Transatlantic Pension

Hello All,

This is my first post on this forum. I've been trying to find answers concerning my 401K Rollover pension. But the responses from elsewhere (IRS, HMRC, etc,) have been at best vague, at worst contradictory. So, I plan to use the K.I.S.S. principle. Here goes...

I'm both a US and UK citizen and have been 10 years resident in the UK.

I lived in the US from 1989 to 2003. I divorced my first husband in '03, taking possession of half of the 401K funds, which now stand at about $100,000.

I was a homemaker in the US, and have not filed a US tax return for some time.

My new husband and I have a business and I want to use the 401K funds to invest in it. We are currently self-employed and earning less than our UK tax threshold.

The funds will become available to me in three months' time. I'd like to draw them as a lump sum for investment - they won't be considered as or used as income.

I understand that the US may take 10% of the sum, or it may not. I know a little about the exemption part of Form W9 but the use of other forms, such as W-4P has been mentioned.

My UK accountant suggests that I need proof of any taxes taken in the US on withdrawal of the funds. She can then calculate the applicable UK taxation, if any.

So, all very confusing. My questions are...

Need any tax be taken in the US?

I believe it's possible to use US taxation as a form of credit against UK taxation. Is this so?

Is there a means of avoiding all taxation?

So, the bottom line is...

Thanks in advance.

A 401(k) is not a UK registered pension plan. You have possibly decided to elect into the treaty in the past by filing UK tax returns claiming that income and gains within the plan are not UK taxable under the treaty. If you have not made such elections it is simply from a UK perspective a foreign investment account .

You may choose to take an LSD (lump sum distribution). It would only be taxable in the US if you elect the treaty on your UK return.

You may owe US tax and may owe an early withdrawal penalty.

Separately you and your accountant will want to consider if there are any unauthorised payment charges in the UK. HMRC explain these here:

http://www.hmrc.gov.uk/helpsheets/hs346.pdf

It sounds as if you need to filing US returns and FBARs.

Quite apart form the tax issues early withdrawal from a 401k should be avoided if at all possible. You will pay income tax on the LSD and a 10% early withdrawal penalty and loose all future tax deferral.

Thank you, people, your responses are much appreciated.

My husband and I knew to avoid early withdrawal of the funds.

The HMRC info is useful, thanks. Also had a look at the FBAR form.

Part of plan A is to also consult a UK-based Us/UK tax expert - I've the numbers of two in London, so I'll be giving them a call after the Bank Holiday.

Thanks again, and all the best,

Wasp

Hello again,

Here's an update, of very little progress 

The 401K rollover doodad stands at just under $100,000. I've been told that 30% tax will be taken in the US, unless I specifically ask for it not to be.

A accountant (in Carlisle) wants a look at the papers but may be unable to help me. The rollover matures in August.

I've lived and worked in the UK with my 2nd husband for ten years now. Even as a couple, we haven't earned enough to pay much UK income tax. I myself have earned very small amounts.

So, here's the questions...

If I choose to ask for the 30% taxation not to be taken, do I just draw the funds in toto, quietly?

Do I have to fill in US tax returns for the last ten years?

If so, is there a benchmark, like the UK personal allowance, to be factored in.

Are there any other workarounds?

Thanking you in advance,

Wasp 

The 401K rollover doodad stands at just under $100,000. I've been told that 30% tax will be taken in the US, unless I specifically ask for it not to be.

If you are a US citizen resident abroad your 401k administrator must withhold tax on any distributions. You don't get any choice in the matter. I think the amount will be 20%.

I've lived and worked in the UK with my 2nd husband for ten years now. Even as a couple, we haven't earned enough to pay much UK income tax. I myself have earned very small amounts.........

Do I have to fill in US tax returns for the last ten years?



Wasp 

I would get into full compliance with US taxation and fill US taxes for any years that you earned enough to have to file.

Thank you, nun, great information.

Anyone have any idea of the US equivalent of the UK personal allowance? 

depends on your filing status and the tax year; a bit more complicated than the UK personal allowance