UK/UK taxation of government 457(b) plan

Here's an interesting one. The US 457(b) plan is a tax deferred savings plan available to employees of US local governments, states and tax-exempt organizations. Contributions are tax deferred and grow tax free until distributions are made when they are taxed as income. In those respects they are similar to 401ks and 403bs. However, the distributions can be taken without penalty at separation from service.

So how does HMRC see the 457(b), is it a pension? If it's funded from US state or local government funds Article 19 applies, but which paragraph? Finally how is the savings clause applied to a UK citizen, US citizen and UK/US dual citizen permanently resident in the UK?

I'm still mulling this one over.

I have a government 457 plan funded while employed by the state of Massachusetts. The government 457 is a US non-qualified deferred compensation plan. MA does not contribute to it, but I choose to defer a portion of my wages and put them into the plan. This lets me defer payment of tax on the income and any gains until I take distributions.

I am a US/UK dual citizen and thinking of moving permanently to the UK. So what are the tax implications? Can this money continue to grow tax deferred from both US and UK taxes until I take distributions? Are 457 plans covered by the Treaty? Do Articles 18 and 19 apply. What would be the implications of my dual US/UK citizenship and UK residency on the taxation of gains and income? So many questions!

I thought a 457(b) to be an eligible plan, it's the 457(f) that would cause problems. I don't see you having any problems with HMRC. I see it as nothing more then a 401(k), (less the employer contribution). These 457 plans were good for contractors I believe too.

In essence it's a bit like an IRA with higher limits, but done via salary deferral.

I thought a 457(b) to be an eligible plan, it's the 457(f) that would cause problems. I don't see you having any problems with HMRC. I see it as nothing more then a 401(k), (less the employer contribution). These 457 plans were good for contractors I believe too.

In essence it's a bit like an IRA with higher limits, but done via salary deferral.

The 457b isn't mentioned as a pension plan in the Treaty, 401k, 403b IRA etc are. I'm mostly concerned whether gain in the plan will remain UK tax free when I'm a UK resident and deciphering the logic of Article 19.

I believe the plan is a "corresponding scheme" and will allow any internal gain to grow tax deferred. At the end of the day, the IRS allow tax deferral, so HMRC will too.

I believe the plan is a "corresponding scheme" and will allow any internal gain to grow tax deferred. At the end of the day, the IRS allow tax deferral, so HMRC will too.

I can't say I'm as optimistic as you. I think of the issues with SIPPs where HMRC allows tax deferral on contributions and growth, but it isn't crystal clear what the IRS does. My 457 has no employer contributions and I can get at the money without penalty when I leave my job. So it's materially different from 401k and IRAs and it's also paid for from government funds so that's another wrinkle. I could just roll it over into an IRA to be sure of tax deferred growth, but then I'd have to wait until I'm 59.5 to take income penalty free.

You say your thinking of moving to the U.K. As you're Stateside right now, I would write to HMRC for clarification. From there you'll be able to assess the situation and take any necessary action, based on received guidance... I still recon you're OK though.


 

I believe the plan is a "corresponding scheme" and will allow any internal gain to grow tax deferred. At the end of the day, the IRS allow tax deferral, so HMRC will too.

You can think it all you want but if hmrc don't list it as a corresponding scheme, i would be more than wary.

You can think it all you want but if hmrc don't list it as a corresponding scheme, i would be more than wary.

Exactly. If HMRC uses similar logic to the IRS they might see the 457b as a foreign trust invested in non-distributor funds.

Interestingly the 2006 US/Belgium Tax treaty specifically includes 457b pension plans

You can think it all you want but if hmrc don't list it as a corresponding scheme, i would be more than wary.

Interestingly the 457 plan is a non-qualified pension plan and to set up withholding tax you use a W-4, NOT the W-4P you'd use for a qualified plan. I've written to HMRC asking for some clarification as how they see it.