UK tax implications for 401k pension withdrawal in the US

Hi, I am a UK tax resident, under the pension age. I have a 401k pension plan in the US, which I would like to liquidate, i.e., withdraw in its entirety as a lump sum. In the US this will be subject to income tax (plus an early withdrawal penalty). According to the 'UK/USA Double Taxation Convention' (Article 17, Paragraph 2), this will NOT be subject to any UK tax. Is this correct? Do I still have to mention this on a UK tax return? If so, where? If all the above is correct, then there is still the 'Saving Clause', according to which HMRC could in principle ignore the above-mentioned article and impose income tax anyway. Is this being done in practice? Thank you

Hi,

Roth Individual Retirement Accounts payments to a UK resident that are not taxable in the United States are not taxable in  the United Kingdom.  

Have a look at below, note 2 in relation to other pensions. 

DT19852 - Double Taxation Relief Manual: Guidance by country: United States of America

UK/US citizens resident in the UK are taxable on their IRA interest in the UK. IRA's are treated differently from Roth IRA's, in that they are taxable in the UK under foreign interest. The gross interest would be declared in the Self Assessment Tax Return, using the supplementary page SA106. The interest would be treated in the same way as UK interest and attract that starting rate of £5000.00.  

Have a look at:

Tax on savings interest

DT19852 implies that tax is not payable in the USA on this interest. 

Thank you.

Thank you for the reply. My question was not about IRAs or Roth IRAs, and not about regular pension income. Rather, I'm interested in a one-off (lump-sum) liquidation of a 401(k) plan. This *will* be taxable in the US (and it will attract a 10% penalty). My question is whether or not this will *also* be taxable in the UK. According to the cited Article, it shouldn't be. That is, unless HMRC applies the Savings Clause. I cannot find official guidance on whether or not HMRC does that. Thanks

Hi gork14,
Please refer to the tax treaty and Articles 17 and 18
UK/USA DOUBLE TAXATION CONVENTION
As taxable in USA, it would be taxable in UK and for you to claim foreign tax credit relief to reduce any UK liability.
Thank you. 
 

Please can you check your answer since it contradicts the DTA Article 17 which states that only the US would tax a lump sum withdrawal from a 401k pension plan and not the UK since the US is the Contracting State and the owner is a resident of the UK: "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."

Hi fred

Please see DT19852 - Double Taxation Relief Manual: Guidance by country: United States of America: Treaty summary
which states it is taxable in the UK.

Thank you
 

Thank you for sending the summary. However, this does not seem to be detailed enough to take into account provisions of Article 17 (which the summary doesn't even refer to). I would be grateful if you could comment specifically on Article 17, paragraph 2 of the UK/USA Double Tax Convention, and explain why this wouldn't apply here.

That refers to income though and not lump sums which have a special treatment under Article 17 (2) of the DTA. I found this older response from HMRC Admin 17 to a similar question “UK tax on US pension fund“. I’m not sure if the link works so I copied the answer as well below: https://community.hmrc.gov.uk/customerforums/pt/e5fe9096-381f-ed11-b5cf-00155d973ade “Posted 11 months ago by HMRC Admin 17 - Article 17(2) with reference to Article 1 (4) if you receive a Lump Sum Pension and you will not receive any further payments from that pension scheme then this will be classed as a one off lump sum payment and will be taxable only in the country that the payment arises.”

Just found https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19853 also covers the lump sum question: Lump Sums A lump-sum payment derived by a resident of one State from a pension scheme established in the other State shall be taxable only in that other State. The provision preserves the exemption from income tax of a lump sum relevant benefit where it is paid by a UK approved pension scheme to a beneficial owner who is a US resident. However, Article 1(4) will apply in respect of US citizens as the provisions of Article 17(2) are not amongst those listed at Article 1(5). So, the US can tax lump sums received by US citizens from UK schemes.

Thanks, fred, this is helpful. And if I understand correctly the thread you linked first, the lump sum doesn't even need to be declared in the UK, i.e., doesn't have to be mentioned on the Self-Assessment return, correct?

It should not be entered as income but added as a note under additional information is my understanding e.g. “If you have a pension that is not taxable in the UK because of a Double Taxation Agreement (DTA), full details of the pension payer, pension and relevant DTA should have been shown in the ‘Any other information’ box on your tax return.” was the advice from HMRC Admin 19 from this thread: https://community.hmrc.gov.uk/customerforums/sa/6b51d08c-8501-ee11-a81c-002248c5fa45#6e73df8c-8501-ee11-8f6d-6045bd127724

Hi gork14,

Article 17(2) with reference to Article 1 (4) if you receive a Lump Sum Pension and you will not receive any further payments from that pension scheme then this will be classed as a one off lump sum payment and will be taxable only in the country that the payment arises.  
If paid from a USA company then remains taxable in the USA even if you are a resident of the UK and vice versa.

Thank you.

Hello, this is a very helpful thread. Am I correct in understanding that an early withdrawal of a US pension plan that is not a liquidation of the pension is not a lump sum payment? Because this is not considered a lump-sum payment, it would be subject to US and UK taxation? For example, one takes an early withdrawal of $25K of a $100K US pension plan leaving $75K remaining in the US pension plan with the intent to receive future payments at retirement age. The $25K would be subject to both US and UK tax? I appreciate your help.

The definition of a lump sum is unfortunately not included in the US/UK Dual Taxation Agreement (DTA) or the HMRC tax manual and there have been conflicting replies from HMRC Admins on this forum ranging from a lump sum being anything that is not a periodic payment (e.g. 25% would normally be treated as a lump sum in the UK) to the lump sum is the entire balance of that pension scheme (normal US IRS definition). In the event it is deemed to not be a lump sum then it should only be subject to UK tax under the DTA. However the US pension scheme administrator is still likely to withhold US tax as a precaution which you could then reclaim by submitting a non resident U.S. tax return and reference the DTA as the reason that the tax should have not been applied. This assumes you are a UK resident and don’t have US citizenship or a green card as then you are liable for US tax on all your income. Just to add this is my understanding but I’m not a tax professional!

Hi ldn360,

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's no tax deduction in the contribution year, but withdrawals are tax-free.
Roth Individual Retirement Accounts payments to a UK resident that are not taxable in the United States are not taxable in  the United Kingdom.  
Have a look at DT19852 - Double Taxation Relief Manual: Guidance by country: United States of America: Treaty summary Note 2 in relation to other pensions. 

UK/US citizens resident in the UK are taxable on their IRA interest in the UK.  
IRA's are treated differently from Roth IRA's, in that they are taxable in the UK under foreign interest.  
The gross interest would be declared in the self assessment tax return, using the supplementary page SA106.  
The interest would be treated in the same way as UK interest and attract that starting rate of £5000.00.  
Have a look at Tax on savings interest.  
DT19852 implies that tax is not payable in the USA on this interest. 

Thank you.

I think I understand. However, I do have a question regarding the lump-sum issue. What is considered a lump sum payment? I have a ROTH I would like to take an early withdrawal on. I am 42 not 59 1/2 (where one would be able to take tax-free withdrawals in both the US and UK). If I withdraw my Roth IRA in full, is this considered a tax-free lump-sum payment?

The advice on an IRA treatment does not seem to be correct. An IRA (Individual Retirement Account) is included in the US UK DTA definition of a pension as defined in Article 3(1)(o) so is treated the same way as a 401k for either lump sums or income and is not treated as foreign interest. Likewise a Roth IRA is treated the same as a Roth 401k. The relevant HMRC manual notes on this are in DT19853. https://www.gov.uk/hmrc-internal-manuals/double-taxation-relief/dt19853 There needs to be better checking of the advice provided by HMRC Admins on this forum related to complex areas such as foreign tax treaties. Also if incorrect information is inadvertently provided it should be corrected for the record.

Hi,

Lump sum is normally a one off payment of all/most of your pension pot. it taking it before the age of 55 it is not tax free.

Thank you.

Hi ldn360, as I understand it you will have to pay a 10% penalty plus income tax in the US on your Roth IRA earnings/growth if you withdraw under the age of 59.5 but the contributions themselves can be withdrawn tax free as they were made after tax unlike a normal IRA but please double check that. HMRC DT19853 referring to the US/UK DTA states that a distribution from a US Individual Retirement Arrangement or “IRA” to a UK resident will be exempt from tax in the UK to the same extent that the distribution would be exempt from tax in the US. So if you only withdraw your contributions (either all at once or as several smaller withdrawals) and not any earnings/growth from the Roth IRA that would be tax free in the US and hence tax free in the UK. Your Roth IRA provider should be able to break down the growth part of your investment. You’d then need to leave the balance that is the growth on your original contributions until you reach age 59.5 to withdraw the balance without penalty/tax. If you instead withdraw everything then you’d be taxed in the US on the earnings/growth part plus a 10% penalty on that part but as this would clearly be a lump sum you should not have to pay UK tax on this withdrawal. So you can decide which approach is best for you and also consider if keeping the Roth IRA is worthwhile given its tax free status if you hold it long term.

Hello, I am a NRA in US and resident/citizen of UK who owns a US IRA. There are two issues I can't resolve: 1/ If I take an entire lump sum distribution of the IRA then it is only taxable in the US, but at what rate? Can I use US tax tables on my US return as is preferable or is it a 30 pct flat tax. 2/ If instead I took a 25pct distribution it could be done with 0 withholding according to the tax treaty because in US this is not considered a lump sum, but would this distribution also qualify as tax free as a 25pct lump sum distribution when taxed in UK? Thank you and please forgive if I posted incorrectly.