US Pensions Explained: The Traditional IRA and Roth IRA compared

This article will outline some of the major differences between ad Roth and Traditional IRA. For expert tax and accounting support for US pensions contact us.

What is an IRA

An Individual Retirement Account (IRA) is a monetary investment account that is optimised against-tax to support individuals saving towards retirement. The IRS also uses the acronym “IRA” in placement for “Individual Retirement Arrangements”. Individual Retirement Arrangements broadly refer to individual retirement accounts, retirement annuities and other trusts or custodial accounts that act as personal saving plans with tax advantages for saving money towards retirement.

Traditional and Roth IRA

Traditional and Roth IRS’s are two retirement saving arrangements that the IRS offers to tax payers. Below we will be explaining how the two IRA’s work and offering a comparison to help individuals decide which is the best type of IRA for them.

Click the button below to see our Roth IRA vs Traditional IRA calculator to get a more accurate idea of the return on investment off each of the IRA’s

How Traditional IRAs Work

A Traditional IRA allows individuals to save pre-tax income and use it for investments that can grow tax-deferred. Under this savings account the IRS does not assess capital gains or dividend income tax until withdrawals are made. This means that tax will not be paid on savings until the point of money is taken out of the account.

Investments for the traditional IRA for a given tax year must be made before the US tax filing deadline (typically April 15th ).

Maximum contributions - 100% of earned compensations

Taxpayers can contribute 100% of any earned compensation up to a specific maximum dollar amount. This amount changes yearly- see out Traditional IRA Threshold chart to identify how much can be contributed for a specific year.

Contributions may be tax-deductible depending on IRA holders income, tax-filing status and other factors.

If an individual has both a Traditional IRA and an employer-sponsored retirement plan, the IRS may limit the amount of contributions that can be deducted from taxes.

For example:

• In 2021, if a taxpayer has a 401k or pension program the individual would only be able to take full deductions if their MAGI was $66,000 or less for singles and $105,000 or less if married couple file jointly.

• With MAGIs of $76,000 for singles and £125,000 for married couples to IRS allows no deductions.

Age of distribution: 59 ½

Account holders can begin taking money out of the account at the of age 59 ½. Once the account holder turns 72 years minimum distributions (RMDs) must be taken each year. The minimum and maximum distributions allowed at different account holder ages is listed in the Traditional IRA Age Distributions chart.

Funds removed before full retirement eligibility incur 10% penalty on the amount withdrawn and taxes at standard rates. There are some exceptions for penalties:

• Money is use for purchase or rebuilding of first home (limited to $10,000)

• You become disable before distributions

• Your beneficiary receives the asset after your death 

• You use the assets for reimbursed medical expenses

• Used for medical insurance cost after losing job

• Your distribution is part of the SEPP

• Asset is used for higher-education expenses 

• Expenses incurred from adoption of a child

• The asset is distributed as a result of IRS levy

• The amount is a return on non-deductible contributions

• You are in the military and called to active duty for more than 179 days

How Roth IRAs work

A Roth IRA is a retirement arrangement that allows money to be invested after the point of tax. However, unlike with a traditional IRA, account holders do not have to pay tax on their investments at the point of withdrawal.

Roth IRAs only allow the holder the contribute earned income, ineligible funds which include:

• Rental income

• Interest income

• Pension or annuity income

• Stock dividends and capital gains

Regular contributions must be made in cash, i.e., they cannot be securities or assets.

Not everyone can have a Roth IRA

Roth IRAs are limited by your income; you cannot contribute to a Roth IRA if your income is too high. To find out who can have a Roth IRA in a given tax year based on income see this chart.

Maximum contribution limit changes yearly

The contribution limit changes yearly, for example, in 2021 the limit is $6,000 a year unless you’re 50 or over, then the limit is $7,000. To find out the contribution limits on Roth IRA’s and deduction limits for Traditional IRAs for a given tax year visit our page on the topic: Roth IRA and Traditional IRA Thresholds.

No requirement to withdraw

The IRA can be maintained indefinitely, there is no requirement to withdraw as there is with a 401k and Traditional IRA.

Roth IRA or Traditional IRA?

Which IRA suits you is entirely dependant on your individual situation, and a judgement call on what you feel your tax situation come retirement age.

For those who feel their marginal tax rate will be higher during their retirement age a Traditional IRA would be a better option. This is because of the tax-deferred nature of a Traditional IRA, allowing any investments to be taxed at a lower rate than if they were to be taxed in a traditional savings account or alternatively a Roth IRA .

A Roth IRA suits those who feel their tax rate will be higher in retirement. The Roth IRA allows individuals to pay tax on their contributions now which means upon distribution they receive the payments tax free. In contrast to the Traditional IRA, any growth from investments are allowed to grow tax-free.

Either IRA is a sound investment for your future, for any help regarding your Roth IRA or traditional IRA do not hesitate to contact us

Managing U.S.-Based Retirement Accounts as an Expatriate: A Strategic Guide

For U.S. expatriates, understanding how to manage U.S.-based retirement accounts like IRAs, 401(k)s, and pensions is crucial. These accounts are governed by specific U.S. tax rules, and proper management can have significant implications on your financial health abroad.

Key Considerations for U.S.-Based Retirement Accounts

Managing retirement accounts while living abroad requires careful planning and adherence to both U.S. and foreign tax laws.

Tax Obligations

U.S. citizens are taxed on worldwide income, including distributions from retirement accounts, regardless of their residence.

Early withdrawals (before age 59½) may incur a 10% penalty, in addition to regular income tax.

Required Minimum Distributions (RMDs)

Account holders are generally required to start taking minimum distributions from their retirement accounts at age 72. It's important to comply with these rules to avoid heavy penalties.

Consider the Tax Treaty

Check if a tax treaty exists between the U.S. and your country of residence as it may offer provisions that impact the taxation of retirement distributions.

Strategies for Managing Retirement Accounts

Maintain Accounts in the U.S

It’s often advisable to keep your retirement accounts in the U.S. to simplify compliance with U.S. tax laws and avoid potential issues with fund transfers.

Timing of Withdrawals

Plan the timing of your withdrawals strategically to potentially benefit from lower tax rates, depending on your residency status and income levels in any given year.

Avoid Unnecessary Withdrawals

If possible, avoid early withdrawals to prevent penalties and preserve your retirement savings for future income needs.

Use of Financial Advisors

Engage with financial advisors who specialise in expatriate finances to ensure that your retirement strategy aligns with your overall financial goals and tax obligations.

Compliance and Reporting

You may need to report your retirement accounts under the Foreign Bank Account Report (FBAR) if the total value of your foreign accounts exceeds $10,000 at any time during the calendar year.

The Foreign Account Tax Compliance Act (FATCA) also requires certain foreign financial assets to be reported to the IRS.

Further Information

Effectively managing U.S.-based retirement accounts as an expatriate involves understanding complex regulations and making informed decisions about withdrawals and tax compliance. By following these strategies and possibly consulting with tax professionals, you can optimise your retirement planning and ensure compliance with U.S. tax laws.

UK Pension Allowance Explained (2025)

Rules, Limits & Tax Impliations Published: February 2025

Author: Alistair Bambridge CTA, AAT, EA, CPA Bio: Alistair is a chartered accountant with over 20 years of experience dealing in US & UK Taxation

The UK Pension Allowance allows for tax-efficient retirement savings, with tax relief on contributions up to the £60,000 annual allowance. However, high earners with an adjusted income over £260,000 face a tapered allowance, reducing their tax-free contributions.

Although the Lifetime Allowance (LTA) has been abolished, tax rules on pension withdrawals remain. International taxpayers and US expats must consider how UK pension contributions interact with US tax laws, including potential double taxation.

Key Takeaways

• The standard pension allowance is £60,000 per year.

• High earners with an income over £260,000 may face a tapered allowance, reduced to £10,000.

• Unused allowances from the previous three years can be carried forward.

• The Lifetime Allowance (LTA) is abolished, but withdrawals may still be taxable.

• US expats face unique tax challenges—some UK pensions may be taxable in the US and require additional reporting.

• Strategic planning helps maximize pension contributions and minimize tax liabilities in both the UK and the US.
  
  

Annual Pension Allowance in 2025

The UK pension annual allowance is the maximum amount you can contribute to a pension scheme while still benefiting from tax relief.

• Standard Annual Allowance: £60,000 (for the 2024/25 tax year).

• Who qualifies? All contributions made by you, your employer, and third parties count toward this limit.

• What if you exceed it? Contributions beyond your allowance may trigger extra tax charges.
  
  

Tapered Annual Allowance for High Earners

If your adjusted income exceeds £260,000, your pension allowance is reduced by £1 for every £2 over the limit.

• Minimum allowance: £10,000 (for those earning £360,000 or more).

• Includes both employee and employer contributions.

Carry Forward Rule – Maximizing Pension Contributions

If you haven’t used your full allowance in the past three tax years, you can carry it forward to offset excess contributions.

Example: If you contributed £40,000 last year (instead of £60,000), you can carry forward £20,000 to use in a future tax year.

US Tax Considerations for UK Pension Allowance

No Automatic US Tax Deferral

• The UK Pension Allowance does not guarantee tax relief in the US.

• US tax law may not recognize UK pensions as tax-deferred. Contributions could be taxable in the US the year they are made.

Foreign Grantor Trust Rules for Some Pensions

• SIPPs and certain workplace pensions may be treated as foreign grantor trusts under US tax law.

• This could lead to additional US tax and reporting requirements.

Mandatory US Reporting (FBAR & FATCA)

• If the total value of foreign accounts (including pensions) exceeds $10,000, US expats must file an FBAR (FinCEN Form 114).

• FATCA (Form 8938) applies if total foreign financial assets exceed certain thresholds.

Risk of Double Taxation & US-UK Tax Treaty Relief

• UK pension withdrawals may be taxed in both the UK and the US.

• The US-UK Tax Treaty helps prevent double taxation, but the right tax elections must be made in advance.

How the US Treats the Lifetime Allowance Abolition

• While the UK removed the Lifetime Allowance, the US tax treatment remains unchanged.

• Large pension withdrawals could still be taxed at US ordinary income rates.
  
  

US Expats & UK Pensions: Planning is essential to avoid unexpected tax liabilities!

Case Study: Pension Allowance Strategy for a High-Earning US Expat

The High Earner’s Pension Dilemma

• Income: £300,000 (Adjusted UK Income)

• Standard UK Pension Allowance: £60,000

• Tapered Allowance: Reduced to £10,000 (due to income over £260,000)
  
  

UK Perspective

Due to their income exceeding £260,000, this individual’s pension allowance is reduced to just £10,000.

Any pension contributions above £10,000 could be subject to UK tax charges.

They have unused allowances from previous years, which could be carried forward to offset excess contributions.

US Tax Considerations

No Automatic US Tax Deferral: Unlike UK rules, pension contributions may not be tax-deductible in the US, meaning this individual could be taxed immediately in the US on their pension contributions.

Foreign Grantor Trust Issues: If their pension scheme is a SIPP, it could be classified as a foreign grantor trust under US tax law, requiring additional reporting and potential tax liability.

US Taxation on Employer Contributions: Any employer pension contributions might also be treated as taxable income in the US, even if tax-free in the UK.

FBAR & FATCA Reporting: Since this high earner’s total UK pension value exceeds $10,000, they must report it on their FBAR (FinCEN Form 114) and potentially Form 8938 under FATCA.

Tax Treaty Considerations: Under the US-UK Tax Treaty, the individual may be able to mitigate double taxation, but proper tax elections must be made.

Solution: Using Carry Forward to Maximize Contributions While Managing US Tax Risks

This individual has unused allowances from previous years:

• 2021-22: £36,000 unused

• 2022-23: £21,000 unused

• 2023-24: £10,000 limit exceeded by £12,000

To reduce UK tax penalties, they can carry forward past allowances to cover their excess contributions.

UK Tax Impact: No additional tax charge since excess contributions are covered by carry-forward rules.

US Tax Impact: Since pension contributions may not be tax-deferred in the US, they must report and potentially pay US tax on them for the year they were made.

Strategy: Work with a US-UK tax expert to mitigate double taxation, correctly report foreign pension contributions, and maximize tax efficiency in both jurisdictions.

Lifetime Allowance Abolition: What It Means for You

• The Lifetime Allowance (LTA) of £1,073,100 was abolished on April 6, 2024.

• You can now save unlimited amounts in a pension without facing LTA tax charges.

• However, withdrawals exceeding certain limits are still taxed at your income tax rate.

For US expats, this change does NOT affect US tax treatment—large pension withdrawals may still be taxable in the US.

UK Pension Allowance Calculator

Use our UK Pension Allowance calculator to help estimate your entitlements for carryover and annual allowance

Income

Contributions 2023-24

Contributions 2022-23

Contributions 2021-22

Calculate your pension allowance

The calculation provided is an example, in many circumstances there are more variables to consider when calculating the full amount you can contribute

FAQ: UK Pension Allowance & US Tax Considerations

1. What is the UK Pension Allowance in 2025?

The UK Pension Allowance is the maximum amount you can contribute to your pension each tax year while still benefiting from UK tax relief. In the 2024/25 tax year, the standard annual allowance is £60,000

2. How does the UK’s Tapered Pension Allowance work?

If your adjusted income exceeds £260,000, your pension allowance is reduced by £1 for every £2 above this threshold. The minimum allowance is £10,000 for individuals earning £360,000 or more.

3. Can I carry forward unused pension allowances?

Yes. You can carry forward unused allowances from the past three tax years, as long as you were a member of a UK-registered pension scheme during those years.

4. Has the Lifetime Allowance (LTA) been abolished?

Yes. The Lifetime Allowance (LTA) was removed on April 6, 2024. There is no longer a limit on pension savings, but withdrawals may still be subject to UK income tax at your marginal rate.

5. How does the US tax UK pension contributions?

Unlike in the UK, where pension contributions receive immediate tax relief, the US may tax contributions in the year they are made. Some UK pensions may also be classified as foreign grantor trusts, leading to additional US tax reporting requirements.

6. Can UK employer pension contributions be taxed in the US?

The UK Pension Allowance allows for tax-efficient retirement savings, with tax relief on contributions up to the £60,000 annual allowance. However, high earners with an adjusted income over £260,000 face a tapered allowance, reducing their tax-free contributions.

Although the Lifetime Allowance (LTA) has been abolished, tax rules on pension withdrawals remain. International taxpayers and US expats must consider how UK pension contributions interact with US tax laws, including potential double taxation.

Yes. While UK employer pension contributions are usually tax-free in the UK, the US may treat them as taxable income in the year they are made.

7. Do UK pensions need to be reported to the IRS?

Yes. US expats with UK pensions may need to file:

✅ FBAR (FinCEN Form 114) – If total foreign financial accounts exceed $10,000 at any time in the year.

✅ FATCA (Form 8938) – If total foreign financial assets exceed the FATCA thresholds.

8. Does the US-UK Tax Treaty protect UK pensions from US tax?

The US-UK Tax Treaty helps reduce double taxation, but proper tax elections must be made. UK pensions are not automatically tax-exempt under US law.

9. What happens when I withdraw from my UK pension as a US taxpayer?

UK pension withdrawals are taxed in the UK at your marginal rate. In the US, they may also be subject to ordinary income tax, but tax treaty provisions may allow for credits to reduce double taxation

10. How can I optimize my pension allowance while minimizing US tax liability?

🔹 Plan contributions carefully to avoid unexpected US taxation.

🔹 Consider carry-forward allowances to optimize tax relief.

🔹 Work with a cross-border tax specialist to navigate IRS reporting & treaty elections.

🔹 Ensure proper FBAR & FATCA compliance to avoid penalties.

Making Sense of Your UK Pension Allowance

Understanding how the UK Pension Allowance fits into your overall tax position—especially if you have international tax obligations—can be challenging. The rules around tapered allowances, carry forward, and cross-border taxation require careful planning to avoid unnecessary tax liabilities.

At Bambridge Accountants, we specialize in UK and US tax matters, including the nuances of pension taxation for international taxpayers. If you’re unsure about how much you can contribute, whether you have unused allowances, or how your UK pension is treated in the US, we’re here to help.

If you’d like tailored advice on your pension contributions and tax position, feel free to reach out.