We have recently been hearing again of another wave of problems for American taxpayers living abroad. Many are being contacted by their US bank or brokerage and informed that their accounts are to be restricted or even closed. The reason for this being that they simply reside outside the US with a foreign correspondence address. For the estimated 140,000 Americans living in the UK, the stance adopted by these financial institutions could have a major effect on their wealth, especially their tax affairs, and they need to take prompt action.
Why is this happening?
This has come about largely as a result of the Foreign Account Tax Compliance Act (FATCA). This legislation brought with it the need for banks and brokerages to gather information on their non-US resident clients, to fulfil their compliance requirements. These regulations affect bank accounts, brokerage accounts, and retirement accounts (IRAs and 401ks).
In some instances, US financial institutions have found the regulations imposed by the Act increasingly onerous and administratively cumbersome, especially as they differ from country to country. As a result, many have decided to curtail the services they offer to those Americans residing overseas. They have informed clients by letter that their account facilities will be restricted (such as sell-only instructions), or worse still, their accounts will be liquidated and a cheque for the balance will be mailed to them.
Impact of having a 401k liquidated
US taxpayers are likely to find themselves in a challenging situation as a result of these actions taken by banks and brokerages. Not only can they find themselves suddenly faced with the need to select the right investment vehicle in which to reinvest their retirement accounts, but worse still, they could also find themselves unexpectedly triggering a Federal tax liability.
The Internal Revenue Service (IRS) gives an individual just 60 days to move their plans to a new provider, otherwise the proceeds from a retirement account are subject to tax at ordinary income tax rates. However, there is more bad news.
Steve Coombs, Associate Director from Everfair Tax tells us:“The tax rules surrounding these accounts stipulate that the income can be accessed for the first time after attaining age59 ½. Taking income earlier than that gives rise to an additional 10% early withdrawal penalty on the gross amount taken out. Worse still, this penalty can’t be credited against any corresponding tax liability that the early withdrawal may create, if for example the taxpayer is resident in another country.”
Under the UK/US taxation treaties, such income is taxed in the client’s location, even if the income stream arises in the other country. However, when all of the income is distributed by way of a lump sum, then the tax rights will remain in the US. There may be situations where this is advantageous, but a client’s individual circumstances need to be reviewed ahead of any such distribution to prevent the adverse tax consequences discussed above.
How we can help
Clearly, Americans resident in the UK who find themselves in this position need informed advice from experts in the field of US/UK taxation and international wealth management strategies.
Nathan Prior, Head of Partners Wealth Management International, offers this advice to US clients in this situation: “Taking professional advice as soon as possible is essential to help ensure that your investments and tax-efficient savings, such as 401Ks, are invested in the right financial vehicles, (excluding Passive Foreign Investment Companies and non-reporting funds). This way, you can avoid expensive mistakes that could give rise to onerous annual reporting requirements and potentially a substantial tax bill.”
Partners Wealth Management is a regulated financial advisor with considerable experience of working on wealth management strategies to suit the complex needs of US citizens who are resident in the UK. We work closely with expatriate tax experts, such as Everfair Tax, who provide tax advisory and compliance services, and have considerable expertise in helping clients facing this type of situation.
Please speak with your Partners Wealth Management adviser if you have concerns about how your personal financial plan might be affected, or contact me on the details below.
This article was produced by Nathan Prior and Steve Coombs, Everfair Tax.
The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information.