Early withdrawal of 401k in UK

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asteroidnix
Posts: 91
Joined: Wed Apr 21, 2021 1:06 pm

Early withdrawal of 401k in UK

Post by asteroidnix »

Hi Folks

This is a follow on from my thread from a couple of months back: viewtopic.php?f=22&t=346805&p=5976122

I am trying to understand the rules for when a 401k is distributed early to a non US Person who is tax resident in the UK. My understanding is that under the UK/US tax treaty, the US delegates the right to tax the 401k to the UK. Now, the interesting question is what happens when there is an early distribution before 59.5.

The normal US rules for early distribution is a 10% penalty on distribution. I had imagined just the 10% penalty would be owed to the US and that it isn't a tax per-se - it's a penalty. The distribution would be taxable in the UK at graduated income tax rates with no ability to offset using the US 10% penalty.

I have however read a couple of articles online which suggest this may not be the case. Consider this one for an Italian citizen: https://sftaxcounsel.com/how-a-non-resi ... 401k-plan/

Since Tom is a citizen of Italy, a country that the U.S. has a bilateral income tax treaty, Tom may utilize the U.S.-Italy tax treaty to avoid the 20% withholding tax and the early withdrawal penalty. This is because under Article 18, Paragraph 1, of the U.S-Italian Income Tax Treaty, “pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State.

Does anyone know if there is any basis to this and whether it applies to the UK? Is this a loop hole where a UK resident can withdraw 401K funds without the 10% hit? Feels too good to be true. Given a 401k isn't deemed as equivalent to a UK pension under HMRC/DWP Rules, I also doubt the UK pension rules on early distributions (55 - about to change) applying.

Edit:

Some other spew from a custodian which alludes to this:
https://talk.uk-yankee.com/index.php?topic=84756.30

Since you are not a U.S. citizen and are not residing in the United States the IRS 10% early withdrawal penalty does not apply to you regardless of your age.
TedSwippet
Posts: 5166
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Early withdrawal of 401k in UK

Post by TedSwippet »

asteroidnix wrote: Sun Aug 01, 2021 5:30 pm Does anyone know if there is any basis to this and whether it applies to the UK? Is this a loop hole where a UK resident can withdraw 401K funds without the 10% hit?
Recently discussed here (if you haven't already seen it): viewtopic.php?p=5818614#p5818614

This thread cites one of the sources you also cited, and adds two others. As far as I know, no new information or thinking has emerged since.
Topic Author
asteroidnix
Posts: 91
Joined: Wed Apr 21, 2021 1:06 pm

Re: Early withdrawal of 401k in UK

Post by asteroidnix »

TedSwippet wrote: Mon Aug 02, 2021 5:17 am
asteroidnix wrote: Sun Aug 01, 2021 5:30 pm Does anyone know if there is any basis to this and whether it applies to the UK? Is this a loop hole where a UK resident can withdraw 401K funds without the 10% hit?
Recently discussed here (if you haven't already seen it): viewtopic.php?p=5818614#p5818614

This thread cites one of the sources you also cited, and adds two others. As far as I know, no new information or thinking has emerged since.
I missed this - my bad. I'll probably get some professional advice on this next year from someone who specializes in UK/US. Could greatly affect the logistics of early retirement. Will circle back when I do.
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