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Where Taxpayers and Advisers Meet

UK tax treatment of US 401(k) & IRA distributions

Posts: 1
Joined: Mon Oct 29, 2018 3:27 pm

UK tax treatment of US 401(k) & IRA distributions

Postby Retired4Good » Mon Oct 29, 2018 3:56 pm

I am a recently retired UK citizen (by birth), currently living in the UK, but also a Long Term Permanent Resident of the USA, although probably not for much longer. My question is not however about expatriation, but rather:

How do I minimize the combined US & UK tax consequences of receiving distributions from my former employer’s 401(k) and also my conventional IRA?

I moved to the USA when young and spent my working life employed by US companies, although I never became a US citizen. The ironic twist is that for the last 12 years of my career, I was posted back to the UK as an expatriate. Moreover, I am now planning to remain here in the UK during my retirement. Hence I intend to give up my Green Card next year, when it is due to expire anyway.

Therefore I will change status in the middle of next year to being a non-resident alien taxpayer in the US. I understand that I will have to waive tax treaty benefits as a condition of expatriation – however unconstitutional that may sound! So what choices regarding these 401(k) and IRA plans are best made before expatriation, or alternatively is there an advantage to deferring some moves until later? (note that my exposure to the mark-to-market elements of the “expatriation tax” is relatively small, as most my wealth is tied up in deferred compensation and 401(k) plans, hence minimizing that tax isn’t the focus of this posting).

For the next decade, I have sufficient income from deferred compensation to more than meet my ongoing needs, so my bias would be to have the 401(k) and IRA funds distributed as lump sums, so as to have a pot of capital that I can invest in other things, such as a home here (I don’t think selling my US property would quite cover the cost of buying in south-east England!).

Moreover, my total income in US tax years 2018 & 2019 will be as low as it’s going to be in the foreseeable future, before regular monthly income from deferred compensation fully kicks in in 2019 and lasts for many years. Would conversion of the 401(k) and IRA into ROTH IRAs in either 2018 or 2019 be a sensible tactic? (my understanding is that that such conversions would be considered non-taxable events by HMRC, again because of section 18 of the tax treaty). But how would HMRC treat future withdrawals from a ROTH IRA?

Additional background info:
Given that the final years of employment were by far my highest earning years, most of the value in the 401(k) is derived from contributions and growth during my time in the UK (for which my employer – who filed UK taxes on my behalf – claimed UK tax relief based on section 18 of the tax treaty). The contributions to the much smaller IRA mostly date from before my time in the UK, although the capital growth has obviously mainly occurred during the last decade.
Also, as a legacy from my time as an expat in the UK, I have a huge 10 year backlog of foreign (UK) tax credits in the US (in the general income category) that will never be able to be used in the US (not even before my expatriation). But could these be used to offset ROTH conversion taxes if I convert while still a US resident?

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