1040NR for 401K

Hello,

I'm looking to close my 401k and wire the funds back to the UK. I see inconsistent advice on the net about how to do this and the implications, so I'd appreciate a sanity check on what I'm proposing to do and why.

I lived and worked in the US nearly 20 years ago. I haven't filed US taxes since I returned to the UK and gave up my green card just after that. I do have some US-sourced income from book royalties but I've filed a W-8BEN so I pay UK taxes on those. I'm older than 59.5 .

I believe I need to pay US federal taxes (but not UK taxes), and claim excess US taxes back.  Here's what I've been advised directly:

• Fidelity (which holds my 401k: we'll deduct 30% federal taxes and there's nothing I can do about it. This is about twice what I should pay, given that I have no other income taxable in the US
• Phone call to HMRC: I don't need to pay UK tax on the proceeds
• Phone call to US-UK tax specialists: you need to file a 1040NR to get the excess federal tax deducted back; we'll do that for you for £650+VAT

Does all of that sound like correct advice?

And has anyone used a service like Sprintax to file a 1040NR without incurring quite such a hefty fee? (Although I'm not yet sure Sprintax is available if you don't live in the US.)

Your thoughts would be greatly appreciated.

That all sounds correct to me except for claiming foreign tax credits. Foreign tax credits are to avoid being taxed twice and since you will only be paying US taxes you can’t expect HMRC to pay for that.

Exchange rates mean this is a great time to do this. Well done.

I’m sure you can file your own 1040NR with free fillable forms or similar. Hopefully someone will come along and point you in the right direction. I pay for TurboTax each to efile our return

Thanks but what foreign tax credits?!

Thanks but what foreign tax credits?!

Apologies, I misread your statement about claiming back excess US taxes as having to use tax credits.  You will simply file a US tax return and claim back excess withholdings that will have been made by Fidelity when you withdraw your 401k funds.

My bad.

I have mandatory withholdings made when I withdraw from my Roth IRA even though Roth IRA withdrawals are all tax free for someone my age. Annoying it is.

Hello,

I lived and worked in the US nearly 20 years ago. I haven't filed US taxes since I returned to the UK and gave up my green card just after that. I do have some US-sourced income from book royalties but I've filed a W-8BEN so I pay UK taxes on those. I'm older than 59.5 .

The above part from your original post interested me - how long did you live and work in the US for? Have you considered any US Social Security contributions you made? Given that you you gave up your green card, not sure how that will impact you, but you may find this topic (started by me) interesting:

https://talk.uk-yankee.com/index.php?topic=100424.0

Thanks for your interest. I was there for four years and I have established that I'll be due about $400/month when I'm 66 .

I guess that, as with the US pension which I'll also be due, I can file a form to pay tax on this in the UK as opposed to the US. Do you have experience of that?

Thanks for your interest. I was there for four years and I have established that I'll be due about $400/month when I'm 66 .

I guess that, as with the US pension which I'll also be due, I can file a form to pay tax on this in the UK as opposed to the US. Do you have experience of that?

I receive a US pension here in the UK and my wife receives SS. (I'll apply for SS in 3 years time).

We are both USC/UKC living in the UK so it may be a little different for you.  The US private pensions I receive are taxed primarily by HMRC but also by the IRS so I have to file an IRS return (the IRS get the 1099-R forms which have withholdings on them) and I use US foreign tax credits on my IRS return to reduce those taxes to zero as HMRC taxes are higher than the IRS.

SS is ONLY taxed in the UK so if you have no other US taxable income you should not have to file an IRS return.  Along with my wife we file MFJ in the USA and report her SS money received but put zero for the taxable amount. (Lines 6a and 6b on the 1040)

Not completely sure what the situation is with a UKC only receiving US pensions and SS.

As a UK resident, HMRC tax you on your worldwide income, (primary taxing authority). Under the DTA, your 401(k) should attract reduced, or zero IRS taxation.

I just don't see how HMRC advise that you have no tax liability. At the very least, you'd take an IRS FTC, and apply to your HMRC SA. This would lower your UK tax liability. (you don't pay tax twice on the same income).

I'm confused about the OP 's statement that the 401k withdrawal is taxed in the US, but not the UK.

Is this different from the tax treatment for a Required Minimum Distribution (RMD) from an IRA?  I thought, like US Social Security, RMD would be the opposite  (tax paid to HMRC, not IRS)

I took my first RMD in January so the transaction will be in the 2022 US and 2021/22 UK tax years.  As required by law, the brokerage firm withheld US income tax.  Because I thought this was exempt from US tax, I wasn't going to include the value in my total income, similar to how the treaty allows us to enter "nil" for Social Security.  My plan has been to pay HMRC the tax by December 31st and take a Resourced By Treaty credit.  I can still do that -- but now I wonder if I must include the value of the RMD alongside other income on the 1040? 

OR,... if it is like a 401k, do I not declare this to HMRC?

I'm dual US/UK citizen living in UK.

Thanks in advance for your help.

The OP is talking about taking his entire 401k as a single lump sum which is why it will only be taxed in the USA.

The OP is talking about taking his entire 401k as a single lump sum which is why it will only be taxed in the USA.

Aha!

Thanks.

Is this different from the tax treatment for a Required Minimum Distribution (RMD) from an IRA?  I thought, like US Social Security, RMD would be the opposite  (tax paid to HMRC, not IRS)

I took my first RMD in January so the transaction will be in the 2022 US and 2021/22 UK tax years.  As required by law, the brokerage firm withheld US income tax.  Because I thought this was exempt from US tax, I wasn't going to include the value in my total income, similar to how the treaty allows us to enter "nil" for Social Security.  My plan has been to pay HMRC the tax by December 31st and take a Resourced By Treaty credit.  I can still do that -- but now I wonder if I must include the value of the RMD alongside other income on the 1040? 

OR,... if it is like a 401k, do I not declare this to HMRC?

I'm dual US/UK citizen living in UK.

Thanks in advance for your help.

You will receive a 1099-R for your RMD similar to how I receive a 1099-R for my US pension so you would do as you suggest (and I do)  by listing it on your 1040 as retirement income then claim a foreign tax  credit marked as Resourced By treaty for the taxes paid on it to HMRC.

For our SS we enter the whole amount from the SSA-BEN form on line 6a on the 1040 and zero in line 6b as the whole of it is only taxable in the UK.

Whether or not withholding tax is taken by the payor, you will file Form 1040-NR.  The lump sum will largely be taxed at 30%, with only a small segment at graduated rates.  Hopefully the tax professional you consulted has explained these rules.

As Guya mentions, a portion of the distribution will be taxed at graduated rates and the remainder will be taxed at a flat rate of 30%.  The portion taxed at graduated rates is the amount that you/your employer contributed into the 401(k).  The remaining balance distributed relates to the earnings that were generated on the original contributions.  These earnings are sometimes referred to as “earnings and accretions”.  The earnings and accretions portion of the distribution is taxable at a flat 30% rate.