to deal with PFIC on the funds within the account which could be a tax and paperwork nightmare.

If you just built up a US tax free basis using FTC you'd still have to carefully track that basis. As your retirement account has similarities to an IRA in that it will have both taxable and non-taxable amounts, but it isn't an IRA so while it sounds sensible to apply the rules for determining the taxable and non-taxable portions of any withdrawals who knows if that's right.