# US expat in UK, 401(k) question



## rtom

I am in the UK for more than a year for work -- got here back in January. Certainly here through next January, definitely leaving sometime later in 2016.

I am still working for my US-based university, so paid in dollars. The UK tax people have not contacted me yet (after > 6 months) so it seems possible that I will not have to worry about UK income taxes -- though since I do have a UK bank account somebody knows I have money here (FATCA).

My US employer is reimbursing me for my apartment and meals.

Wages with university match are around $90K. If the university were to decide that my apartment and meal reimbursements are taxable, then that 1099 plus wages will be about $120K.

I assume for now that I will have no UK tax liability. Could change of course.

I believe that I will probably qualify for the foreign earned income exclusion/housing exclusion.

I have been contributing heavily, as I always have, to my 401(k), and I already made my 2015 traditional IRA contribution.

I have only just now run across some information that made me realize that if I file form 2555, I won't have any earned income to put into the traditional IRA. So I will have to fix that, assuming I file form 2555.

Now I am also wondering about the 401(k) contributions.

So my questions are

1. If I do end up with zero or very low taxable income (I should have a few thousand $ in unearned taxable investment income), then am I allowed to make contributions to the 401(k)?

2. Even if I am allowed to contribute to the 401(k), is it a good idea? Using the FEIE means all of my income for 2015 won't be taxable, so why put it into an account from which all distributions will be taxed at my marginal rate (though many years later)? 

I suppose that it might make sense to make the 401(k) contributions if they will grow tax-free for long enough before getting taxed when distributed.


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## Nononymous

rtom said:


> I am still working for my US-based university, so paid in dollars. The UK tax people have not contacted me yet (after > 6 months) so it seems possible that I will not have to worry about UK income taxes -- though since I do have a UK bank account somebody knows I have money here (FATCA).


The UK tax people may never know until you tell or ask them - otherwise they have no way of finding out. Even if you have some kind of work permit allowing you to spend 12+ months in the country on a US salary, that doesn't mean that the tax people will have been informed by the immigration people.

As a general rule you would be paying UK tax on worldwide income for the time you're living in the UK, but if you're on some sort of research deal that might not be the case. Academic arrangements can be a bit funky. I've never known of anyone on sabbatical (one year give or take) who's paid local tax. Whether this is because of some international university exchange agreement or just because nobody wants to or can figure out how to deal with the hassle, I don't know. (Since immigration and tax people don't seem to talk to one another, it's not really detectable.)


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## rtom

Thanks!

Any idea if my 401(k) contributions are allowed? I would hate to be in violation of some rule.


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## Nononymous

rtom said:


> Any idea if my 401(k) contributions are allowed? I would hate to be in violation of some rule.


Not my department, but someone here might know.

The common-sense approach would be that if you're paying US tax on US income while living temporarily in the UK, then as far as the IRS is concerned it's a US job so you can make US retirement contributions - I would file my taxes with my permanent US address (i.e. act like you're still in the US, the only thing that suggests otherwise is an FBAR on your UK bank account, but you don't file that with the IRS anyway).

If you're paying UK tax and doing the FEIE/FTC thing then it might be a different story.

PS on edit - I have no specific knowledge of the UK situation, these are just general guidelines.


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## rtom

Most of what I have read suggests that I *can* use the FEIE to exclude all of my foreign earned income, while also making 401(k) contributions (while living in the UK and being paid by a US source in dollars).

But it would be good to confirm this.


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## Bevdeforges

You need to talk to your employer about your tax situation. There are ways for the employer to exempt you from the local (i.e. UK) social insurance system in order to retain your US social security status. But I'm not sure what the tax situation might be.

Normally, you would pay local (UK) taxes if you meet the local standard for being "tax resident" - but in any event, you will probably meet the requirements for the FEIE as long as you spend a full one year "resident" abroad. The 401K status is something different - though you would definitely lose your ability to contribute to an IRA if you take the FEIE.
Cheers,
Bev


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## rtom

Bevdeforges said:


> You need to talk to your employer about your tax situation. There are ways for the employer to exempt you from the local (i.e. UK) social insurance system in order to retain your US social security status. But I'm not sure what the tax situation might be.
> 
> Normally, you would pay local (UK) taxes if you meet the local standard for being "tax resident" - but in any event, you will probably meet the requirements for the FEIE as long as you spend a full one year "resident" abroad. The 401K status is something different - though you would definitely lose your ability to contribute to an IRA if you take the FEIE.
> Cheers,
> Bev


Unfortunately my employer has been extremely unhelpful. I am essentially on sabbatical, and nobody back in my department knows much or is willing to put much time into giving me advice. The advice they have been giving is often wrong, too.

I lived in the UK some years ago so I already have some familiarity with the FEIE, though I was paid in pounds by a UK university then. In fact, back then I ended up not owing tax in either country. My current situation is however much more complicated and subtle.


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## BBCWatcher

If the employer allows 401(k) contributions, great. Keep it up. Max it out if you can.

With respect to your IRA contributions, you need earned income that is not shielded via the FEIE to make those contributions. But it is possible. Let's suppose you have earned income from work in the U.S. through March, 2015. You then spend April, 2015, through July, 2016, inclusive, physically present and working in the U.K. You then resume work in the U.S. from August, 2016. You stay on U.S. payroll the entire time.

In this example your 401(k) contributions continue unabated. You're on U.S. payroll. Same with U.S. Social Security -- no problem there, all well within the social security treaty with the U.K. You likely qualify for the FEIE for the period April, 2015, through July, 2016, so you can exclude that part of your income if you wish. Though, caution: that income is likely subject to U.K. income tax, so you should take a look at whether it's a better deal to take the Foreign Tax Credit on that income instead of the FEIE. Finally, even if you take the FEIE, you have some unexcluded income in 2015 and some in 2016. You can contribute to an IRA from that unexcluded earned income (and for your spouse as well, if applicable) as long as you have enough unexcluded earned income. You cannot contribute more than that amount, and of course the usual contribution limits apply. You also cannot have too high an income (inclusive of excluded income) if you want to contribute directly to a Roth IRA or deductible (pre-tax) Traditional IRA, though "backdoor" Roth IRA contributions may be possible via rollover.


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## Nononymous

You're faculty on sabbatical? Have a look here: Academic Visit to UK | Academic Visitor | UK Visit Visa (for one rapidly googled example). Within reason, I assume you could extend that past 12 months if need be.

Academics have a totally different status from others coming over and applying for a work permit. As far as the UK is concerned, you're on a long business trip and would remain outside the UK tax system. As far as the US is concerned, nothing has changed - you're still on payroll, you can make your 401(k) contributions.

This is how we've always done our Canada-Germany sabbaticals - we're given a residence permit based on income from the Canadian university, good for up to a year, with no tax obligations in Germany and no change to our tax status in Canada. (Things get a bit funky if you have an accompanying spouse working remotely, but typically they do the same thing, just pay taxes at home as if nothing has changed; the bureaucracy would otherwise be a nightmare, they are in the country legally as a family member, and it's undetectable anyway.)

If your university can't offer you good advice, try asking colleagues who've done sabbatical in the UK.


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## BBCWatcher

To add another interesting idea here, if you're subject to student loan repayment then take a look at whether an income-based repayment plan would make sense. Notably FEIE-excluded income does not count as income for purposes of student loan income-based repayment.


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## Nononymous

BBCWatcher said:


> To add another interesting idea here, if you're subject to student loan repayment then take a look at whether an income-based repayment plan would make sense. Notably FEIE-excluded income does not count as income for purposes of student loan income-based repayment.


That would only work if one could become non-resident for tax purposes while on sabbatical - I'm not certain about the US rules, but you can't do that in Canada, for example, if the income is coming from the home institution.

If one could claim the FEIE it's an even better deal because there's likely no UK tax with academic visitor status, so you'd get off without paying anyone. But I'm sure others have tried that already.


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## BBCWatcher

Nononymous said:


> That would only work if one could become non-resident for tax purposes while on sabbatical - I'm not certain about the US rules, but you can't do that in Canada, for example, if the income is coming from the home institution.


I didn't even follow that. Canada has no role here, does it?

U.S. income-based repayment student loans set payment amounts based on simple AGI, right from your (truthful) U.S. tax return. The FEIE (if taken) reduces AGI -- it's just that simple.


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## Nononymous

BBCWatcher said:


> I didn't even follow that. Canada has no role here, does it?
> 
> U.S. income-based repayment student loans set payment amounts based on simple AGI, right from your (truthful) U.S. tax return. The FEIE (if taken) reduces AGI -- it's just that simple.


Can you take the FEIE on salary income from a US university while you are temporarily out of the US for 12 months? While not paying host-country taxes because you are on an academic exchange?

If this is allowed, you do better than just reducing your student loan payments, you also pay no tax on the first $100k of your salary.

Somehow I don't think it's that easy. 

Scott


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## Bevdeforges

Nononymous said:


> Can you take the FEIE on salary income from a US university while you are temporarily out of the US for 12 months? While not paying host-country taxes because you are on an academic exchange?


Sure you can - you only have to meet the requirements of either the Physical Presence test or the Bona Fide resident test. PP test only requires 330 days outside the US in a 12 month period (12 months have to be consecutive). There is nothing about where your salary comes from during that time. Or about having to pay tax in your host country. (The whole Emirates crowd would be out of luck if that were the case!)
Cheers,
Bev


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## Nononymous

Bevdeforges said:


> Sure you can - you only have to meet the requirements of either the Physical Presence test or the Bona Fide resident test. PP test only requires 330 days outside the US in a 12 month period (12 months have to be consecutive). There is nothing about where your salary comes from during that time. Or about having to pay tax in your host country. (The whole Emirates crowd would be out of luck if that were the case!)


This may be a rare instance where US citizenship is a better deal for expats - Canadians abroad cannot declare tax non-residency if their income is primarily earned from sources in Canada, as would be the case for an academic on sabbatical drawing salary from a Canadian university.


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## BBCWatcher

Nononymous said:


> This may be a rare instance where US citizenship is a better deal for expats....


Not rare. Student loans are quite common. The intersection between income-based repayment and the FEIE is a great deal.

Children are also common, and the Additional Child Tax Credit is another great deal, though that one is the opposite: you don't take the FEIE.


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## Dunedin

*UK tax position*

The following comments on the UK tax situation may be of assistance-
•	The starting point for UK tax is whether you are UK resident or in any event liable in principle to UK tax on your earning while present in the UK. The answer is undoubtedly that you are in principle so liable.
•	The next step is to see whether you are exempt from UK tax by virtue of Article 20A of the UK US double tax treaty. This deals with teachers and visiting academics. You can see commentary on this in HMRC manuals at DT19939K. (I am prevented by the posting rules for this site from giving you the full link.)


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## craigpellet

Your 401k should still be fine if using the FEIE. Your excludable earned income for FEIE purposes is considered after deducting the 401k from taxable wages.

It is still a good idea to contribute to your 401k. You'll get the benefit of tax deferral on the growth. Also, many employers contribute to their employee retirement plans, but only if the employees contribute. If your employer does this, you'll miss out on the employer contribution.

Craig Pellet, EA
John Schachter & Associates


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## craigpellet

Bevdeforges said:


> Sure you can - you only have to meet the requirements of either the Physical Presence test or the Bona Fide resident test. PP test only requires 330 days outside the US in a 12 month period (12 months have to be consecutive). There is nothing about where your salary comes from during that time. Or about having to pay tax in your host country. (The whole Emirates crowd would be out of luck if that were the case!)
> Cheers,
> Bev


I'd be careful if claiming FEIE under the bona fide residence test. You may not qualify if you've stated that you are a non-resident of your host country for tax purposes. But, Bev is right, that doesn't mean that you must pay tax to the host country.


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