US pension contributions in a world of changing UK pension landscape
For many Americans living in the UK, the focus of retirement savings and contributions has typically been UK pensions as opposed to US pensions due to the generous annual allowances and tax relief offered in the UK as a higher tax jurisdiction. However, with the ever changing UK pension landscape, individuals earning over £150,000 have a tapered UK pension allowance, making funding US pensions as part of the overall retirement saving strategy slightly more attractive.
As a recap, individuals earning in excess of £150,000 now have their UK annual allowance tapered from £40,000 down to £10,000 once earnings are £210,000 or over. For any person who has their UK annual allowance reduced, there may still be an opportunity to make a non-deductible Traditional IRA contribution or a ‘back-door’ Roth IRA contribution (by making a non-deductible Traditional IRA contribution and subsequently performing a Roth Conversion of the contribution – this ‘back-door’ contribution can generally be a valuable opportunity if you have no other existing IRA assets). The annual contribution to an IRA is currently at $5,500 ($6,500 if you are age 50 or over). Contributions into a Traditional IRA at the very least will offer tax deferred growth with that growth generally taxed upon distribution in the country of residence at the time. Any money held in a Roth IRA generally receives tax exempt treatment at distribution in both the US and UK and is not subject to the US Required Minimum Distribution (RMD) rules.
For US purposes, the current maximum amount that is allowed to be contributed to defined contribution schemes is $54,000 per year (and $60,000 per year if you are age 50 or over). Therefore, those individuals who are limited in the UK as to the pension contributions that they can make, can consider making IRA contributions, if eligible, to add additional tax deferred or tax exempt funds to their overall investment portfolio. Generally, as long as a US person has earned income for US purposes (which should be the case as long as an individual does not exclude all of their earnings under the foreign earned income exclusion each year) then they should be eligible to make a Traditional IRA contributions and potentially benefit from ‘back-door’ Roth IRA contributions.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.