401k/SS Tax

British citizen living in the USA with plans to retire back in Blighty.

I have a 401k account in the USA which I would use for my retirement.

If I withdraw $50k a year which roughly equates to £35k;  where would it be taxed and at what rate(s)?

I will also have a US Social Security payment too and like above where would that be taxed and at what rate?

All help would be appreciated.

401k
Depends on:

• if in addition to being a UK citizen, are also a US Citizen or Green card holder
• If you take the withdrawal as a periodic payment or a lump sum (note the US definition of a lump sum is different to the UK's)
• if you take a withdrawal after moving to the UK, but before becoming UK tax resident
• If you have other sources of income (UK salary, US/UK pensions, rental income etc), the rate at which you pay tax may be effected

Presuming the answers in turn are: No, Periodic payments, UK tax resident, and no other income then your 401k distribution will be tax free in the US and taxed as income in the UK. Presuming an exchange rate of $1:£0.72 your £36,108 would incur £4,706 in UK tax, leaving you with £31,402 after tax.

Known gotchas:

• You need to fill out your W8-BEN to avoid a 30% withholding tax on the US side
• It is not unusual for 401k providers to withhold the tax anyway, either through fear, system limitations, or incompetence. In which case you'll be making a interest free loan to the US government for at least 3 months, and will have to file a 1040NR at the end of the US tax year to get it back
• Some providers will not pay directly into a UK bank, and if they do, you might not want them to due to hidden exchange rate fees (even banks that don't claim no foreign exchange fees still use an exchange rate significantly higher than you'd pay from a dedicated service such as Wise or XE)

US SS
Depends on the same things as 401k, plus:

• You have also have a UK or Private pension (if you do, you US SS will likely be reduced by WEP)

Presuming the same answers as before, your SS payments would not be taxed in the US, and taxed in the UK as income (on top of what you took from the 401k). Without a $ amount for your SS, I can't estimate the tax amounts, but with your proposed 401k income, I would expect the first £1,000 to be taxed at 20%, and the rest at 40%.

Known Gotchas:
The US will pay into a UK bank account, but again, hidden exchange rate fees.

Disclaimer: I'm still learning all this myself. I find the best way of understanding something is to explain it to someone else. Hopefully someone else will jump in if I've got something completely wrong, but in short, don't trust you financial future to an unqualified stranger on the net!

I agree with DeveB's response and will add a couple of things.

SS Everything I hear is that when SS pay directly into a UK bank you get the best exchange rate on the day with no fees and it is the best deal around (we usually use Wise to transfer money to the UK). I will be able to confirm that in due course as my wife has applied for her SS, given her UK bank details and is waiting for the payments to start.

401k What we did, and also our son, was to move our 401k to an IRA with a brokerage such as Vanguard or Fidelity who support overseas customers and then managing an IRA from the UK is actually very easy. Our son actually left the USA within 7 days of quitting his job but initiated the 401k rollover to an IRA before and he left, and it completed after he arrived in England.  A 401k to IRA rollover is a non-taxable event.  Like us he then did lump sum conversions to a Roth over a couple of years and those are taxable only in the USA. However, like us, he is keeping his Roth in the USA until it can be withdrawn tax free in both countries and that may not suit the OP's plans.

Thank you both for the counsel.

One other question.  What is the outcome for the same scenario but for a US citizen (my spouse)?

Everything I hear is that when SS pay directly into a UK bank you get the best exchange rate on the day with no fees and it is the best deal around (we usually use Wise to transfer money to the UK).

This was news to me (I'd just assumed it was the same as any other cross-border cross-currency transfer), so I did some research, and durhamlad is correct as ever. As long as your getting your SS paid digitally (i.e. not by cheque) and directly into a UK bank you shouldn't pay fees or inflated exchange rates. Nice!

(I'm a way off claiming SS myself yet, but avoiding fees/rates on regular SS payments was the main reason I signed up for a wise.com Borderless Account last week. Guess it'll get less use than I thought  )

Thank you both for the counsel.

One other question.  What is the outcome for the same scenario but for a US citizen (my spouse)?

She will continue to be taxed on her worldwide income as if she was resident in the USA, plus as a UK resident the UK will also tax her on her worldwide income but for most income the UK is the primary taxing authority so they will tax her first and she claims UK taxes paid as foreign tax credits against her US taxes on that same income. Any tax free income in the UK such as cash ISAs and the first £1,000 of regular interest  will be fully taxed by the IRS, but the UK equivalent of a 401k or IRA is not taxed until withdrawals take place.  SS for and her OAP is only taxable in the UK. 401k and IRA regular distributions will be taxed by the UK and US which is why she may consider IRA to Roth rollovers depending on her tax brackets.

I know that I am in the UK 20% bracket now but I will be in the 40% UK tax bracket once my SS starts so all my required minimum distributions starting at age 72 from my 401k/IRAs will be taxed at 40%. That is one of the reasons I am putting off my SS until age 70.  (I am age 66now). I have had 11 years since retiring at age 55 to do Roth conversions so that when I do start withdrawals they will be tax free and I will only have paid taxes to the US at much lower rates. I am now 100% Roth and we are working on my wife’s Roth conversions. (She is also a USC like myself)

One other question.  What is the outcome for the same scenario but for a US citizen (my spouse)?

Short version: same outcome, different journey.

401k (as a US citizen)
As a US citizen, 401k withholding won't apply, but the withdrawal will be subject to US and UK taxation. As a US citizen, your spouse has to do a US tax return each year anyway, and they'd reclaim the UK taxes back from the US ones, effectively reducing the US tax to zero in all real world scenarios.

Timing becomes an issue though as the UK and US tax years don't align. The easiest way to solve this is to ensure your 401k withdrawal(s) only occur between Jan 1st (2022) and April 5th (2022), then file your UK (2021-2022) tax return before Dec 31st (2022). This ensure the full amount can be claimed for tax credit in your US (2022) tax return.

(Withdrawing once a year at about the same time of year still counts as periodic and not lumpsum, although you might have trouble persuading your broker of that in year 1)

SS (as a US citizen)
To be honest, I'm still trying to work this one out (I'm still 18-19 years off away from claiming). Normally, the tax treaty would mean you only pay tax in the UK, but as a US citizen the Savings Clause may kick in, meaning your spouse could have to pay taxes on both sides (with UK tax effectively reducing US tax to zero again). So it's only the paperwork that changes.

Short version: same outcome, different journey.

401k (as a US citizen)
As a US citizen, 401k withholding won't apply, but the withdrawal will be subject to US and UK taxation. As a US citizen, your spouse has to do a US tax return each year anyway, and they'd reclaim the UK taxes back from the US ones, effectively reducing the US tax to zero in all real world scenarios.

Timing becomes an issue though as the UK and US tax years don't align. The easiest way to solve this is to ensure your 401k withdrawal(s) only occur between Jan 1st (2022) and April 5th (2022), then file your UK (2021-2022) tax return before Dec 31st (2022). This ensure the full amount can be claimed for tax credit in your US (2022) tax return.

(Withdrawing once a year at about the same time of year still counts as periodic and not lumpsum, although you might have trouble persuading your broker of that in year 1)

SS (as a US citizen)
To be honest, I'm still trying to work this one out (I'm still 18-19 years off away from claiming). Normally, the tax treaty would mean you only pay tax in the UK, but as a US citizen the Savings Clause may kick in, meaning your spouse could have to pay taxes on both sides (with UK tax effectively reducing US tax to zero again). So it's only the paperwork that changes.

I can confirm that SS is only taxed in the UK

Also you can make life easier, as we do,  by assuming the calendar tax year  aligns with the UK tax year, but you must do this from the start once you return and stick with it. When filing UK taxes then 1099s etc are just reported as is, and P60s etc are also reported as is. However, when filing the US return you have to stick to calendar year so need to keep a spreadsheet of UK income by the month Jan to Dec.

@durhamlad - I'm interested to hear examples of receiving your SS directly into your UK bank account.

The reason I ask is, like the OP, I have opened up a Wise borderless account in US$ and was planning on receiving my SS directly into that account (I presume it is possible?) allow it to accumulate and then to transfer into £ when I want to (at a rate that I will know) or alternatively keep it in $ and use it to spend on any trips or holidays back in the US.

I guess it all depends on the immediate need for the income?

@durhamlad - I'm interested to hear examples of receiving your SS directly into your UK bank account.

The reason I ask is, like the OP, I have opened up a Wise borderless account in US$ and was planning on receiving my SS directly into that account (I presume it is possible?) allow it to accumulate and then to transfer into £ when I want to (at a rate that I will know) or alternatively keep it in $ and use it to spend on any trips or holidays back in the US.

I guess it all depends on the immediate need for the income?

I'll let you know how it works if and when SSA get off their duffs and process the claim.  They have accepted the claim, have all the bank details, and on the website it says her application is at step 3 of 3 and should be completed by end of July. (It is now Aug 17)

I have 2 US private pensions which go into our US bank and I use Wise to transfer the funds when I want.  I've been doing this for 5 years now and I have no idea whether I am ahead or behind in my attempts to time the exchange rate market.  Like the stock market I suspect it is better, certainly easier, to "dollar cost average" by not trying to time anything, just make the transfers on the day the pensions hit the account, but I have never done that analysis. With a little bit of work I should be able to that by creating a spreadsheet and entering all the pension payments and then converting them to £s on the days they were paid, then recorded all the dates when I actually made the transfers and seeing if I won or lost.

@durhamlad - I'm interested to hear examples of receiving your SS directly into your UK bank account.

The reason I ask is, like the OP, I have opened up a Wise borderless account in US$ and was planning on receiving my SS directly into that account (I presume it is possible?) allow it to accumulate and then to transfer into £ when I want to (at a rate that I will know) or alternatively keep it in $ and use it to spend on any trips or holidays back in the US.

I guess it all depends on the immediate need for the income?

For this year, 2021, I transferred the first 6 months of my pension payments in June.  If I had transferred them at the exchange rate on the day they were paid into my US bank I would have received 0.33% less in £s, so this year by choosing what I think is a good exchange rate has given me a whopping return of 0.33%.  Now that the spreadsheet is set up I will continue to update and make this calculation.

OK - thanks for that.

Presumably then you have your SS paid into a Wise $ account and then transfer it when you're ready and you feel the exchange rate is good? (or you need the cash  ).

I use the following to track and see exchange rate movements:

https://www.poundsterlinglive.com/data/currencies/gbp-pairs/GBPUSD-exchange-rate

Thanks again.

OK - thanks for that.

Presumably then you have your SS paid into a Wise $ account and then transfer it when you're ready and you feel the exchange rate is good? (or you need the cash  ).

I use the following to track and see exchange rate movements:

https://www.poundsterlinglive.com/data/currencies/gbp-pairs/GBPUSD-exchange-rate

Thanks again.

My US private pension is only payable to my US bank so no choice there then every few months I will use Wise to transfer it to my UK bank.

For SS it will go direct into my UK bank. My wife has already completed her SS application including providing them with sort code and account number for our UK bank and is now waiting for the payments to start.

OK thanks - my plan is maybe a little different to what you actually do in that I've opened up a Wise Account with a USD account - it has the US routing number and account number (Borderless but all based in New York)  - basically meaning I can receive tax refunds, my SS and any stimulus payments (fat chance!) directly into this account in $'s and then transfer as and when I want to, directly to my UK account.

She will continue to be taxed on her worldwide income as if she was resident in the USA, plus as a UK resident the UK will also tax her on her worldwide income but for most income the UK is the primary taxing authority so they will tax her first and she claims UK taxes paid as foreign tax credits against her US taxes on that same income. Any tax free income in the UK such as cash ISAs and the first £1,000 of regular interest  will be fully taxed by the IRS, but the UK equivalent of a 401k or IRA is not taxed until withdrawals take place.  SS for and her OAP is only taxable in the UK. 401k and IRA regular distributions will be taxed by the UK and US which is why she may consider IRA to Roth rollovers depending on her tax brackets.

I know that I am in the UK 20% bracket now but I will be in the 40% UK tax bracket once my SS starts so all my required minimum distributions starting at age 72 from my 401k/IRAs will be taxed at 40%. That is one of the reasons I am putting off my SS until age 70.  (I am age 66now). I have had 11 years since retiring at age 55 to do Roth conversions so that when I do start withdrawals they will be tax free and I will only have paid taxes to the US at much lower rates. I am now 100% Roth and we are working on my wife’s Roth conversions. (She is also a USC like myself)

Regarding the IRA/ROTH conversion - I currently have a brokerage account and an IRA with Schwab.  They would not allow me to a) buy anything other than individual stocks and bonds in my IRA, and b) insisted on taking funds from my IRA for tax withholding/penalty (I am less than 59.5) if I did a rollover.  The latter would occur because even though I would be doing a direct rollover the funds that are withheld for taxes are treated like a distribution by Schwab.  Thus I am moving my IRA to Fidelity.  As  a side note I did start working with a company called Thun to manage my brokerage and IRA investments.  This allows me to own ETFs etc within my Schwab accounts (albeit at the cost of Thun's management fee) and have a better balanced portfolio.  We will see how Thun's portfolio performs.   

Thun were pretty non-committal regarding the tax position of a rollover conversion and whether it should be taxed in the US or in the UK.  The crux of the matter depends upon the definition of "lump sum".  It means different things to the IRS and HMRC.  I have elected to convert a relatively small % of my IRA to a ROTH, doing it every other year to avoid periodic payments (as suggested by Durhamlad and Dave B).  I think I will stick to only converting 25% in total since this correlates to what HMRC considers a lump sum.    However, I would be open to doing more if I could better understand the legalese tax language of the IRS and HMRC.