IRA, 401K – US pension plans and UK residents (for non-US taxpayers)

by Paul Devonshire, in

First thing, IRAs (individual Retirement Accounts) and 401Ks are US pensions.  They are not savings accounts, “interest”, or anything else for that matter.  This is clear from the UK/US Double Taxation Agreement (DTA) notwithstanding HMRC moderator comments on their online forums.

But if you are a non-US person (neither a citizen or Green card holder) living in the UK and own a US pension (401K and/or IRA), you must consider the UK and US taxation of distributions from these plans.

There are various options available when considering taking withdrawals; 100% lump sum, irregular and regular payments.  The UK and US taxation of these payments will depend on the type of distribution (lump sum, regular, etc) and the relevant articles of the UK/US DTA. In broad terms, a lump sum will generally be taxed in the US, and not the UK. Whereas regular payments will be taxed in the UK, and not the US.

The US taxation of lump sums is not straightforward.  The part of the distribution that relates to employer and employee contributions is taxed at regular graduated Federal tax rates (0% to 37%).  The balance is then subject to a maximum Federal tax rate of 30%.  Capping the tax at 30% on, what is likely a significant part (the growth in value) of a long-held pension, looks good when considered against potential UK tax rates of 40/45%.

For non-Americans with these assets, there are some interesting opportunities if the pension contains tax “basis” from non-tax deductible contributions.  I would add that the US will (should) withhold Federal tax at a rate of 30% and you will have to file a non-resident Federal Tax Return (1040NR) for the year of the payment/distribution.  There are more aspects of the DTA that may be relevant.  Even with no DTA (eg, a non-US pension), there may be UK tax relief on a lump-sum if it accrued before 6th April 2017.

And if you have a Roth IRA, there is no need to worry about any of this. Qualifying Roth IRA distributions are free of UK and US taxation.  You may wish to consider transferring existing 401k/IRAs into a Roth IRA, to benefit from future tax-free growth.

You should always seek professional advice on this matter, but we hope that this throws some light on the subject.