US 401K Withdrawals and tax treatment

Hello I am resident and employed in the UK and am 61 years old. I have a US 401K account from previous employment in the US. What is the most tax efficient way of receiving income from this 401K in the UK? I understand that the US will levy a 30% penalty tax if i withdraw the 401K into my US bank account, then I have the expense of the exchange to GBP. Does the UK-US Tax Treaty reduce this US penalty tax? Thanks Greg

Hi,

HMRC is unable to provide financial or tax planning advice.

You may wish to seek advice from a financial advisor or accountant.

Thank you.

Apologies my intention is not to ask for tax advice, I just want to understand the law, let me recast my enquiry as follows: - Does the UK-US Tax Treaty allow me to not pay the US 30% levy on my 401K withdrawal, and only pay UK tax on this income? - If so what tax forms do I need to complete in US and UK to enable this Thanks 

Name removed .

Hi,

Article 17(2) of the UK/USA DTA provides the US with the right to tax any Lump Sum payment which is made from a US sourced pension scheme (including IRAs). However, the UK is also permitted to tax the same lump sum payment(s), which is in accordance with Article 1(4) of the DTA .

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. 

To claim relief, please refer to:

Double Taxation: Treaty Relief (Form DT-Individual)

Thank you.

Thank you, that's exactly what I needed to know

I am a UK citizen/resident with a 401k plan from years working in the US. [As an aside: I recently renounced my US citizenship (this was a strightforward renounciation, I was not "covered" and did not need to pay exit tax]. a) Could you please outline what constitutes a lump sum from a 401k plan? is it defined by size or frequency? I have read that this is treated differently from a regular withdrawal from a 401k on which I should simply pay UK tax, not US tax. b) where a lump sum withdrawal is recognised as such with tax payable in the US not the UK, is there any danger of this withdrawl bumping me up a UK tax bracket? Many thnaks

This is an update to my previous post on withdrawing from my 401k (I am not a US citizen any more, just UK) I have now read all the forum messages I can find and now understand the following: A) There is no formal definition of a lump sum B) HMRC is empowered to tax the lump sum as well as the the IRS C) They may or may not do so That seems to be the upshot. Could HMRC correct any misunderstanding with the above. BUT my big question now is: if HMRC does tax a lump sum withdrawal, will this be seen as UK income and hence factored in when determining my tax bracket? Many thanks

Hi Susie,
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 Sum’s under the UK/USA DTA. Whereas any amount withdrawn in set, periodic, frequent intervals (e.g. weekly, monthly, annually etc.) would not be a Lump Sum, but rather periodic payments. 
Thank you.

Hi
A 401K is an Individual Retirement Account.  It is taxable in the UK as you are a UK tax resident, whether taken as regular payments or a lumpsum, under interest and not pensions.  The IRS also has the right to tax your 401Ks, meaning that you have to claim a foreign tax credit in a self assessment tax return of up to 100% of the foreign tax paid.

I do not believe that is correct. A 401k is not an IRA account. Some people roll their 401k plan into an IRA. But I have not done that. I understand that IRAs are treated differently, particularly the interest income. A 401K is the US equivalent of a defined contribution pension pot and is administered by the company I once worked for. IRAs are administered by retail fund managers. I was asking about the lump sums from 401ks as I have read on the other, longer, HMRC community 401k forum that the lump sums are treated very differently from a more regular withdrawal.

Hi,

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 the 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 (file a form 1040NR).  
HMRC will not give a credit for this tax against any UK tax charged on this income.   

Payments made into a Roth IRA are made before tax relief is given. As a result, payments from this account are not taxable in the USA. HMRC recognises this account as a pension scheme and as it is not taxable in the USA, it is not taxable in the UK either.

Thank you.

HMRC - are lump sum payment or payments out of a 401k fully taxable in the UK or is a deduction available in respect of the value of the pre-6th April 2017 lump sum rights?

Hi I am a UK resident. I have a "Retirement Savings Plan"/ 401K from a former employer, it is in US$ and located in the US. I was working overseas as an expatriate when I got the 401K i.e. I have never been a US citizen or worked in the US. I want to make a withdrawal from the 401K and I was told today by the plan administrators that the Tax Treaty between the UK and the US changed in 2024 to the effect that because I have a UK address any withdrawal is subject to 30% US withholding tax. My question is, did the UK tax treaty with the US change in 2024 as it relates to 401k withdrawals? Second question, if the US deducts 30% from any withdrawal, am I also liable for UK tax? thank you

Hi MuirisR,
Please refer to guidance here:
EIM75550 - The taxation of pension income: lump sums from foreign pension schemes
Thank you. 

Hi ,
 

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 the 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 (file a form 1040NR).  HMRC will not give a credit for this tax against any UK tax charged on this income . Thank you .

You can file a W8-BEN form in theUSA with the holder of your IRA/401K so that the USA will not tax any withdrawels as they will be tax under UK tax law. THe IRA/401K holder will notify both the IRS and the UK Tax Office of the withdrawels as you are require to provide both your USA SSN and you UK NI number.