Managing Your US IRA As An Expat
If you’re a US expat living in the UK, you might have a US retirement account such as a 401(k) or an IRA from a previous employer, or you may have inherited one from a relative.
Managing these accounts whilst living abroad can be complicated due to differing tax laws in both countries. US financial institutions often treat non-residents as ‘offshore’ clients, making it difficult to access the right financial advice.
Understanding the best way to manage these assets, while ensuring tax efficiency, requires working with a specialist who understands both US and UK regulations.
The Wealth Genesis - Expat Financial Advice & Services In The United States
Managing A US 401K Whilst Living In The UK
If you’ve moved permanently to the UK, you can keep your 401(k) in the US, but this may not be the best choice. The IRS does not allow direct transfers of 401(k) funds to overseas pension schemes, meaning you cannot move the money into a UK pension.
Your main options are to leave the funds where they are or convert them into an IRA (Individual Retirement Account). However, some US providers restrict services to non-residents, which can make managing your account more challenging.
Additionally, withdrawing any funds before age 59.5 can result in a 10% early withdrawal penalty, so it is advisable to leave your account untouched until retirement.
IRA Rollovers For US Expats
One of the most common challenges faced by US expats is the restrictions imposed on their trading accounts, including IRAs, Roth IRAs and 401ks.
Many US custodians will enforce a transfer to another provider, giving you 60 days to transfer your IRA account to avoid restrictions.
Our team of expert advisers can assist with IRA rollovers to non-US residents, by utilising providers such as Interactive Brokers and Charles Schwab who accept US expat accounts, depending on your residency.
This means you can still have your retirement accounts managed professionally outside of the USA.
Understanding The Tax Implications
As a UK resident with a US retirement account, tax planning is essential to avoid unnecessary losses. Both the US and UK assert taxation rights on distributions, meaning that without proper planning, a large portion of your savings could be lost to tax. The US-UK Double Taxation Agreement (DTA) helps prevent double taxation, but it is important to understand how it applies in this case.
Lump sum withdrawals from a 401(k) are typically taxed only by the US under Article 17 of the double taxation agreement, meaning HMRC does not tax them. However, partial withdrawals may still be subject to UK income tax.
On the other hand, the first 25% of withdrawals from a UK pension may be tax-free in both countries if reported correctly. Regular pension payments from a US account are taxed in the UK but exempt from US taxation, allowing you to effectively manage your tax liabilities.
However, If you choose to take irregular or partial distributions, the tax situation can become more complex, so professional advice is necessary.
Inheriting A 401K As A Non-Resident
If you inherit a 401(k) as a non-US citizen, you will need to obtain a US Taxpayer Identification Number (ITIN) and comply with IRS reporting requirements. Note that some 401(k) providers do not allow non-residents to maintain accounts, which can create additional challenges.
Inherited IRAs also come with their own set of rules, depending on your relationship to the original account holder. Seek advice from a qualified professional to understand the implications and obstacles of inheriting a US 401(k).
Expert Retirement Advice For US Expats
Managing US retirement assets from the UK requires specialised knowledge of both tax systems. Many US financial institutions hesitate to work with non-residents, so it is crucial to find an adviser well versed in the tax laws of both the UK and US.
At The Wealth Genesis, we can ensure compliance, help you maximise your retirement savings, and develop the most tax-efficient withdrawal strategy. We can also help with converting your 401(k) into an IRA, should that be the most suitable option for your circumstances.
Our advisers specialise in cross-border wealth management for US expats and non-residents. Our team is qualified to provide advice on both US and UK tax systems, ensuring you receive expert guidance tailored to your financial goals, and that you are tax compliant.
To learn more, book a free discovery call with one of our advisers today using the diary below.
