Advice on 401k distribution

Hi,

Hoping someone can clarify a few things for me regarding the taxation of my 401k distribution when I finally take it (after age 59.5).  Let's say I'll have $1,000,000 in the 401k by then - probably well short but it's a good round figure for illustration.  As I've mentioned before on this forum I'm a UK citizen and UK resident, and probably will be when I retire.  I have a 401k from the years I worked in the US. Let's assume the current rules and tax rates will be the same when I retire (I know, I know).

I understand that if I take a lump sum distribution, 30% will be automatically withheld and, given the amount involved, I'd owe some more to the IRS because it would put me in the highest tax bracket.  My conclusion is that I'd be barking mad to do this. Correct?  So...

If I understand my plan's rules correctly, I can take periodic payments.  Let's say I were to take 10 annual distributions of $100,000 (or until it ran out). I'd still have 30% of each withheld in the US (I think) but since I'd be in a lower tax bracket I'd get some tax back if I filed.  If my rough calculations are correct I figure I'd pay about half the tax overall compared with taking it all in one go.

Does this sound correct?

The other thing I'm not sure about is whether the UK would want to tax those annual distribtions as well, or does the double taxation treaty prevent this.  Or, would the UK want to tax them at say 40% but give relief under the DTA for the 25% (say) paid to the US.

Would appreciate any thoughts and comments (especially if I've got it completely wrong), and/or advice.  Thanks.

Great.  Thanks.

Clearly one has to pay for this kind of advice.

It's only been a couple of days since you asked the question and not many people here on the forum know specific details about tax-related things... perhaps those people who do haven't seen your post yet.
I'd like to be able to help, but I'm afraid I don't even know what a 401K distribution is, let alone what you can do with one tax-wise.

As ksand said, not many people would know how to answer your question.

Clearly one has to pay for this kind of advice.

Yes, one generally does pay for tax advice, since (especially for the US) it can be highly specific to your personal circumstances, so there's no "one size fits all" solution/answer that can be handed out to everyone.

Im a CPA and I cant even answer this with the information you provided because its not my specialty. This is something you need to sit down with a tax advisor and go over completely with all the details. It is going to cost some money but you will have the piece of mind of a CPA who specializes in this sort of thing and it will save you money in the long run. All CPA's have specialty knowledge so make sure you find someone who does this specific thing and not just a strip mall tax advice firm. Also, just so you know, you shouldn't solicit this kind of advice on a forum because you can get in some big trouble with someone who doesnt know what they are talking about.

Also, just so you know, you shouldn't solicit this kind of advice on a forum because you can get in some big trouble with someone who doesnt know what they are talking about.

Is that not true of all tax-related questions?  So, what is the purpose of this forum?

You are correct that this is a forum for taxes but this is mainly for easy questions that most expats know. Anyone is free to post whatever, however you should take any information with a grain of salt. You dont know who the people are on the other side of the computer and they might not know anything which can get you in a lot of trouble. If you have out of ordinary questions, you should always consult a professional.

Just to give a slightly contrary opinion - this is really not an out of the ordinary question!  It is of concern to almost any person who plans to live in the UK in retirement who has lived in the USA for more than a few years and has accumulated a significant sum of money in their tax-advantaged retirement accounts (403b, 401k etc.)

On the general point about the danger of relying on free information from helpful people on forums like this, my perspective on this is that if I know nothing about a certain topic I need to get better informed (and sounding out other people who may have similar concerns or experiences is one way of doing that.)  That way, when I talk to the tax-expert or accountant or lawyer, I'll have a list of questions to ask and be able to make the best use of her/his expertise.  It's not either the online forum or the paid expert; you need both!

Just to give a slightly contrary opinion - this is really not an out of the ordinary question!

Thanks.  I must admit I thought it would be a fairly common scenario.  There are, I imagine, lots of people in a similar situation to me, hence my disappointment with the response.

Thanks.  I must admit I thought it would be a fairly common scenario.  There are, I imagine, lots of people in a similar situation to me, hence my disappointment with the response.

I just re-read your original scenario in your first post on this thread.  I am currently resident in the US and am only familiar with the US rules.  Just to tweak your scenario, you can of course spread your distributions over a longer period; say, take 5% of your accumulation as a distribution between retirement age and age 70, then take "required minimum distribution" after that.  This should extend your distributions over your lifetime with better tax consequences than your ten equal payouts scenario.
As for advisers who are familiar with US and UK tax issues as they apply to retirees, I think that you can find them in Britain.  I imagine that there are many thousands of US/UK retirees in Britain with 403b, 401k, IRAs, US Social Security/UK Sate Pension, "Windfall Elimination Provision" etc etc.. so, everyone has a unique set of issues, but with much commonality. So it should not be a problem to find someone..

Thanks for the insight.  I'm pretty sure you're right - there's lots in the same situation as me.  It's perfectly understandble but I figure that when people get their own situation sorted out, there's no reason for them to frequent forums (fora?) like this so the possibility for sharing information is lost.  And, also understandably, professionals want to be paid for their advice.

Hi,

Hoping someone can clarify a few things for me regarding the taxation of my 401k distribution when I finally take it (after age 59.5).  Let's say I'll have $1,000,000 in the 401k by then - probably well short but it's a good round figure for illustration.  As I've mentioned before on this forum I'm a UK citizen and UK resident, and probably will be when I retire.  I have a 401k from the years I worked in the US. Let's assume the current rules and tax rates will be the same when I retire (I know, I know).

I understand that if I take a lump sum distribution, 30% will be automatically withheld and, given the amount involved, I'd owe some more to the IRS because it would put me in the highest tax bracket.  My conclusion is that I'd be barking mad to do this. Correct?  So...

Your 401k is tax deferred until you withdraw at 59.5, there are ways to withdraw before that with or without a penalty, but lets keep this a bit simple. You can take as much or as little as you want from the 401k until you reach 70.5 when the IRS will make you take Required Minimum Distributions. You should arrange your distributions to meet your income requirements and minimize your tax....so many people will take just enough to fill up the 15% tax bracket ($34k if your single).

Your 401k provider will withhold 30% tax as you are not a US citizen and the payment is going abroad. When you do your US taxes you may well get a refund if this "withholding" tax was too much. If you are a UK citizen and resident in the UK for tax purposes you'll have to deal with UK taxes too, but you'll get credit for any tax you paid to the US.

I would not attempt to do your taxes yourself (at least not for the first couple of years) as this is complicated. Once you have the forms filled in by a professional you may be able to use them s a guide to do it yourself.

@nun.  Thanks very much much for that explanaiton.  Kind of confirms what I feared i.e. it would be silly to take it all in one go, because it would put me in the higher tax brackets in both countries.  So taking it piecemeal is the only sensible option.  My current feeling is that I'd prefer to take bigger chunks in my 60's but that coud well change.

I will certainly pay for professional advice/assistance when the time comes.  I've always paid someone to prepare my US returns.

One issue that's just occurred to me is that I would (probably) file as married filing jointly in the US, so the tax thresholds would be higher.  As far as I know, the UK doesn't have that concept.  I don't suppose you know whether an annual withdrawal would be treated solely as my income in the UK, or whether it could be treated as half-and-half with my wife?