Here’s another account that you might bring over from the US. Unfortunately, while in the US this is the “ultimate retirement account“, in the UK it loses its shine and basically becomes a taxable brokerage account. That doesn’t make it bad, just not nearly as good.
You may already have an HSA from the US and you can bring it with you without penalties. However, you lose the tax advantages and you won’t be contributing to it without a High Deductible Health Plan.
Basically, you either already have it when you leave the US, or you won’t be getting one.
To qualify, you need to have a “High Deductible Health Plan” – these are common in the US, but with the NHS, they don’t exist in the UK as far as I can tell.
Two options I can imagine that could be worth exploring if you really want to keep contributing to an HSA from the UK – I can’t vouch for either of these and have some doubts, but I can see the potential for an option:
- Consider UK private health insurance as an HDHP
- Continue to pay for qualifying US health insurance
I don’t think either of those are especially attractive, so I haven’t dug too much, but would be interested if anybody has.
Pretty much whatever you want. However, because this is not a “pension scheme”, you have to be careful of UK tax considerations. If you’re going the index fund route, you should probably stick to HMRC reporting funds – otherwise, your gains get taxed as income (up to 45%) instead of capital gains (up to 20%)
Risk & Return
Depends entirely on what you invest in – capital at risk, no guarantees.
Two primary ways of withdrawing:
- Health expenses – you can withdraw to cover any eligible health expenses. You don’t have to withdraw within any specific time, though – if you have a $100 health expense today, you could withdraw that $100 30 years from now. Keep the receipts!
- Fully accessible without penalties after age 65.
Other withdrawals generally attract a 20% penalty plus income tax.
UK Tax Treatment – Withdrawals
The UK doesn’t see an HSA as anything special – just a taxable investment account. So you’re subject to tax on capital gains, interest, dividends, etc. as they arise – not tax deferred.
You would be eligible for the normal capital gains allowance (£12,300 in 2020/21), dividend allowance (£2,000), and personal savings allowance (up to £1,000), depending on what kind of income you get. You’d also be able to do capital loss harvesting and other tactics applicable to a taxable account.
The only way out of this is if an HSA was a “pension scheme” – but I don’t see that as the case. HSA are covered under Internal Revenue Code section 223, nowhere near pensions. And just from a plain English interpretation, clearly the reason for HSAs existing is for health reasons, not as a pension. The “ultimate retirement account” is just a side effect. I’d certainly be interested if anybody has a differing interpretation, though (I haven’t been able to find any).
US Tax Treatment – Withdrawals
Two taxation regimes correspond to the two main ways of withdrawing:
- Health expenses – tax free, as long as you have health expenses to cover (regardless of how long ago they were)
- After age 65 – taxable income, the same idea as a Traditional IRA.
You can likely offset any US tax with UK tax credits, although this gets a bit complicated – basically, the UK thinks this is all passive income (capital gains, dividends, interest), while the US taxes it as earned income that was tax-deferred. So you’ll accumulate foreign tax credits in the passive category but have US income in the general category. There may be a clever way around this – we’re now deep in the intricacies of the Foreign Tax Credit and at the point you should really talk to a professional.
Of course, if you have enough other passive income that you can use the FTCs, it’s a moot point.