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.
