Appropriate tax reporting on US 401K

Hi I am a UK National and UK tax resident. I worked in the US from 2004-2009 and have a 401k. I am 62 and now considering taking it all out as a lump sum. I think it has approx £400k there. How is it classified for tax in the UK. I do completed a W8 in US. Thanks on any insight.

Hi seattlemadness,
A 401(k) plan is a company-sponsored retirement account to which employees can contribute income, while employers may match contributions.  
There are two basic types of 401(k)s—traditional and Roth—which differ primarily in how they're taxed.  
With a traditional 401(k), employee contributions are pre-tax, meaning they reduce taxable income, but withdrawals are taxed.  
Employee contributions to Roth 401(k)s are made with after-tax income: There is no tax deduction in the contribution year, but withdrawals are tax-free.
If you have a Roth 401K, then the lump sum will not be taxable either in the USA or in the UK.  
If you have the tradition 401K, then the lumpsum is taxable in the USA.  Article 17(2) states the lumpsum is taxable only in the USA, however, article 1(4) over-rides
this and allows the UK to tax the lumpsum as well.
In these situations, double taxation will occur since both the UK and the USA can tax the same income.
However, that double taxation will be eliminated in accordance with Article 24(4)(a) of the DTA which requires the UK (as the country of residence) to provide FTCR
to offset the US tax correctly paid against the UK tax charged on the same the IRA withdrawal.  
In short, you pay tax on the lumpsum in the USA and declare the lumpsum in a UK tax return and also claim a foreign tax credit of up to 100% of the foreign tax paid.  
(Uk/USA Double Taxation Agreement - 2002).
Thank you.
 

Does HMRC consider taking a lump sum from a 401(k) plan having the same consequences as accessing a UK pension, specifically in relation to triggering limits on future contributions to the UK pension scheme?

Hi PRW,
Yes it does.
Thank you.

Further question for HMRC - Does the tax treatment applicable to lump sums paid out of funds built up in overseas employer-financed retirement benefits schemes (EFRBS) prior to 6th April 2017 apply to lump sum payments from a 401(k) in this situation? - i.e . will the lump sum value accrued up to that date be free from UK tax?

Hi,
You can see guidance here:
EIM75550 - The taxation of pension income: lump sums from foreign pension schemes
Thank you

I have a couple of further questions. 1. If I take a series of lump sums from my 401(k) pot - one per year over a 10 year period for example - does each of them qualify for the same tax treatment as for a single lump sum? 2. Is there a HMRC definition of a Lump Sum? Thank you

Could you confirm how tax would be reported for a monthly withdrawal in the same circumstances i.e UK national who is a UK tax national but has a 400k traditional 401k in the US

Hi MuirisR,
There is no legislative definition of a lump sum but HMRC regards these as being any non periodic payment of a pension, that is, any non regular payment that decreases the value of the remaining pension pot after such payment is made. For example, the first IRA withdrawal is taken in year 1, the next withdrawal was made in year 5, and another withdrawal in year 7, such payments will not be regarded as periodic and will be treated as lump sums under the UK/USA double taxation agreement.
Whereas any amount withdrawn in set, periodic, frequent intervals, for example, weekly, monthly, annually, would not be a lump sum, but rather periodic payments.
Thank you. 

Hi Andrew,
Payments made by the individual into an IRA, are made after tax relief is given to the individual by the employer. Payments from this pension are taxable in the USA.  
HMRC do not recognise IRA schemes as pensions, so for UK residents, they are taxed as income under interest and declared as foreign interest on a tax return, SA106.    
There is no US taxation if the pension is subject and liable to UK tax. If US tax is withheld, then the individual, should seek a refund of this tax by filing a form 1040NR.  
HMRC will not give a credit for this tax against any UK tax charged on this income.   
Thank you.

 

May I have a further clarification in respect of lump sum payments? You have said that one payment per year over a 10-year period would not be considered a lump sum payment. Do you know if this corresponds with the IRS interpretation? Would they accept that these periodic payments are taxable only in the UK (in accordance with Article 17.1 of Treaty, rather than Article 17.2, which states "Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment derived from a pension scheme established in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in the first-mentioned State"? If IRS were to consider these as lump sum payments, would HMRC accept this also?

Hi,
You would need to check this with the IRS. We would need to know what they class it as before any confirmation could be given.
Thank you