US pensions and retirement savings and living in the UK

We are thinking of retiring to the UK from the US, in 2017 or possibly 2018. I’m a UKC who has been in the US for 40 years on a green card, my wife is a USC.

We will have a mix of Social Security, private pension, a pension through California State Teachers Retirement Fund, and a collection of tax-deferred savings accounts in an IRA, Keoghs, and 401(k). There will be no UK pension.

This raises many questions.

I believe the SS is easy, it’s taxed in the UK. It doesn’t get reported as income in the US, is that right? I also believe that the full amount will be taxed because the UK government is planning to do away with the 90% rule.

The CalStrs pension I’m not sure of—is it a state pension?  Is the difference really only whether or not there is withholding?

The private pension distributions will have taxes withheld in the US, but they are taxed in the UK, so the UK taxes are ultimately credited against the US taxes and will probably result in a tax refund from the IRS.

Is there anything special about a private pension that would make that not true? Mine is from a union job I had in the film industry in the 1980’s, no government involvement.

Most of the retirement savings are in my name and have been building in an assortment of mutual funds for more than 20 years. What’s the best way of dealing with those accounts to simplify life and minimise the tax cost? I know I can roll it all over into one IRA, preferably in HMRC reporting funds. Obviously there are capital gains and dividends accumulated in the funds, how are those dealt with? Does rolling over into one IRA reset the clock on capital gains as far as HMRC is concerned? I believe distribution from such an IRA will be subject to withholding as above, unless it’s a Roth IRA.

I know that if it were in a Roth IRA then withdrawals would be tax free in both countries, but the tax hit of moving it all into a Roth over one or two years would be brutal.

Does the fact that my green card will no longer be valid change the tax situation at all.

Since HMRC is not going to know about all of these fund disbursements and withdrawals I assume we’ll have to do self assessment if we’re living in the UK.

That’s a lot of questions, sorry. And a bunch of assertions any number of which might be completely wrong.

It makes my head hurt, but I suspect that hiding under the pillows until it goes away is a flawed approach.

I believe the SS is easy, it’s taxed in the UK. It doesn’t get reported as income in the US, is that right? I also believe that the full amount will be taxed because the UK government is planning to do away with the 90% rule.

Yes as it is a cross border SS payment it is only taxable in the UK and you are right that the UK is looking at taxing foreign pensions at 100%

The CalStrs pension I’m not sure of—is it a state pension?  Is the difference really only whether or not there is withholding?

This is a government pension and so Article 19 of the DTA applies. It will be taxable only in the US if paid to a US citizen living in the UK, taxable only in the UK if paid to a UK citizen living in the UK and will be taxable in both the US and the UK if paid to a UK/US dual citizen living in the UK. The withholding should depend on your citizenship, but as it's an annuity type income it should be zero for a UK citizen.

The private pension distributions will have taxes withheld in the US, but they are taxed in the UK, so the UK taxes are ultimately credited against the US taxes and will probably result in a tax refund from the IRS.

Is there anything special about a private pension that would make that not true? Mine is from a union job I had in the film industry in the 1980’s, no government involvement.

Yes, there might be withholding, often at 30% if they are periodic payments. But it depends on the administrator. If they are annuity type payments you can set the withholding level. If the payments are made to a UK citizen living in the UK (ie not a US permanent resident) then there is no US tax due at all and any withholding can be claimed back using Article 17 of the DTA.

Most of the retirement savings are in my name and have been building in an assortment of mutual funds for more than 20 years. What’s the best way of dealing with those accounts to simplify life and minimise the tax cost? I know I can roll it all over into one IRA, preferably in HMRC reporting funds. Obviously there are capital gains and dividends accumulated in the funds, how are those dealt with? Does rolling over into one IRA reset the clock on capital gains as far as HMRC is concerned? I believe distribution from such an IRA will be subject to withholding as above, unless it’s a Roth IRA.

Retirement accounts like 401k, 403b etc do not have taxable capital gains and dividends because tax inside the accounts is deferred and withdrawals are taxed as income. If they are transferred to another qualified retirement plan like an IRA it is not a taxable event....unless you transfer to a ROTH when you'd have to pay the income tax on the money transferred. For qualified retirement accounts there's no need to worry about HMRC reporting, but you should check with your administrator about managing your account from the UK. Both Vanguard and Charles Schwab are pretty good about that so you might look into consolidating your accounts in one of their IRAs.

If you have mutual fund investments outside of qualified retirement accounts (401k, IRA etc) you then have to worry about them being HMRC reporting and avoiding US PFIC issues if you have a US tax liability. If you keep the funds in the US and are living in the UK then you will have to deal with tax on the capital gains and dividends in both countries, but the DTA and local laws have mechanisms for claiming foreign tax credits so you'll end up paying the larger of the two tax rates and having to work out how much to pay in each country. But as you are not a US citizen you can move the money to the UK and you won't have to deal with US taxes at all..........but to do that you will have to go through expatriation and form 8854.

I know that if it were in a Roth IRA then withdrawals would be tax free in both countries, but the tax hit of moving it all into a Roth over one or two years would be brutal.

Correct. Many people transfer to a ROTH over a number of years to keep the tax paid as low as possible.

Does the fact that my green card will no longer be valid change the tax situation at all.

Definitely, as a UK citizen and not a US permanent resident you will be taxed very differently. As you are a LPR you must look at the expatriation form 8854 and then form I-409 to give up the greencard. However, you would have to apply again if you ever wanted to move back to the US. As your wife is a US citizen have you considered getting US citizenship before you move for family reasons?

Since HMRC is not going to know about all of these fund disbursements and withdrawals I assume we’ll have to do self assessment if we’re living in the UK.

Probably