Roth or pension?

We plan to participate in my husband's work pension plan, and also to have Roths at Charles Schwab.

If we have an extra sum of money that can go into either, which makes most sense? We don't know if we will retire in the UK or US, so my original thought was to keep the accounts equal.

BUT, the 20% top up from HMRC is very attractive.

On the other hand, the funds we will choose for our Roths will have lower fees, and we can take contributions out with no penalty.

This debate is similar in the US and other countries. Do you want a TEE or an EET type plan is the essential question. The wrinkle here is that if you do not elect into the treaty you will have some basis for the UK plan, and use up excess foreign tax credits. Consequently not electing for treaty benefits might swing it towards a UK plan if you plan on drawing benefits when living in the US.

Thanks! Could you explain more about using up the foreign tax credits?

I also felt like keeping the plans equal would help with currency risk since we don't know where we will retire.

I would make sure you are contributing enough into your UK work pension to get the maximum matching employer contribution if there is any variation in that.

Then I would contribute to the ROTH. To do that you have to have earned income on your 1040, so you probably want to look at FTCs to cover your US tax bill. As Guya suggests a sensible approach might not be to claim treaty exemption for your employee and employer pension contributions if your US exemptions and deductions and FTCs cover the US tax bill for those and your other taxable earnings. You would want to claim treaty exemption from tax on any gains. Then you would have a large US tax free basis that would be useful if you move back to the USA.

The ROTH is nice as withdrawals are tax free in both the US and the UK.


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The employer will give us the money to invest as we want to.  However, then we won't get the 20% from government.

I have used Foreign tax credits for years so have US taxable income plus lots of carryover credits. How does one actually use these carryover credits? Is there a place on 1116, guidance on Turbotax?

Interesting idea.  I wonder if the foreign tax credits would cover any tax due on contributions because the ftc tends to be capped.  I could play around with Turbotax.  If I did it that way, would I also have to pay tax to HMRC on those contributions?

It sounds a bit complicated. 

If we move back to US and draw on UK pension, does it only get taxed by US?

Pros and cons to this strategy of building up a tax-free basis?




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If we move back to US and draw on UK pension, does it only get taxed by US?

Pros and cons to this strategy of building up a tax-free basis?

If you are US resident, and we are not talking about Government pensions, then a UK pension will only be taxed in the US. If you have a US tax free basis on the contributions you'd only have to pay income tax on the gains you have made over the years.

Very good. Do you think it works for most people to take this tax-free basis? Or should I just plug in numbers next year and see how different scenarios play out?

If you are US resident, and we are not talking about Government pensions, then a UK pension will only be taxed in the US. If you have a US tax free basis on the contributions you'd only have to pay income tax on the gains you have made over the years.

Very good. Do you think it works for most people to take this tax-free basis? Or should I just plug in numbers next year and see how different scenarios play out?

Plug in the numbers; FEIE, FTC or treaty.

Building up a US tax free basis is only really advantageous if you retire to the US and it will require some good documentation and accounting.

Do bear in mind that the actual basis percentage is pretty tough to calculate; because the calculation is based on a formula set out in US Treasury Regulations that are drafted in weirdo government and actuarial language.

Do bear in mind that the actual basis percentage is pretty tough to calculate; because the calculation is based on a formula set out in US Treasury Regulations that are drafted in weirdo government and actuarial language.

Are you referring to "The General Rule"? As an aside I was going to use that to calculate the tax free basis in my UK state pension as I've paid for it entirely with voluntary contributions from after tax US earnings....is that kosher?

I think I have seen lawyers argue that it treif; but I honestly cannot recall where!

Plug in the numbers; FEIE, FTC or treaty.

Building up a US tax free basis is only really advantageous if you retire to the US and it will require some good documentation and accounting.

One easy way of keeping a running tally of both basis and gains would be to report the figures each year on the Form 8833 that you file in order to exempt the gains from taxation. Each year, calculate the basis as (non-deductible contributions made during the year + basis from previous year). Similarly report the gains during the year as (year end balance - previous year end balance - contributions).

I think I have seen lawyers argue that it treif; but I honestly cannot recall where!

Well any UK SS is going to go on line 16 of my 1040 and the instructions talk about using The General Rule to work out any tax free basis and my contribution have Ben made with US after tax dollars. I won't be doing this for another 12 years, but that will be my starting point and if the IRS disagrees I'll listen.


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One easy way of keeping a running tally of both basis and gains would be to report the figures each year on the Form 8833 that you file in order to exempt the gains from taxation. Each year, calculate the basis as (non-deductible contributions made during the year + basis from previous year). Similarly report the gains during the year as (year end balance - previous year end balance - contributions).

Keeping track of such things is conceptually simple, but over 30 or 40 years it is tricky. Given the lack of knowledge and interest most people have when it comes to retirement saving I doubt how well it would be done. Also financial companies often limit the historical data they will provide so making paper copies as you go is vital......I still don't trust electronic record keeping for finances. I have things stored electronically, but do paper copies each year and put them somewhere safe.


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It sounds a bit like how the IRS will tax our Canadian RRSPs. When we go to withdraw them, our contributions are not taxed by IRS but growth is. 

Difference is Canada takes a big chunk of tax first, so once we take credit for those taxes, the tax-free basis may not even matter. 

I just keep a record every year of our RRSP contributions along with what the exchange rate was that year. Will that be sufficient for the method you are describing?