Tax on 401k lump sum distribution for UK citizen/resident?

Hello All:

Newbie here, from the BritishExpats site. I lived in the US and Bahamas from 1983 to 2006 and am now back in the UK. Non-US resident for either tax or immigration purposes, and non-US citizen.

I'll keep my first thread/post simple. I have a TIAA-CREF 401a (two actually, one from TN, one from NC). I wanted to roll over to an IRA but TIAA-CREF won't let me open one.

So, I want to take my money out of the 401a plans and repatriate to the UK, in 18 months when I will be 59.5. Can I check whether my understanding of the tax implications are correct:

Lump sum withdrawal(s): Taxed only in the US? If so, how do I calculate the tax? The online "salary calculators" include Social Security and I presume as I already paid SS on the income that went into the 401k, I won't pay again (also, as a non-resident, I wouldn't pay SS)?

Using the online salary calculator, it seems I would only pay about $4k Federal tax on a $40k withdrawal, so about 10%. Does that sound right?

Periodic withdrawal(s): Taxed only in the UK? And only taxed on 90% of the withdrawal?

Using periodic withdrawals, I'd pay 18% UK tax (20% of .90 of the periodic withdrawal), assuming the amount didn't take me over the 40% tax threshold.

Any advice greatly appreciated! I get lots of useful US-UK advice over on British Expats, but it seems some of these questions, now I am getting clearer to my strategy, might be better asked here.

[I do have other questions about this situation, but wanted to keep my first request for help brief]

Hello dunroving, and welcome to the "other place". As you've probably figured out, you'll come across a lot of folks you're familiar with, although 1 or 2 may have different user names.

I've read you're latest post (this morning) in the MBTTUK section of BE; a response to your ongoing inquiry to TIAA-CREF. I don't know what to say, really. Jobs-worth?

Hello dunroving, and welcome to the "other place". As you've probably figured out, you'll come across a lot of folks you're familiar with, although 1 or 2 may have different user names.

I've read you're latest post (this morning) in the MBTTUK section of BE; a response to your ongoing inquiry to TIAA-CREF. I don't know what to say, really. Jobs-worth?

Hi, thanks for the welcome! I had noticed some familiar names on here while browsing over past weeks.

I have one other attempt at the IRA thing - I looked at Vanguard's paper application form and it appears to allow a US street address as a mailing address and asks for a "street address" only "if it’s different from mailing address or if
mailing address is a P.O. box" it also says below this "*If you’re a nonresident alien, you must complete an IRS Form W-8 electronically to certify your tax status, and to claim treaty benefits if applicable. We’ll mail you instructions for completing the electronic Form W-8 once your account has been established."

- nowhere does it state you must live in the US, from what I have found so far. It also has field to say if you are a USC, US resident or non-resident alien. It doesn't define the latter ...

So I may send one of these in while visiting in April, using a friend's address (she knows). Then wait and see.

Otherwise the plan is to liquidate most of my 401k (actually it is a 401a, I think) and invest in either a SIPP or ISAs, over the following 2-4 years. Unfortunately, I only started loading up pension contributions in the past year or two and so have loads of unused annual pension allowance that will disappear before I hit 59.5 and can take the 401a. So I may have to divest some ISA holdings in order to maximize my SIPP contribution next tax year, and then replace the used ISA holdings from the 401a income over the following years. Alternatively, I have such a god record with my bank and CC that I could avoid liquidating the ISAs by using overdraft, bank loan and CC to fund the SIPP (or fund my living costs while I use salary to pay into SIPP). As it will only be for a matter of months, the interest paid may be worth it for not losing the tax-free ISA status.

Lots of calculations to do! I may hire an accountant to help me check my maths (seriously).

Hi dunroving, good to see you again....we must stop meeting like this.

I've talked to Vanguard about opening accounts with them and they don't do it for non-US residents. This inflexibility makes managing US retirement accounts difficult without a ridiculous amount of planning before leaving the US.

So, I want to take my money out of the 401a plans and repatriate to the UK, in 18 months when I will be 59.5. Can I check whether my understanding of the tax implications are correct:

Lump sum withdrawal(s): Taxed only in the US? If so, how do I calculate the tax? The online "salary calculators" include Social Security and I presume as I already paid SS on the income that went into the 401k, I won't pay again (also, as a non-resident, I wouldn't pay SS)?

Using the online salary calculator, it seems I would only pay about $4k Federal tax on a $40k withdrawal, so about 10%. Does that sound right?

Periodic withdrawal(s): Taxed only in the UK? And only taxed on 90% of the withdrawal?

Using periodic withdrawals, I'd pay 18% UK tax (20% of .90 of the periodic withdrawal), assuming the amount didn't take me over the 40% tax threshold.

Any advice greatly appreciated! I get lots of useful US-UK advice over on British Expats, but it seems some of these questions, now I am getting clearer to my strategy, might be better asked here.

[I do have other questions about this situation, but wanted to keep my first request for help brief]

The 401a is mostly for state and government employees so my answers will assume that and that Article 19 of the tax treaty applies. If that's not correct then Article 17 will apply.

Therefore, as a UK citizen (non-US citizen) resident in the UK Article 19.2(b) applies and both lump sum and periodic withdrawals are only taxable in the UK. You'd file a W-8BEN with TIAA-CREF and would not need to file a 1040NR if the 401a was your only US source income. You'd then pay UK tax on 90% of those pensions.

Hi dunroving, good to see you again....we must stop meeting like this.

I've talked to Vanguard about opening accounts with them and they don't do it for non-US residents. This inflexibility makes managing US retirement accounts difficult without a ridiculous amount of planning before leaving the US.


The 401a is mostly for state and government employees so my answers will assume that and that Article 19 of the tax treaty applies. If that's not correct then Article 17 will apply.

Therefore, as a UK citizen (non-US citizen) resident in the UK Article 19.2(b) applies and both lump sum and periodic withdrawals are only taxable in the UK. You'd file a W-8BEN with TIAA-CREF and would not need to file a 1040NR if the 401a was your only US source income. You'd then pay UK tax on 90% of those pensions.

Thanks, Nun. It seems crazy that if I was in the US on a short-term exchange and residing there short-term, I could open an IRA, and/or that if I'd opened an IRA before I left, TIAA-CREF would have been perfectly happy to roll over into that IRA. Bonkers. It's particularly frustrating as it means I can't take advantage of your insight into the unique situation of US non-resident, non-citizen folks when rolling over into a Roth. Ah, well.

You are right in your assumption about me being a former state employee (state universities).

It's a shame the lump sum is taxable in the UK as US tax treatment would be preferable. I'll try to find the Web site that indicated lump sums were taxable in the US only, periodic payments and annuities taxed in the UK only. Unfortunately I closed the page after reading it.

ETA: Interesting, I didn't find the page yet, but found this page (from 2002):

http://www.us.kpmg.com/microsite/tax/ies/tea/summer2002/stories/article06.htm

Containing the following text:

"New U.S.–U.K. Treaty
 A new tax treaty between the U.S. and the U.K. was signed on July 24, 2001, but not ratified. The treaty's related Exchange of Notes recognizes a 401(k) plan as a valid "pension scheme"; therefore, look to article 17 for guidance on the taxation of the distribution. As valid "pension schemes," they will be treated in the same manner as approved U.K. schemes.

Article 17 of the new treaty states that a pension distribution is generally taxable only in the country of residence; however, if the distribution is paid out as a lump sum, it will be taxed only in the country where the scheme is established. Therefore, the form and the timing of the distribution will determine which country's tax laws would apply. In summary:
•Periodic payments—taxed in the country of residence
•Annuities—taxed in the country of residence
•Lump sum—taxed in the source country. **** [my asterisk]

While it is not yet clear how the new treaty will interact with U.K. domestic law, it is likely that the periodic payments and the annuity element of the pension would be taxed in the U.K. if upon receipt, the individual were a U.K. resident. However, the United States would have taxing jurisdiction if the form of the distribution were as a lump-sum payment."

- do you know anything about the new tax treaty mentioned? I presume it never was ratified?

It's a shame the lump sum is taxable in the UK as US tax treatment would be preferable. I'll try to find the Web site that indicated lump sums were taxable in the US only, periodic payments and annuities taxed in the UK only. Unfortunately I closed the page after reading it.

You're applying the wrong article. Government service is covered by Article 19.
Juts google "us uk tax treaty" and look at the 2001 version, Article 19.2(b). You don't need to use the treaty, but then you'd have to file tax returns in the US and the UK and resource US income to the UK so you could take a US FTC for the UK tax you pay. Amount of tax paid would be the same, but the trouble and effort would be a lot more.

You're applying the wrong article. Government service is covered by Article 19.
Juts google "us uk tax treaty" and look at the 2001 version, Article 19.2(b). You don't need to use the treaty, but then you'd have to file tax returns in the US and the UK and resource US income to the UK so you could take a US FTC for the UK tax you pay. Amount of tax paid would be the same, but the trouble and effort would be a lot more.

OK, the bit in bold is the key bit for me. 

Ah well, keeps life simpler I guess. Thanks.

When you do this make sure TIAA-CREF understand the treaty exemption you are claiming. There should be no US tax and no withholding. TIAA-CREF's inclination will be to withhold 30%, that would mean you'd have to file a US tax return to claim the money back.

When you do this make sure TIAA-CREF understand the treaty exemption you are claiming. There should be no US tax and no withholding. TIAA-CREF's inclination will be to withhold 30%, that would mean you'd have to file a US tax return to claim the money back.

Yes, I am dreading this bit. I feel a big, heavy stick will be necessary. I will file the relevant forms and send multiple messages and speak to at least two different people beforehand. And record the calls.

I am currently struggling with a US university I will be presenting at in April. They keep insisting they should withhold tax at source from my expenses check, and my referencing IRS documents and pages and specific text seems to go flying over their heads. Numpties, the lot of them.

FYI this might be useful to you at some point

https://www.tiaa-cref.org/public/pdf/forms/F10684.pdf

I don't know if they are Numpties....after getting into this subject the last year or so (with lots of info from nun/theOAP/durhamlad).....the tax laws require a savant/genius to figure things out (or at least with a better memory than I have). They could be a lot simpler....but I just can't imagine the powers that be making things that way. I sure know a lot more than I did.....but something else ALWAYS keeps coming up just to piss me off. 

Slightly off the original topic, but in terms of a non-US citizen, non-US resident, UK citizen, UK resident, are there any situations I should look out for in taking income from a US tax-deferred pension plan, in terms of taxation on the US side?

[Maybe not explaining myself very clearly, I just mean are there are any ways I would take income from my TIAA-CREF 401a plans that would trigger a US tax issue, other than the 10% penalty for early withdrawal, which I don't plan to do?]

Further to my original post, the TN ORP 401a plan (I have a TN plan and a NC plan) has restrictions placed on it such that I can not withdraw ALL of it - I can take up to 50% of it as a lump sum but if I do that, I have to set up an income stream from the other 50%. TIAA-CREF message: "The rules of the Tennessee Optional Retirement Plan (TN ORP) allow take a lump-sum withdrawal or rollover of up to 50% of your TN ORP balance.  However, in order to do so, you simultaneously must use an equal amount of your TN ORP balance to start an income through one of eligible payout options."

- I may do this, or I may simply use all of the TN portion (about 30% of my total TIAA-CREF investments) to set up a single-life level annuity with 15-year guarantee, which gives a return of 6.2%, if taken from age 60 (the rate is 7% if taken from age 65). This seems superior to any annuity I'd get from a UK provider, and would provide some balance to my pension income streams.

- but my main question is whether it matters if I am taking lump sum, periodic withdrawals, TIAA-Traditional "interest" income or any one of  a variety of annuity options, will I trigger any sort of US tax situation with one or other, or does the W8BEN and various aspects of the tax treaty cover all of these?

FYI, below is a reply from a TIAA-CREF advisor on taxation of any withdrawal (I have corrected several typos):

"As for the taxes on any withdrawal that you would request.  It appears that based on the tax treaty the United States has with United Kingdom and particularly England, the taxes would be 30% on any withdrawal.  In addition, because you have not attained age 59 1/2, you would be subject to a 10% early withdrawal penalty.  This would be imposed by the IRS at the time of your tax filing."

"As for the taxes on any withdrawal that you would request.  It appears that based on the tax treaty the United States has with United Kingdom and particularly England, the taxes would be 30% on any withdrawal.  In addition, because you have not attained age 59 1/2, you would be subject to a 10% early withdrawal penalty.  This would be imposed by the IRS at the time of your tax filing."

You need to correct TIAA-CREF about this because they have it almost all wrong, I have no idea what they mean by "particularly England". Because you are not a US citizen under the DTA you can claim zero withholding and tax.  Your retirement money comes from working for the states of TN and NC and so it is from Government service and covered by Article 19 of the DTA.

So to answer you main question....no it doesn't matter if you take a lump sum or periodic distributions wrt US taxation because Article 17 is irrelevant in your situation. Your pension payments fall under Article 19.

As you are not a US citizen and are a UK citizen resident in the UK under Article 19.2(b) any withdrawals are only taxable in the UK....no US tax or withholding......you should make sure TIAA-CREF understands that you will be claiming zero withholding and US tax under the DTA. Here is the applicable paragraph of Article 19....the Notwithstanding is important as it means despite what Article 17.1 and Article 17.2 says this is how the money from Government service will be taxed. Because you are a national and resident of the UK section b) applies and the TN and NC pensions are only taxable in the UK. Because you are not a US citizen the saving clause does not apply and the IRS cannot swoop in and tax you regardless of what the DTA says. So bottom line no US withholding or tax on your TN and NC pensions.

2. Notwithstanding the provisions of paragraphs 1 and 2 of Article 17 (Pensions, Social
Security, Annuities, Alimony, and Child Support) of this Convention:
a) any pension paid by, or out of funds created by, a Contracting State or a
political subdivision or a local authority thereof to an individual in respect of services
rendered to that State or subdivision or authority shall, subject to the provisions of subparagraph b) of this paragraph, be taxable only in that State;
b) such pension, however, shall be taxable only in the other Contracting State if
the individual is a resident of, and a national of, that State.

 TIAA-CREF is correct that you will have to pay a 10% penalty on any early withdrawal and you will also have to comply with the particular income options of the 401a plans.

I just spoke to TIAA-CREF yesterday about taking income from my TIAA accumulations and there are no problems at all setting up a single life annuity, 10 year payout annuity (from TIAA-Traditional) or systematic distributions as a foreign resident.

Your take on TIAA annuities is correct, they are significantly better than those available in the UK. But be careful the "6.2% and 7%" rates you are quoting are the payout rates. That's just the annual annuity amount divided by the cost of the annuity. The implied investment return depends on how long you live and if we assume an average life span of 84 years that usually works out to be around 5.5%.....but that's a lot better than what you'll get in the UK and not a bad foundation for retirement if you are healthy and have some other assets to use for growth and liquidity.

You need to correct TIAA-CREF about this because they have it almost all wrong, I have no idea what they mean by "particularly England". Because you are not a US citizen under the DTA you can claim zero withholding and tax.  Your retirement money comes from working for the states of TN and NC and so it is from Government service and covered by Article 19 of the DTA.

So to answer you main question....no it doesn't matter if you take a lump sum or periodic distributions wrt US taxation because Article 17 is irrelevant in your situation. Your pension payments fall under Article 19.

As you are not a US citizen and are a UK citizen resident in the UK under Article 19.2(b) any withdrawals are only taxable in the UK....no US tax or withholding......you should make sure TIAA-CREF understands that you will be claiming zero withholding and US tax under the DTA. Here is the applicable paragraph of Article 19....the Notwithstanding is important as it means despite what Article 17.1 and Article 17.2 says this is how the money from Government service will be taxed. Because you are a national and resident of the UK section b) applies and the TN and NC pensions are only taxable in the UK. Because you are not a US citizen the saving clause does not apply and the IRS cannot swoop in and tax you regardless of what the DTA says. So bottom line no US withholding or tax on your TN and NC pensions.


 TIAA-CREF is correct that you will have to pay a 10% penalty on any early withdrawal and you will also have to comply with the particular income options of the 401a plans.

I just spoke to TIAA-CREF yesterday about taking income from my TIAA accumulations and there are no problems at all setting up a single life annuity, 10 year payout annuity (from TIAA-Traditional) or systematic distributions as a foreign resident.

Your take on TIAA annuities is correct, they are significantly better than those available in the UK. But be careful the "6.2% and 7%" rates you are quoting are the payout rates. That's just the annual annuity amount divided by the cost of the annuity. The implied investment return depends on how long you live and if we assume an average life span of 84 years that usually works out to be around 5.5%.....but that's a lot better than what you'll get in the UK and not a bad foundation for retirement if you are healthy and have some other assets to use for growth and liquidity.

Thanks Nun, you're a star. I now realise you give even more advice on this board than you do on BE!

I absolutely intend to send messages to TIAA-CREF correcting their mis-perceptions and very clearly setting up the relevant arrangements so that ASAP after I reach 59.5, I will start taking withdrawals and repatriating to the UK. I know there are some advantages to keeping investments in the US but if I am stuck with TIAA-CREF I want to move as much as possible out of their hands, being careful of the UK tax threshold side of things. Your provision of the correct articles and terminology will be very helpful when the time comes.

Re: The annuity, I was quoting my own calculations from a TN-ORP illustration of what I could get from a lifetime annuity. Some quoted text:

"There are many annuity payment options available. The projections below are for monthly payments for a lifetime annuity based on a single life without guarantee, a single life with a 10-year guarantee period, and a single life with a 15-year guarantee period".

For the latter, it shows monthly payments on a $41,729 account balance (TN part of my TIAA-CREF, some of which is in TIAA-Traditional) to be $208. I got to the % by multiplying $208 x 12 = £2,496 p.a., divided by $41,729 equates to a 5.98% return rate (the 6.2% I cited was actually for single life but with no guaranteed period). That's from age 60. So I think you and I are saying just about the same thing. You've no idea how reassuring that is!

Unfortunately genes are not on my side (males in the family usually don't even reach retirement age) and I like the 15-year guarantee. I know exactly who would be the beneficiary if I pop my clogs and it feels kind of nice to think of him and his family being reminded of me by a wee monthly check.  If I do conk out before the 15 years I realise the return rate isn't as good but the general premise of an annuity doesn't fit my genetic profile.  This just adds a  bit of variation to my income streams with guaranteed endless payouts (as in, until I die!) from UK State pension, small US Social Security check (also taking from 62, bearing in mind my genes) final salary pension, and the TIAA annuity, and sufficient chunk of change in SIPPs and ISAs for other drawdowns that if I die early, there'll be plenty left for my favourite friends.

TBH, I'd get married just to feel I'm getting my moneys worth from my final salary pension and US Social Security if I die! I have a couple of very nice old friends (single) who could do with the money. 

Thanks Nun, you're a star. I now realise you give even more advice on this board than you do on BE!

I absolutely intend to send messages to TIAA-CREF correcting their mis-perceptions and very clearly setting up the relevant arrangements so that ASAP after I reach 59.5, I will start taking withdrawals and repatriating to the UK. I know there are some advantages to keeping investments in the US but if I am stuck with TIAA-CREF I want to move as much as possible out of their hands, being careful of the UK tax threshold side of things. Your provision of the correct articles and terminology will be very helpful when the time comes.

TIAA-CREF aren't so bad and their TIAA-Traditional and annuities are good value for money. TIAA-Traditional is a great place to get above market interest, admittedly you have to lock the money away for 10 years, but I just think of it as a 10 year CD that's currently paying me 4.75% interest.....

Re: The annuity, I was quoting my own calculations from a TN-ORP illustration of what I could get from a lifetime annuity. Some quoted text:

"There are many annuity payment options available. The projections below are for monthly payments for a lifetime annuity based on a single life without guarantee, a single life with a 10-year guarantee period, and a single life with a 15-year guarantee period".

For the latter, it shows monthly payments on a $41,729 account balance (TN part of my TIAA-CREF, some of which is in TIAA-Traditional) to be $208. I got to the % by multiplying $208 x 12 = £2,496 p.a., divided by $41,729 equates to a 5.98% return rate (the 6.2% I cited was actually for single life but with no guaranteed period). That's from age 60. So I think you and I are saying just about the same thing. You've no idea how reassuring that is!

Remember you did not calculate the interest rate, you calculated the payout rate.