Helpful Tips

Essential Tips for any British Expat with a 401(k)

In our new TOP TIPS feature our experts provide essential information and guidance on the issues that affect expats in the USA.

Information for Non-Resident Aliens

If you are a British citizen living as an expatriate in the United States, you may be categorised as a non-resident alien by the Internal Revenue Service. The IRS considers non-resident aliens to be any individual who is legally resident in the United States but does not meet either the green card or the substantial resident test.

Many British non-resident aliens in the US choose to invest for their retirement via an employer-sponsored 401(k) retirement plan, however, investing in a 401(k) can provoke a number of complex questions – for example, what will happen to the fund if you decide to return to the United Kingdom?

Below we offer our top tips for managing your 401(k) as a British expat in the US.

1. Know your rollover rights

If you move back home before you reach the age you are able to make withdrawals from your 401(k), you can cash out the funds and move them to a retirement plan in the UK, however, this can be extremely costly.

Opening an IRA account and then using it to roll over your 401(k) is one way to avoid the early withdrawal penalties which will be tagged on to your normal tax rate.

Although IRAs, like 401(k)s, incur a 10% penalty for any withdrawals you take before you reach 59½, they offer greater freedom and flexibility for things such as first-time property purchases, medical expenses, qualified higher education expenses and more. So, your decision whether or not to use an IRA rollover, may depend on your plans before you leave the US.

This is not to say that an IRA is always advantageous; distributions sent to non-US addresses attract a federal withholding fee of 10%. However, because of a US-UK tax treaty, distributions made to the UK attract the same of level of tax as they would in the United States.

Both IRAs and 401(k)s are not accepted by HMRC as pension funds, so you will be unable to transfer funds directly into a retirement account in the UK. The best option is to seek early advice from a specialist adviser who understands the ramifications of US to UK movements, so that a plan can be put in place to mitigate tax liability as much as possible.

2. Know when to cash out

You cannot make withdrawals from your 401(k) until you reach 59½ without attracting an early withdrawal penalty - the exception is if you become medically retired through injury, illness or disability.

If you are younger than 59½, not disabled and choose to cash out the funds from your 401(k), you'll be subject to a 10% penalty. This has obvious consequences and means that you can substantially erode the value of your retirement account – for example, if you have an account that is worth $50,000 and decide to withdraw it completely, you will have a $5,000 tax penalty to pay.

And because 401(k) contributions are made with pre-tax dollars, when you make the withdrawal the sum would be added to your gross income for the year and taxed at the correct rate of income tax – it is easy to see how it can quickly get very expensive.

As such, it is often a good idea to liquidate the account only once you have left the United States and are no longer earning US income as, ultimately, cashing out when you are no longer in receipt of any other US income could reduce your overall liability in the long-term.

3. Seek the right advice

If you have significant retirement funds combined with cross-border assets, investments, and income and outgoings, your individual situation could be particularly complex. To ensure you receive the right advice and guidance for your circumstances, and to make the most of your wealth while in the US and once you leave, it is imperative that you seek out a team which has full knowledge and experience of the US rules and regulations, and how they might affect your finances and overall wealth management.

Retirement planning with Blacktower in the US

Blacktower (US) LLC is fully licensed and regulated by the SEC and has over 30 years' experience in the offshore and cross border expat market. We know the ins and outs when it comes to managing the US retirement accounts of British expats, including 401(k)s, IRAs and 529 education plans.

What you choose to do will depend on your individual circumstances and tax considerations but one thing is certain, deciding upon the right strategy takes time, knowledge and expertise.

Contact Blacktower in the US today for more information.


Disclaimer: Blacktower (US) LLC is not a tax adviser and independent tax advice should be sought. The above does not constitute advice.

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