What is the UK equivalent of a Roth IRA?
Published on February 21 2023
Updated on November 08, 2024
by Rose-ann De Villa, EA, CPA
Rose-ann De Villa, an IRS Enrolled Agent and CPA with 14 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in the UK.
Rose-ann has been mentioned in the Daily Express UK news wherein she talked about Stimulus payments and Child Tax Credit refunds for US expats in the UK.
Table of Contents
What is the UK equivalent of a Roth IRA in 2024?
Because of the different tax systems in both countries, there isn’t an exact copy of a Roth IRA in the UK, but there are other alternatives.
Two types of accounts exist with benefits and growth potential similar to those of a Roth IRA. They are an Individual Savings Account (ISA) and a Self-invested Personal Pension (SIPP).
What is a Roth IRA?
A Roth IRA is an individual retirement account designed to help individuals save for retirement with a tax advantage. It is usually contributed with after-tax income, which grows free of tax.
A Roth IRA is similar to a regular investment account, but withdrawals at retirement are tax-free. You can only contribute cash towards this account instead of any other assets, like equities, securities, or property. While fewer restrictions exist, it does not come with immediate tax benefits.
When can I withdraw from a Roth IRA?
There are generally no withdrawal fees provided you meet specific criteria, such as being over the age of 59 and a half and having a Roth IRA for over five years. You can also withdraw money early, incurring no penalties if you’re going to:
- Buy your first home
- Cover college expenses
- Cover birth or adoption expenses
How does a Roth IRA work?
With a Roth IRA, your money is invested in different assets to provide a return over time, such as stocks and shares, funds and ETFs, bonds, and certificates of deposit.
For the year 2024, account holders can deposit up to US$7,000 if they’re under 50 and up to US$8,000 if over 50 years old. Since money is held in different investments, the returns will depend on what individuals prefer to invest in. This is similar to a few ISAs in the UK.
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What are the alternatives to the Roth IRA in the UK?
There are two types of accounts that have similar benefits to a Roth IRA in the UK:
- Individual Savings Account (ISA): Contributions are made with post-tax money, and investments grow tax-free.
- Self-invested personal pension (SIPP): A retirement plan that offers individuals more flexibility and control over how their pension savings are invested compared to traditional pension schemes and is suitable for saving toward retirement tax-free.
What is an Individual Savings Account?
Like a Roth IRA, an ISA is an individual savings account that offers UK residents tax-free interest payments from investments.
There are four types of ISAs available:
- Stocks and shares ISA: Investment in bonds, shares, stocks, and ETFs to grow passive income.
- Lifetime ISA: For anyone aged between 18 and 39 with tax-free withdrawals used for retirement or first-time home purchases. With a government bonus of 25% in addition to initial deposits.
- Cash ISA: Traditional option of income through yearly interest that grows tax-free.
- Junior ISA: Suitable for adults with children or grandchildren who want them to learn to save. Once they’re 16, they can take over the account and can withdraw from it once they’re 18 years old.
How much can I put in an ISA?
- Stocks and shares ISA: You can contribute up to £20,000 a year.
- Cash ISA: You can contribute up to £20,000 a year.
- Lifetime ISA: The contribution limit is £4,000 per year.
- Junior ISA: The contribution limit is £9,000 per year.
The amounts are set by His Majesty’s Revenue and Customs (HMRC) and are subject to change.
Does a stocks and shares ISA have capital gains tax?
No, you won’t pay capital gains tax or any kind of taxes (dividend or income tax) on any UK dividends or interest from your stocks and shares ISA.
Is the lifetime ISA only for retirement or first home purchase?
Generally, if you wish to withdraw funds before 60 and not for the purpose of buying your first home, there is a 25% withdrawal penalty, which depletes the government bonus and some of your initial contributions.
What is a self-invested personal pension?
Like a Roth IRA, a self-invested personal pension (SIPP) is suitable for tax-free retirement savings. SIPPs are ideal for those with specialized knowledge in certain sectors who want to manage their own investments.
With SIPP, taxpayers can claim tax relief on pension contributions on 100% of their earnings, up to £60,000 annually. This relief comes in the form of a refund that is contributed toward the pension.
What can I contribute to a SIPP?
SIPPs allow you to invest in a wide variety of assets, including stocks and shares, bonds, mutual funds, properties, and other investment options. This is different from standard pension plans, which often limit your options to pre-selected funds.
When can I start to withdraw on a SIPP?
You can withdraw money from your SIPP account earlier than a Roth IRA. With a SIPP account, withdrawals can start at the age of 55 even if you are still employed.
Is there a tax relief on SIPP contributions?
Yes, to encourage individuals to save for retirement, the UK government provides tax relief on pensions. The basic tax relief of 20% is applied automatically on your initial investment, but you can claim a higher rate relief on your self-assessment tax return.
How much can I put in a SIPP?
You can contribute 100% of your income or a maximum of £60,000 per year. For low and non-earners, they can still contribute up to £3,600 each year.
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