Hello
I was working in the US until July 1st of this year (and since 2003). Ever since I have been living and working in the UK. I had earned about $46000 gross in my previous company in the US in those 6 months. I have about $20000 in my 401K account. I was planning to transfer all my 401K balances, but when I called Fidelity and explained my situation, the customer service rep said I could avoid the 20% withholding and the 10% penalty if I filled in the Form 8BEN for foreign beneficiaries. Now, after a lot more "forms-reading" and google searches I have still not got all my questions answered. I really hope the experts on this forum will help me

1. I had lived in the USA this year for exactly 182 days and will be in the UK for the remaining 183 days. Can I claim to be a non-resident alien for using the foreign beneficiary form to not withhold 20% off my 401K return ? I believe I can claim to be a non-resident because I was a resident of another country after July 1st. UK-USA seem to have a treaty and it appears there would be 0% withholding on pensions and annuities according to page 37 of publication 515 (http://www.irs.gov/pub/irs-pdf/p515.pdf). I am not sure if I am perhaps interpreting the treaty wrongly

2. Even if the US source (Fidelity) does not withhold tax will I end up paying that when I file tax returns in 2007 for year 2006 ? I dont know if I should file tax return as a dual status alien or a resident alien by virtue of the substantial presence test.

3. Will I have to pay tax in UK for the 401K transfer for funds ? It is really money being transferred from my bank account in USA to bank account in UK. So there is no way the UK tax department would know its 401K money.

I believe if I do not do any of the things above and ask for early withdrawal from the 401K, I could lose as much as $9000 of my $20000 401K fund in taxes and penalties. Would I benefit by withdrawing the money in 2007 instead ? I would prefer to do that only if the money saved is atleast $1000, other wise I may have to bite the bullet and take it out now.

I really am at the mercy of the internet because being in the UK I cannot even approach a US tax advisor. I appreciate the help so much.

Cheers,
Rajiv

AtlantaTaxExpert

First, what was your visa status? J-1? F-1? H-1? H-1B? It makes a difference.

2) Taxes will probably be due.

3) No expertise in UK taxes, so I cannot answer.

SarahRajiv

Sorry, I forgot to mention that - I was on a H1-B visa in the US.

AtlantaTaxExpert

1) Okay, since you were here since 2003, you are considered a resident alien and are subject to the same taxes as a U.S. citizen, to include the early withdrawal penalties. Now, it is likely you can transfer the money tax-deferred into some pension plan in the U.K. You need to contact an expert in British tax law to determine if that is possible.

If not, you can set up a withdrawal plan where you can withdraw the money gradually, definitely NOT pay the early withdrawal penalties and, very likely, not pay too much in taxes. Regardless, there is no reason to withdraw the money right away. Do a trustee-to-trustee transfer from the 401K to a traditional IRA which you can manage from the U.K via phone and e-mail.

SarahRajiv

Thanks a lot ! I got similar advice from the tax department of Fidelity as well. I am going to look at rolling over into a pension in the UK.

AtlantaTaxExpert

Glad to help!

Leigh60615

Hi Did you get anywhere with your attempts? I am in axactly the same situation. Ex H1B holder with 5 years in the states and $40,000 in a 401K with Fidelity. I'm sure I was classed as a non-resident alien. My UK pension firm is telling me my 401K is 'stuck' in the states and I'll end up paying tax if I try to move it. I hope this is a lack of experience on their part. Let me know how you got on.

SarahRajiv

We decided that best alternative for us was to not transfer to a pension fund here but to withdraw out of american 401K every year so that we would be below taxable income but lose the 10% penalty everytime. This would give us the most money, but in our pockets. Ofcourse you would need to file a W8BEN to make sure fidelity does not automatically withhold 20% on tax from this annual withdrawal.

I was told it would be possible to roll-over the 401K plan into my current UK pension plan, but I never bothered to enquire further into it because even if I make a loss, the 401K money is more valuable to me in the next few years as cash than inside a pension fund.