UK Citizen with a US 401k - What happens when I retire here in UK

Hi,

Firstly I am a UK citizen (Scottish) and currently living in the UK but from 1997 to 2003 I worked for a US firm over in the US (NJ) and while there I paid into a 401k. I still have the 401k but what happens when I retire? I will be living here in the UK and do not intend on going back to work or live in the US (no offence I had a great time while I was there

What taxes would I need to pay (to US or to UK) for having the funds transferred? (when is the earliest I can claim retirement in the US? and could i transfer the funds to the UK prior to that possibly into a SIPP account?) I guess I would either do this as a lump sum or as the proceeds of an annuity that I would setup in the US ?

Hopefully someone has had a similar experience and will be able to provide some help. Any comments or insight into this question is much appreciated.

bump...

What have you reported on your UK returns since 2003? 

nothing! I haven't had the need to file an individual tax return. I havent been able to add extra funds since I left the US in early 2003 and I havent taken any money out due to the penalties (I dont really want to take anything until I retire). My thinking is, when I retire I can turn the funds into an annuity and have the proceeds transferred to my UK account every quarter ? I assume that I would not be liable for US tax at that point if I’m not living in the US but depending on the amount may be liable for UK tax on the income ? all information is very welcome

just for clarity, I rolled the 401k into an Individual Retirement Account (IRA) before I left.

nothing! I haven't had the need to file an individual tax return. I havent been able to add extra funds since I left the US in early 2003 and I havent taken any money out due to the penalties (I dont really want to take anything until I retire). My thinking is, when I retire I can turn the funds into an annuity and have the proceeds transferred to my UK account every quarter ? I assume that I would not be liable for US tax at that point if I’m not living in the US but depending on the amount may be liable for UK tax on the income ? all information is very welcome

In general, the IRS imposes a 30% withholding tax on US source income paid into foreign bank accounts.  This is to encourage you to file a US income tax return, at which point you might get your 30% back. 
http://www.irs.gov/businesses/article/0,,id=180219,00.html

A side issue you may well already be aware of, but, if you contributed to US Social Security in the States and receive payments in the UK due to the Totalization Agreement:

http://www.ssa.gov/pubs/10137.html#additional

From the above:
"If you are not a U.S. citizen or a U.S. resident, federal income taxes will be withheld from your benefits. The tax is 30 percent of 85 percent of your benefit amount."

"It will be withheld from the ­benefits of all nonresident aliens, except those who reside in countries that have tax treaties with the United States that do not permit taxing of U.S. Social Security benefits (or provide for a lower tax rate). The United States has such treaties with Canada, Egypt, Germany, Ireland, Israel, Italy, Japan, Romania, Switzerland and the United Kingdom (defined as England, Scotland, Wales and Northern Ireland). Under the tax treaty with Switzerland, benefits paid to residents of Switzerland who are not U.S. citizens are taxed at a rate of 15 percent. In addition, the Social Security benefits paid to individuals who are both nationals and residents of India are exempt from this tax to the extent that their ­benefits are based on U.S. federal, state or local government employment. (This list of countries may change from time to time.)"

Well I am not eligible for US Social Security benefits as I only have 24 credits and I need 40 to have any kind of payout. But I have no wish to claim any Social Security from the US. I am only interested in the Individual Retirement plan account that when it becomes eligible for me to withdraw that I can do so and it is my understanding that as I will be living in the UK at the time I will NOT be taxed at all by the IRS and that I WILL be liable to be income tax to the UK goverment based on my personally allowances at the time. This is mainly due to the tax agreements between the US and the UK ? would that be a fair assumption of the situation ?

Well I am not eligible for US Social Security benefits

I can't comment on the 401k. When I left the US, they were not very common. I Know nothing about them. (I don't want to learn more. This is all complicated enough.)

You may be in for a pleasant surprise though, regarding US SSA retirement benefits. They're very good (vs. the amount you will receive from the UK), and you would qualify under the Totalization Agreement. (More than 6 quarters.)

IV.A.1. Benefits from the U.S
in the following link.

http://www.ssa.gov/international/Agreement_Pamphlets/uk.html#monthly

I have equal qualification periods in the US and the UK. The US benefit is 2+ times the amount of the UK benefit, even after 30% WEP reduction by SSA and lower wages used in the US calculation. If you're worried about US reporting, this does not require you to file US taxes.

Of course, it's your choice.

Thank you for the information, I was under the impression that when I eventually go to claim my pension in the UK I would simply use the credits and time from my social security in the US to be used as time against my UK pension so I have enough built up to get the full uk Pension ? It basically states that I need 40 credits to qualify for retirement benefits and I only have 24 so I assume I wont get anything from the US other than I can use the credits to help with the time required to qualify for a Full UK pension (if you can call what the UK give as a pension FULL!!!!)

OK. Clarification.

UK - The qualifying years for a full pension changed in April, 2010 and now stands in transition to 30, depending on your date of birth. So, by the end, if you worked in the UK, have 15 qualifying years, you will receive 50% of the basic State pension (15/30, and provided you paid the minimal National Insurance contribution). The UK State pension is taxable by the UK.

US - The minimal qualifying years for Social Security benefits is 10 years (40 credits), NORMALLY. But…..

The US has a special Totalization Agreement with the UK. This allows you to use UK State pension qualified years to help you qualify for the US Social Security benefits. The UK years do not leave the UK, and still count towards the UK State Pension (i.e.: 15 years above are still worth 15 years).

You have 6 years (24 credits) in the US. The SSA (Social Security Administration) would use these, and add 4 from your UK qualified years to allow you to meet the minimum US requirement. Again, the UK years do not leave the UK. They still count towards the UK State Pension. You now qualify for US Social Security benefits. The actual benefit calculations would only be made on the 6 years worth of contributions, but as they say, better than a sharp stick in the eye. The UK Pension Service must do this for you, and you must tell them that you have US contributions when applying for the UK State Pension. The Social Security benefits are not taxable in the US (by the treaty), but are taxable in the UK. Your payments are made from the US, which requires you to fill in a UK self assessment tax form (no big deal), since no UK tax is deducted, but for which you are liable. You paid money into the US SSA system, so ....

There are even more benefits (and good ones, if you’re married) once you qualify for the SSA benefits, but you'll discover them on your own. I don't wish to bankrupt US Social Security any sooner than necessary.

This is all according to pre2010 UK pension rules. I've seen nothing that changes this as of yet.

Footnote:
I see from the exchanges that you have time in Germany. There is a similar agreement to the US/UK agreement between Germany and the UK (EEA agreement). It works much the same, and retirement benefits from the Continent are similar in value to the US. Again, be sure to alert the UK Pension Service that you have these contributions and to access these funds due you by qualifying you for the German system.

My reason for bringing all this up is that you seem to be under the impression that your US benefit years can be used to help your UK State pension. Under the UK rules, it appears that although there is discussion of calculating them as additional years, the actual amount of your UK pension will NOT increase above the number of qualifying years you have in the UK at the time of retirement. In most countries, including the UK, the input of contributions from abroad are only used to qualify you for the pension, and not to “top the pension up”.

This is why it is important to be sure to claim the US and German pensions. I imagine the view of the UK Pension Service is that you are entitled to the US and German pensions, so there is no reason for the UK to pay for them through additional UK benefits. (You claim from each system based on what you contributed to that system.)

WOW thank you so much for that very useful information. As you alluded too I suspect that the respective pension systems for both countries will have to be changed in the future as there just want be enough funds in the pot for it to go around. I am very much of the opinion that I need to take care of my own retirement than hope the state will provide for me, and as you say, getting some money from them is better than a sharp stick in the eye. I am married so that is positive. I have have a real mixed bag for my pensions as I worked some time in Germany and then the Isle of Man and then the USA and back to the UK where I started. I see my US 401k being a nice top up to any UK pension I have and by some miracle I have managed to turn my 6 years 401k contributions into a nice tidy sum now.

Once again thank you so much for your help and the information on the Social Security pension and the UK pension.

You said you wanted nothing from the US social security system even though you are entitled to something, so I am not sure why you are quite so excited!

Your UK returns have failed to disclose the IRA so you should correct this ASAP and pay any tax and penalties due to the UK since 2003.

Guya, Thank you for your reply but I think you misunderstand my feelings of “excitement” My response was more a statement of surprise that I could make a claim when I was under the belief that was never going to happen. As I stated the chance of there being any money in the pot for people of my age getting something from the Government when I retire will be so means tested that I most likely wont qualify for anything. Hence the main reason I had a 401k to prepare for my future and to ensure I had something put aside rather than rely on the government.

There is no tax due from the 401k to the UK authorities as I have not realised any funds as I am not retired yet. Nothing has been added or taken from the IRA account which in effect is a rolled over 401k into an IRA account. As you will most likely know the benefit of those accounts is they grow tax free until you retire and then pay the taxes on the income they generate when they are used.  When I returned to the UK I had my last US / first UK tax return done KPMG and there was no need to inform them of the recognised Retirement savings account.

If you are aware of a reason that the tax advice given back then was wrong and that I should declare then please elaborate a little more on that.

Here in the UK it is not an automatic requirement to submit a tax return and you should only do so if you need to declare something that is generated an income which maybe be termed to raise a tax or a capital gain. I have not needed to return a tax return since coming back to the UK. I am not receiving benefit of the 401k funds or assets yet and therefore have not declared.

It is not a 401(k).  It is an IRA.  An IRA has no special treatment under domestic UK tax rules.  It is merely a "wrapper" that domestically is ignored by HMRC. You have omitted reporting income within the "wrapper" on any UK return since 2003.  I am suggesting that you need to rectify this misunderstanding with Her Majesty.  You will of course wish to read the UK/US income tax treaty, understand what it says and the dates from which it could be have been of benefit to you before acting.

It is a shame that you missed the opportunity under the previous treaty to take a totally tax-free LSD.