As a British expat living in the US with your family, you’ll know the importance of having your finances in order. Your entitlements in the US will vary wildly from those of the UK: for example, you’ll likely be taxed as a non-resident alien, meaning you’re subject to standard US taxes. A 401k plan, typically sponsored by your employer, means security for you and your family for your pension and future. But is a 401k considered a pension?
1) Knowing When To Cash Out & Avoiding The 10% Penalty
You must be aged 59.5 or older in order to cash out your 401k – the income of which will be taxed as regular income. This is why it’s best to leave the US before cashing out your 401k and draw out what you need annually; fewer withdrawals mean less taxes, plus UK residency will also reduce your liability and costs. Rolling your 401k into an IRA is classically the best way to avoid the 10% penalty.
2) Checking Out The IRA: Know Your Rollover Rights
By cashing out prior to the 401k withdrawal age, you are setting yourself up for very high costs. This can be mitigated by opening up an IRA (Individual Retirement Account), which you can use to rollover your 401k, thus avoiding early penalties for withdrawal.
IRAs don’t come without their cons. Like 401ks, they incur a penalty of 10% for pre-aged 59.5 withdrawals, and if you send anything outside of the US, you’ll be subject to a federal withholding fee of 10%. Ultimately, though, you have greater flexibility and financial freedom. This includes the benefits of a UK-US treaty on tax, meaning no higher tax rate than the one you’d already receive.
Whatever you choose, it’s essential to note that should you return to the UK, HMRC does not accept a 401k nor an IRA as a pension fund. This is when you need to get in touch with expert advisors, such as FFCM.
3) Knowing Your Tax Bracket
Your tax bracket is pivotal in the understanding of your 401k. If you have a $100k 401k, in this example, and you’re in the 22% tax bracket, you’ll lose $22,000. Don’t worry: all can be resolved by talking to a financial advisor and gaining clarification on your 401k plan, ensuring you feel confident with its management.
Seeking The Right Advice
The stipulations for a 401k for an expat can seem confusing, but we’re here to help. To find out more about your UK expat pension entitlement, contact our team at Financial Freedom Capital Management today, and browse our website for more information.