# 401k tax withdrawl implications/strategy, UK citizen



## melaniejane

I'm trying to decide whether it's worth joining the 401k my US company offers. 

I'm a UK national, I'm only planning on working in the US for about 5 years.

(I realise there are tax advantages, and retirement savings are always good, but just thinking about filing in the US gives me a headache.)

But what happens when I hit 65 or 70 or whatever and decide to start drawing down my US 401k but I will then be living back in the UK.

Will I have to file a US tax return for every year I withdraw something from my 401k? 
What if I am still earning in the UK, will my tax-rate in the UK affect the tax rate I pay in the US? 

Are there any other filing/tax implications I should consider? 

Is there another good strategy for dealing with a 401k - like I could take a sabbatical during one whole US tax year, not be earning any income from anywhere, and withdraw the whole 401K with the 10% penalty and minimal US tax liability because of not living in US that year and having no income, so the tax on the 401K would be at lowest possible level??? 

thanks
MJ


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## Bevdeforges

melaniejane said:


> But what happens when I hit 65 or 70 or whatever and decide to start drawing down my US 401k but I will then be living back in the UK.
> 
> Will I have to file a US tax return for every year I withdraw something from my 401k?
> What if I am still earning in the UK, will my tax-rate in the UK affect the tax rate I pay in the US?
> 
> Are there any other filing/tax implications I should consider?


Assuming you stay only 5 years in the US and don't take US citizenship, you should only have to file US taxes in those years that you withdraw something from the account - and then, it will be an NR (non-resident) return, based on only your US source income.

The one inconvenience is that, as a non-citizen, non-resident, there is a flat 30% withholding on all withdrawals - though you get the excess withholding back when you file the tax return. Bit of a nuisance, but at retirement time, it may seem quite a bit less so if you need the money.
Cheers,
Bev


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## BBCWatcher

It's very hard to see how it wouldn't be to your advantage to maximize your employer's 401(k) matching contributions if that's what they're offering. Many employers add, say, $1 for every $2 you contribute to your 401(k), up to a certain maximum. I would definitely grab as much of that free money as possible if it's on offer.

You also never know whether you'll only be in the U.S. for 5 years (or 3, or 15, or...), but the probability that you'll stay longer than 5 years in the U.S. certainly increases once you set foot in the U.S.

You may already be contributing to U.S. Social Security (or probably should, if you have a choice), so when it comes time to collect retirement benefits you could be filing U.S. tax returns on that basis alone.

Keep in mind that traditional 401(k) plans have what are called required minimum distributions (RMDs) that must begin no later than age 70 1/2. That is, you must withdraw at least a certain amount of funds from your account per year when you reach that age. That'll also be when your U.S. tax filings start if you haven't been filing up to that point.

You have a couple additional options. If your employer offers it, there's something called a Roth 401(k). You contribute to Roth 401(k) accounts from after-tax income, then, assuming you follow the rules (basically let the money grow until you reach a youngish retirement age or 5 years, whichever is longer), you can withdraw the money free of U.S. taxes. Except if you're in the U.K. you might have to pay U.K. taxes on these earnings, and you'd probably be subject to 30% U.S. withholding which you'd have to claim back, so unless the U.S.-U.K. tax treaty says otherwise I don't think I'd recommend a Roth 401(k) for you -- it isn't generally a good fit for non-citizens living outside the U.S. in comparatively moderate or high tax jurisdictions (absent a tax treaty protection). Stick with a Traditional 401(k) account, at least to the level to max out any employer matching funds.

Also, you can contribute to a Traditional Individual Retirement Account (IRA) or Roth IRA outside your employer -- you're still eligible to do that assuming you meet the various qualifications for those types of accounts. As for whether that's wise in your situation, it depends. If you plan to do some (more) retirement savings anyway, and you're sure you won't tap into the funds before you retire, it's probably a good idea, and again probably the Traditional IRA flavor rather than the Roth for you. Note that you can contribute to a spouse's IRA as well even if that spouse is non-working, as long as you and he/she otherwise meet the requirements.

Back to the 401(k) plans. Most 401(k) plans offer a choice of investment funds. I would recommend you consider all the options and avoid high cost funds (funds with total fees and expense ratios 0.5% or more per year would be "high cost"), funds which solely or predominantly invest in your employer's stock (if that's an option), actively managed funds, and bond funds. My two recommended options for you would be either an international stock index fund (such as Vanguard's if offered, ideally) or a "target" fund based on your expected year of retirement (such a Vanguard's "Target" fund, ideally). Or some blend of these two funds. The reason for the international stock index fund is that, if you do return to the U.K., you'd probably prefer something that moves a little bit more like the British pound in value. An international stock fund won't do that fully, but it'll come a bit closer than a U.S. stock fund. A "Target" fund is nice because it'll automatically, gradually de-risk the funds, shifting from equities into bonds as you get closer to retirement age. So you can (and should) just leave it alone.

If your employer offers an employee stock purchase program (ESPP) then that's also worth considering but only if you get a discount or if your employer matches purchases. Otherwise, forget it. Naturally if they want to give you stock options or awards -- more free money or potential free money -- sure, that's fine.

Employer-provided life insurance -- not travel accident insurance, which isn't real insurance -- is U.S. taxable if the death benefit is over $50,000 (current limit). If you don't need more than $50,000 of life insurance -- if you don't have any dependents, for example -- then you can avoid the tax by placing a letter on file with your employer (or its life insurance carrier) which designates two beneficiaries: one beneficiary for the first $50,000 (your estate, your spouse, your child, your nephew, whoever), and a qualified IRS 501(c)(3) charity (or charities) for any benefit over $50,000, e.g. Save the Children, Doctors Without Borders (U.S.), the American Cancer Society, etc. You can even write that letter generically and use "U.S. Internal Revenue Service taxable limit" in lieu of a hard number like $50,000, and that works, too. Again, that's employer-provided life insurance, not travel accident insurance. The latter is not U.S. taxable in any amount. ("How did she die? Plane crash? Awesome!" Doesn't make any sense, and the IRS doesn't think so either. Dead is dead.)


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