Have a Tax Question? Ask a Tax Expert
Hi and welcome to Just Answer!Inheritance itself - is not taxable income in the US. Please see for reference IRS publication 525 page 31 left column - - http://www.irs.gov/pub/irs-pdf/p525.pdf
Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you.
However - when funds are distributed out of inherited 401k - that is taxable income.
Some income received by the estate or beneficiaries AFTER the decedent passed away might be classified as Income in Respect of the Decedent (IRD) - and could be taxable. Examples of IRD include interest and dividends paid to the estate AFTER the date of death, distributions from tax deferred accounts (401k, IRA, annuity, etc), gain from the sale of inherited assets. Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. Income in respect of a decedent realized AFTER the death is taxable the same way as it were taxable for the decedent.
Please be aware that there is a tax treaty in effect between the US and UK - see here - http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdfsee page 19 - ARTICLE 17 - Pensions, Social Security, Annuities, Alimony, and Child Support1. a) Pensions and other similar remuneration beneficially owned by a resident of a Contracting State shall be taxable only in that State.Thus distribution will be taxed in the US and not taxed in United Kingdom.
My Dad passed away on 1st September. If I withdraw the funds now will I be charged tax as his beneficiary?
Yes - distribution will be taxable income - and distribution to nonresident alien will be subject of mandatory withholding, You may spread distribution over several years and reduce the tax pressure.
I don't live in the US. My Dad was an american citizen. Is it 30% tax on the whole amount?
That is correct - 30% is mandatory withholding for nonresident aliens - if you are not US citizen and are living abroad.In most situation the full amount of distribution is taxable.Only if your father made after tax contributions into 401k plan - that amount is distributed tax free.
In UK - that income is NOT taxable based on the tax treaty between the US and UK.
His company told me it 100% fully paid....I'm not sure what that meant. They have said that the account can be transferred to me and I can choose what to do with the funds. I've been advised to withdraw it but it's quite a lot of money and i'm unsure the best way forward.
I may not know what exactly they meant under "100% fully paid" ...I might guess that means fully vested - so you may choose what to do with funds without any restrictions.Your options are to request the full distribution ORor open a separate "inherited IRA" account with any financial company - and transfer funds there. After that - you may set the amount of distribution - and either distributed within five year period or during your lifetime based on your age. If you do not need the money now - that might be better to postpone distributions.However - that is your choice.
Yes fully vested was probably what she said. It's been a very emotional time. When you say ANY financial company...could that be in the UK? i'm 43. Why a 5 year period?
When you say ANY financial company...could that be in the UK? Separate "inherited IRA" account may be open ONLY in the US.If you transfer to the UK - that will be classified as distribution - and the amount will be immediately taxed.Why a 5 year period?That period is set by the law - you may plan distribution in any way withing the 5 year period. For instance - you may take a full distribution after four years.If you want to to set a periodic distributions over your lifetime - these distributions must be started by the end of of 2014.
I will still pay 30% yes? only it will be spread out? In the UK your usually have to pay 40% inheritance tax. Since I won't have to pay that, and my poor Dad never got to see his pension I think I will probably withdraw the lump sum. Thank you very much for your assistance you've been very helpful. Tracey
My Dad also has me as beneficiary to his life insurance and to his stocks and shares account. Are they subject to a 30% tax too? Will all this money be classed as income in the UK?
It's fine if I've now asked too many questions.
Hi Lev I did not know how to ask for you again. I will pay £33 for this answer, will I just tip it to you if you reply? many thanks Tracey................My father sadly died and named me as the beneficiary of his 401K pension. I am aware that the withholding company will withhold 30% tax if it is transferred directly to me, as I am a UK Citizen (non-resident alien). My fathers HR department want to know if the 401K is to be transferred to my fathers estate (He was a US citizen and so is my step-mother) or myself. If it is transferred to the estate will it be subject to 20% withholding and further taxes in the estate account? I have up to 5 years to withdraw the funds if I transfer it to me. I would like to know the most tax efficient way to transfer the funds from Texas, USA to the UK please.
Ok I think I understand. The situation stands however, that if my father was taxed on his pension now would the maximum withholding for a US citizen be 20% withholding? There is $700,000 in the 401K. Even if I spread it out over 5 years I would be taxed in the UK at 40%. Its in a good place and probably would grow but i'm not sure which would be better and most tax effective.
Ok Thank you. If you were me, which I know your not...but would you roll it into the inherited account? Do they just transfer it into my name? How do the inland revenue in England assess what was inherited and what was not?
Ok you have been very helpful Lev Thank you. Hi Lev i've just spoken to an advisor at Merrill Lynch and they told me that because I am not an american citizen I can not open an IRA account. I told them that It was to be rolled over into an inherited IRA from my deceased father. They said his account will just transfer into my name, I'll have 5 years to withdraw the funds but it will just be a 401k not a IRA. I'm confused.
Ok you have been very helpful Lev Thank you. Hi Lev i've just spoken to an advisor at Merrill Lynch and they told me that because I am not an american citizen I can not open an IRA account. I told them that It was to be rolled over into an inherited IRA from my deceased father. They said his account will just transfer into my name, I'll have 5 years to withdraw the funds but it will just be a 401k not a IRA. I'm slightly confused does that mean it won't be taxed differed and will be withheld at 30% again?
I think I have finally sorted this out, with your help. I can claim tax treaty benefits with 0% withholding from the USA. When I withdraw my lump sum payment I will not have to pay tax on it in the UK according to HMRC because my father died before 75. 'If you die before 75 (death in Service) pension schemes that pay a lump sum are usually tax-free if you haven't used up your lifetime allowance'. I also read in the treaty that the UK does not withhold tax for lump sums unless the deceased had already started taking payments, then its 55% tax.
Why do they make it so complicated?
Thank you for your reply Lev - I realised my mistake after I asked you the question. They make tax laws so complex (I feel very stupid for asking so many questions) yet a lot of the answers and interpretations can be varied depending who answers the question.
Can I request an initial large instalment followed by a few small ones so long as its distributed in 5 years as part of the tax treaty agreement?
Also does it make a difference that it wasn't my pension in the first place, I haven't built one up and then gone back to the UK i've always lived here?
Is it possible as a non-spouse beneficiary to roll the 401K into an inherited ROTH IRA?
In doing that will it generate tax due on ONLY employee contributions made to the 401K?
As a non-resident alien would this tax be 30% flat and I would need to submit an irs form?
I could then take periodic payments tax free in the us and uk?