Taxes on 401k withdrawals?

How do I handle taxes on my 401k withdrawals? Do they get automatically taxed in the US at 20%, then I pay taxes in the UK, then claim the UK tax on my US filing to get the 20% back?

Background: I'm a US and UK citizen, intending to retire back to the UK next year. I've spent hours reading the UK tax treaty documents, which have confused me.

The simple answer to your question, I believe, is "yes".

However there some options regarding 401ks.  What I did was to roll my 401k into and IRA before I moved back. My son moved back from the USA 1 week after leaving work so he initiated the rollover before he left and it completed after he was here.  The reason we both choose to do rollovers, which are tax free, is that the brokerage we chose was much more accommodating, and used to having, overseas customers, plus it gave us lower fees and a better choice of funds.

I will be in a higher UK tax bracket once I start receiving OAP, SS and RMDs from an IRA so I converted all my IRA money to a Roth IRA which has tax free withdrawals in both the USA and UK.  I did the conversions over 10 years, the first 7 years of which I was still in the USA. Once in the UK I still did a single lump conversion each year for 3 years and those conversions were only taxed in the USA.

The simple answer to your question, I believe, is "yes".

However there some options regarding 401ks.  What I did was to roll my 401k into and IRA before I moved back. My son moved back from the USA 1 week after leaving work so he initiated the rollover before he left and it completed after he was here.  The reason we both choose to do rollovers, which are tax free, is that the brokerage we chose was much more accommodating, and used to having, overseas customers, plus it gave us lower fees and a better choice of funds.

I will be in a higher UK tax bracket once I start receiving OAP, SS and RMDs from an IRA so I converted all my IRA money to a Roth IRA which has tax free withdrawals in both the USA and UK.  I did the conversions over 10 years, the first 7 years of which I was still in the USA. Once in the UK I still did a single lump conversion each year for 3 years and those conversions were only taxed in the USA.

Thanks, that's most helpful! Sadly, I don't think I can roll over to an IRA. I'm retiring at 55 from the job that controls my 401k, so I can withdraw without the 10% penalty. That rule doesn't apply to an IRA, so I'd be blocked until I'm 59.5.

Thanks, that's most helpful! Sadly, I don't think I can roll over to an IRA. I'm retiring at 55 from the job that controls my 401k, so I can withdraw without the 10% penalty. That rule doesn't apply to an IRA, so I'd be blocked until I'm 59.5.

You can do a tax free rollover to an IRA at any age once you have quit a job. I was 55 when I did my rollover, my wife was age 51, and my son was was age 35.

The 10% penalty only applies to withdrawals, not to rollovers since the money stays in a retirement account.

The same applies to Roth conversions, no 10% penalty, but you will have to pay regular taxes.

You can do a tax free rollover to an IRA at any age once you have quit a job. I was 55 when I did my rollover, my wife was age 51, and my son was was age 35.

The 10% penalty only applies to withdrawals, not to rollovers since the money stays in a retirement account.

The same applies to Roth conversions, no 10% penalty, but you will have to pay regular taxes.

Sorry, I should have been clearer. I agree we can do the rollover, but we will need to withdraw from the 401k (or IRA) when we retire.

Sorry, I should have been clearer. I agree we can do the rollover, but we will need to withdraw from the 401k (or IRA) when we retire.

Gotcha 

I would check with your 401k provider about support for overseas customers and then decide if you will be better off with an IRA at a brokerage familiar with overseas customers.

You have this correct. You also have to remember to PAY HMRC no later than 31 December each year.

Hello , question to Durhamlad.. I read your comment WRT conversion from 401k/ IRA to Roth and I still find this whole subject confusing. Maybe you can illuminate..
I have an IRA with Vanguard and have yet to take any distributions but will start to in next couple of years. All I guess will be taxed in UK ( and hopefully not in US as well) Can I make use of a Roth IRA, would this help to reduce my UK 40% tax band on these??

Hello , question to Durhamlad.. I read your comment WRT conversion from 401k/ IRA to Roth and I still find this whole subject confusing. Maybe you can illuminate..
I have an IRA with Vanguard and have yet to take any distributions but will start to in next couple of years. All I guess will be taxed in UK ( and hopefully not in US as well) Can I make use of a Roth IRA, would this help to reduce my UK 40% tax band on these??

IRA withdrawals will be taxed by both the IRS and HMRC if you are, like me, a USC living in the UK.  You can use tax credits to reduce the IRS taxes. If you make a lump sum conversion from an IRA to a Roth it will only be taxed in the USA. Roth withdrawals will be tax free in both countries.

This is why I made lump sum conversions from IRA to Roth in the years leading up to moving to the UK and then the last 2 lump sum conversions in the years since I have been back.  This was because required IRA withdrawals from age 72 for me would be taxed at 40%.  I also have my IRA and Roth at Vanguard.

Hi and thanks again Durhamlad!  i checked my Vanguard IRA and i seem to also have a Roth RA open but zero balance ( i must have opened it at some point...). It seems very simple to do an Exchange between my Vanguard IRA and my ( till now unused ) Vanguard Roth. Am i right in assuming that the 6/7K limit is irrelevant in a conversion and i can transfer as much as i wish to the Roth from the IRA? The only determinant being the amount of US tax that large amounts would occur? I have found a calculator on Schwab US site which seems to give tax implications. Given my retirement income will put me in the UK 40% bracket it seems a bit of a no brainer to keep moving sums ( but avoid hitting higher US tax bands) to a Roth each year? or am i missing something! Also do i need to declare to HMRC any of this? Do i declare any Roth IRA withdrawals once they occur. ( I've not touched any of the retirements funds at all yet).

There is no limit to how much you can convert. I use TurboTax to file taxes so I run tests to see how much of the conversion is taxed. I file MFJ and usually convert about $100k which is what my wife converted last year. Tax paid on the conversion for us is well under 40%

When filing HMRC taxes I list the conversion in the white space and quote the relevant part  of the tax treaty - section 17.

Thanks, from looking at US tax tables a 100K transfer would only put me in the 22% bracket and no additional UK tax to pay once it is withdrawn; even if I transferred say 250K ( married filing joint) I would still only be paying 24%. All of this is much lower than the 40% tax UK would take on normal IRA withdrawals? Are there any downsides??

I just remembered the 5 year rule, I guess that is the only limitation. If I transfer say 100K to my Roth IRA now I can't touch it to say 2025, so I need a 5 year buffer from my Trad IRA to last me to then. In the meantime make annual transfers to Roth.
Have I got it?

I just remembered the 5 year rule, I guess that is the only limitation. If I transfer say 100K to my Roth IRA now I can't touch it to say 2025, so I need a 5 year buffer from my Trad IRA to last me to then. In the meantime make annual transfers to Roth.
Have I got it?

Yep, you’ve got it.

https://www.bankrate.com/investing/ira/roth-ira-5-year-rule/

The Roth IRA is a retirement saver’s dream, but only after this important rule has been followed. Five years must have elapsed since the tax year of your first Roth contribution before the earnings can be withdrawn tax-free. That applies across the board to retirees, even if the account owner is 110 years old, a first-time homebuyer or deceased.

Also note that Roth IRA conversions have their own five-year clock that starts on January 1st of the year the conversion was made. Inherited Roth IRAs have their own clock as well, but it starts with the original account owner and when they made their first contributions — not when the person inherited it.

I think it is possible to make IRA withdrawals as well as conversions to a Roth. I have a friend in the US who is doing this. He is about 80 years old now and did not discover the Roth conversion option until into his 70s after he started doing his RMDs from his IRA. He expects to die before his wife who is about 8 years younger and the surviving spouse of course has to file single with a much lower tax deduction. When they both die the children who inherit will also benefit from this tax free vehicle.

I think if you needed to withdraw from your IRA for living expenses you could make periodic withdrawals during the year and pay HMRC taxes and once a year do a lump sum conversion paying only IRS taxes. After 5 years you will have access to tax free Roth money.