401(k) and pension plans in the US

What is the difference between a 401(k) and pensions plans in the US?

If you are planning to retire in the US, you should either have a traditional pension plan or a defined contribution scheme– such as a 401(k) account. While both provide money in retirement, there are differences between all the pension plans in the US.

Our US advisers have listed below the various schemes you can have in the US. At Hoxton Capital Management USA LLC, we understand the complications of having to manage various schemes and trying to get them invested, along with tax implications. Our US-qualified advisers can help you with creating a retirement plan that works best for where you are and what you need in the future. Get in touch to speak with an adviser today.

The information contained herein has been prepared solely for informational purposes. 

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Contents

401(k) What is it?

A 401(k) is an employer-sponsored retirement plan. If an employee is offered a 401(k) plan, they can choose to contribute part of their wages to fund the 401k, within the annual limitations of course. We can help with managing the funds and can consolidate them. Speak with an adviser about this.

PROS

  • Protected by the Employee Retirement Income Security Act of 1974 (ERISA)
  • Matching Funds – Employer can contribute as well (Up to $38,500)
  • Higher annual contribution limit compared to most others
  • Mostly free investing advice
  • Tax deferred account

Cons

  • Limited Investment options
  • Higher account fees
  • Early withdrawal fees
  • If HNW then the contribution limits may not be high enough

Maximum Contributions

  • Up to $20,500 PA for 2022

  • Catch-up contribution limited to $6,500

  • Employer limit $40,500

  • Total limit is $61,000

Withdrawal

  • Withdraw available from 59½ without early withdrawal penalties Must take minimum distributions at age 72
  • Taxed at usual income tax rate
  • Withdrawal before 59½ would probably result in a 10% tax penalty from the IRS
  • If employment is lost between 55 and 59½, it is possible to withdraw the 401k from the most recent employer without penalty
  • Can continue to contribute even after a withdrawal is made
USA pensions IRA

Traditional IRAs What is it?

Sometimes known as deductible IRAs, are the original. Contributions are tax-deductible, so they reduce the taxable income and therefore, federal taxes. Earnings grow tax-deferred until withdrawal.

We can help with managing the funds and can consolidate them. Speak with an adviser about this.

PROS
  • Tax deferrable
  • No tax payments until withdrawal
  • Can pass on as an inheritance
  • Full autonomy over investment strategy
Cons
  • Taxed on withdrawals at income tax rate
  • Early withdrawal penalties

Withdrawal

  • Withdrawal can begin without penalty at 59½

  • Withdrawals must begin by 70½

  • Withdrawing before 59 ½ will result in a penalty of 10% usually

TSP WHAT IS IT

Roth What is it?

A Roth IRA is a special individual retirement account (IRA) where you pay taxes on money going into your account, and then all future withdrawals are tax-free. Similar to an ISA in UK.

We can help with managing the funds and can consolidate them. Speak with an adviser about this.

PROS
  • Savings grow tax free as the tax was paid at entry
  • No required minimum distributions
  • A Roth can enable you to keep your tax bracket lower by juggling accounts
Cons
  • Tax paid upfront
  • Maximum contribution is low
  • There are income limits to have a Roth. However, you can convert your traditional to a Roth with no income limits
  • Can only contribute if household income less than $208,000

Maximum Contributions

  • Under 50 – $6,000

  • Over 50 – $7,000

Withdrawal

  • No penalties to withdraw contributions on a Roth IRA at any age

  • If withdrawing before 59½ or inside the first 5 years of holding the account

Pension transfer to USA

What is a 401(k) rollover?

A 401(k) rollover is when you direct the transfer of money in your 401(k) plan to a new 401(k) plan or IRA. The IRS allows 60 days from the date you receive an IRA or retirement plan distribution to roll it to another plan or IRA. At Hoxton Capital Management USA LLC, we can help consolidate the plans and manage the investments in the same way that we do with the UK SIPPs.

How can Hoxton Capital Management USA LLC help you rollover?

You would prefer to have someone manage it for you and take away the stress

  • At Hoxton Capital Management USA LLC, we are fully licenced by the SEC and our US-qualified advisers have the capabilities to help you with managing your US pensions.
  • Your 401k is likely limited to a small sample of the investment options that are available. However, with an IRA, most types of investment are available to you, including not just mutual funds, but also individual stocks and exchange-traded funds (ETFs). Having more options can help you develop a better long-term strategy for your retirement savings.

You have high fees on your existing 401k and have cheaper alternatives available to you

  • 401(k)’s can often incur large fees that can negate the tax benefits and growth. It is essential to understand if you could save more by using an IRA.
  • That is why it is vital to have a US-qualified financial adviser look at your pensions and help you determine what are the best and most cost-efficient options for you and your retirement planning,

More control

  • If you find that a fund in your 401k is not performing well, you may not be able to find another investment option to switch to as easily as you can with an IRA.

Wealth transfer advantages

  • Upon your death, there’s a good chance that your 401k will be paid in one lump sum to your beneficiary. An IRA generally allows you to name multiple beneficiaries—or even trust as a beneficiary.

Fewer restrictions

  • Understanding your 401k is not easy – each company has a lot of flexibility in how they set up the plan. IRAs are standardised by the IRS. Ultimately, there are pros and cons to both the 401k and IRA models and that is why discussing these options with a financial adviser is essential for retirement planning. Our advisers have laid out the process below and what those pros and cons are.

Process

  • We will help you decide if it is best for you to rollover to another 401(k) plan or an IRA
  • If it is an IRA, then the account needs to be opened before you can begin your rollover. 
  • We will prepare all documentation for the new IRA, including ensuring the transfer of funds is completed in a way accepted by the new IRA institution
PROS
  • Consolidation of all 401(k)s
  • More investment choices in an IRA
  • Account can be moved anywhere
Cons
  • Current 401(k) is low cost and working well
  • 401(k)s have certain benefits that an IRA may not
  • 401(k)s sometimes allow loans. Although not advised.

Tax liabilities

  • Traditional 401(k) to Traditional 401(k) = No tax liability

  • Roth 401(k) to Roth 401(k) = No tax liability

  • Traditional 401(k) to Roth IRA – Likely tax liability

529 pensions

529’s What is it?

A 529 plan is an investment account that offers tax benefits when used to pay for qualified education expenses for a designated beneficiary.

We can help with managing the funds and can consolidate them. Speak with an adviser about this.

There are two types:

Prepaid Tuitions Plans

  • These let a saver or account holder purchase units or credits at participating colleges and universities for future tuition and mandatory fees at current prices for the beneficiary. They usually cannot be used to pay for room and/or board at colleges and universities, and do not allow you to prepay for elementary or secondary schools.

Education Savings Plans

  • These let a saver open an investment account to save for the beneficiary’s future qualified higher education expenses, such as; tuition, mandatory fees and room and board. They can also be used to pay up to $10,000 per year per beneficiary for tuition at any elementary or secondary school.

Contributions

Many states offer tax benefits for contributing to a 529 plan; however, it is likely that you must be a resident in the state to be eligible.

Withdrawals

There is no tax on withdrawal on any qualified higher education expenses. If the funds are used for anything else, there is a 10% federal tax penalty on earnings.

Who is Uncle Sam?

Uncle Sam is a common national personification of the federal government of the United States or the country in general; a nickname for the government/tax man.

When do US nationals have to file their returns | FY 2022-23?

  • 1st Installment – June 15th
    • 15% of tax liability
  • 2nd Installment – September 15th
    • 45% of tax liability
  • 3rd Installment – December 15th
    • 75% of your tax liability
  • 4th Installment -March 15th
    • 100% of tax liability

Which tax forms will you need?

  • Form 1040
  • Form 2555 – FEIE
  • Form 1116 – FTC
  • Form 8938 – Specified Foreign Assets

*Note, there are others, but these are the most common.

401K rollover

What can we do for you?

  • Risk-appropriate portfolio advice and management
  • We can give advice to people who are now living outside the US

Hoxton Capital Management USA LLC, we will always recommend that you speak with a US-qualified financial adviser when dealing with various pension schemes and taxes.

Our advisers will work with you to put a retirement plan together and make sure that your pensions are invested well and that there are no tax implications. Managing your various pensions and investments can be complicated. At Hoxton Capital USA LLC, we know the ins and outs of managing US pension accounts and have the time and knowledge to put together the right strategy for you. Talk to us now to start planning.

For more information, download our guide here:

401K pensions

How can we help you?

If you would like to speak to one of our advisers, please get in touch today.

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