The ultimate US:UK personal finance translation compendium

I’m betting that at some point along your journey to financial freedom you’ll have stumbled across a US phrase or word that just means absolutely nothing to you. You’ll briefly Google it, still have no clue how it relates to the UK and be right back at square one. I can definitely say I’ve been there and was trapped at that point for a long time when starting out.

No longer must you suffer! Introducing the ambitious project that will be: The ultimate US:UK translation compendium.

The US:UK compendium. Why bother?

I find myself regularly listening to US produced podcasts, reading US centric blogs or absorbing US focussed books. These are some of the best resources in the world to learn from on our journey to Financial Independence, but they really are directed towards US citizens. I’ll find myself listening to podcasts and nodding along to the basic principles, but having no clue how on earth I could apply this to life on our little island.

If you find yourself perusing US literature and asking: What is the equivalent of that account?, Do we have that system in the UK? and Does that relate to anything I know about at all? then this compendium might just be what you were looking for.

I’ll loosely break things down by sub-section, I’ll give an overview of what the thing is, does or means and I’ll give some insight into what the UK equivalent might be (if a proxy even exists).

Some terms will be more complex than others (and frustratingly may require you to understand other terms too) but I will try to give a good broad sweep of all the phrases I often read, hear and see discussed.

If you quickly want to jump to a term, hit CTRL-F, type in your query and away you’ll go!

Account types and retirement plans.

These are probably some of the most common terms discussed in the US FIRE circles that will quickly lose all semblence of meaning to ordinary UK folk. Whilst you don’t need to learn about the inner workings of all of these, knowing what these accounts and plans do for the holders allows us to spot similarities and apply theories to our own accounts appropriately.

IRA.

The IRA, or “Individual Retirement Account” umbrella. There is no single “IRA account” that one can open, it is broken down into several further subtypes, all of which have tax advantages for the user. The types of IRAs are: Traditional, Roth, SEP and SIMPLE.

All IRAs will allow their contents to grow tax free, which is the main draw to using them. This allows capital gains and dividend taxes to be entirely, legally, avoided for the most part.

Most IRAs have a similar rule on withdrawals, if you withdraw funds before age 59½ you will pay at least a 10% tax penalty. All IRAs will have a maximum contribution allowance per tax year.

Finally, most IRAs have special rules applied to them if you’re married. These mainly include bigger allowances on annual deduction limits, especially if filing taxes jointly.

UK translation: The IRA umbrella has no direct UK equivalent. There are similarities between the UK ISA umbrella and US IRA umbrella: both confer signficant tax advantages to the user, both have subtypes, both have maximum contribution limits and both are truly “individual” accounts (no joint options exist) but these are loose comparisions at best. The overarching design of the IRA system is very different to the ISA system.

Traditional IRA.

The Traditional IRA, or “trad”, falls under the IRA umbrella. Contributions to this account type are in most circumstances tax deductible, meaning that the individual who made contributions can reduce their income tax liability.

Contributions are made pre-tax with the withdrawals taxed when the individual is in retirement. This can be a big advantage, as most people will have a lower tax rate when they retire than when they are working.

The 2019 annual allowance for contributions to this account type is $6,000, or $7,000 is age 50 or older.

The Traditional IRA does not encourage early withdrawals, if you withdraw funds before age 59½ you will pay at least a 10% tax penalty.

Interestingly, these accounts also force withdrawls later in life. Through the use of RMDs, or “Required Minimum Distributions”, traditional IRA account holders must begin to take money out of the account after age 70½. Failing to do this can see eye watering tax bills slapped on top of up to 50% of the value of the RMD. Ouch! Once RMDs have begun, the holder may no longer contribute new funds to the account.

If you’re a first time home buyer, it is possible to take up to $10,000 from your Traditional IRA to fund the purchase. This withdrawal will dodge the 10% early withdrawal penalty but will still be subject to your income tax rates. This is also a lifetime limit, you could not take $10,000 from multiple IRAs.

UK equivalent: The Traditional IRA has no direct UK equivalent, but is most functionally similar to a UK SIPP. Money goes in tax free and is then taxed on the way out upon withdrawal.

Roth IRA.

The Roth IRA, or “roth” as it’s usually called, is the most favoured IRA account for many FIRE enthusiasts. Contributions to this account type are not tax deductibile; for most this means that only money that has already been subject to income tax can be deposited.

The 2019 annual allowance for contributions to this account type is $6,000, or $7,000 is age 50 or older. The 2019 annual income limit is $122,000 for individuals or $196,000 for couples – if you earn more than this, you cannot contribute to the Roth account.

The Roth IRA does not encourage early withdrawals but it is more leniant than the Traditional IRA if you wish to do this. You may withdraw your contributions at any point without any tax implications. If you withdraw any gains that your funds made before age 59½ you will pay at least a 10% tax penalty.

If you’re a first time home buyer, it is possible to take up to $10,000 from your Roth IRA to fund the purchase. This withdrawal will dodge the 10% early withdrawal penalty but will still be subject to your income tax rates. This is also a lifetime limit, you could not take $10,000 from multiple IRAs.

UK equivalent: The Roth IRA has no direct UK equivalent. If we were to compare an account in the UK that was most functionally similar, it would be a modified UK Lifetime ISA – if we stripped out the government bonus and allowed withdrawal of contributions without penalty. As you can see, that’s hardly the same, but you get the idea. The key take home for the Roth is that money goes in post-tax, grows tax free and is then tax free on withdrawal, with some early withdrawals allowed.

SEP IRA.

The SEP or “simplified employee pension” IRA is much less frequently discussed than the previous two. This account has the same taxation rules as the Traditional IRA but with a modification to the allowed contributions: one may contribute 25% of compensation or $56,000, whichever is less.

Fundamentally, a SEP IRA can be considered a traditional IRA with the ability to only receive employer contributions. The employee cannot contribute. SEP IRAs are usually used by self-employed individuals or small business owners as a cheap alternative to more expensive retirement plan options.

UK equivalent: The SEP IRA again, has no direct UK equivalent. It is most similar to a UK Defined Contribution pension plan, if the employee made no contributions to the scheme at all. Ultimately, contributions are made by an employer into a tax advantaged retirement account for the employee, that is then taxed on the way out.

SIMPLE IRA.

The SIMPLE IRA, or “savings incentive match plan for employees”, is the least discussed retirement account that I see in FI community chatter. The account, much like the SEP IRA, is again geared towards small business owners and self-employed individuals.

The key difference betweeen the SEP and SIMPLE IRA accounts is in their contibtution limits and who can contribute. A SIMPLE IRA allows contributions from both employer and employer and has annual contribution limit of $13,500.

Interestingly one cannot opt out of a SIMPLE IRA if their employer offers one and they are eligible to enroll. The employee can stop their own contributions if they desire, but the employer must continue to make their pre-determined contributions.

UK equivalent: Seeing a pattern yet? The SIMPLE IRA has no direct equivalent but, unlike all the other IRAs, is remarkably similar to a UK Defined Contribution pension plan. Both the employer and employee make contributions to the plan, the contributions are made in a tax efficient manner, the pot then grows tax free and is taxed upon withdrawal.

The 401(k) umbrella and its derivaties.

Ah yes, the 401(k), probably one of the better known US retirement terms alongside the IRA.

The 401(k) coins its peculiar name from the section of Internal Revunue code that permits “the creation of an employer sponsored pension scheme”. Oh how thrilling and imaginitive bureaucratic nomenclature can be!

The 401(k) plan is once again an umbrella term. Seeing as you can make a career out of account optimisation and tax planning, this will get complicated really quickly, so I’ll mostly stick to the basics on this for a good grounding.

At its core a 401(k) plan is a contractural agreement between an employer and an employee to put some money aside for the employee’s retirement. This money is treated in a tax favourable way, can potentially be made before tax is applied through payroll deduction and features rules on when and how it can be withdrawn.

The funds committed to a 401(k) plan by employer and employee must be deposited into an elgible account type; enter the Traditional 401(k) and Roth 401(k).

Much like the IRAs discussed above the two variants of the 401(k) account have significant differences. Handily, the rules are very similar to the Trad and Roth variants mentioned above, so once you’re au fait with those you’ll be most of the way there.

  • Both 401(k) account types have the same annual contribution limit, which is currently $19,000 – or up to $56,000 if both the employer and employee make contributions. This goes up to $62,000 if the employee is aged 50 or over.
  • Both account types have the same penalty-free withdrawal age of 55.
  • Both types allow employer matching, but with some caveats for the Roth 401(k).
  • Both types feature RMDs as discussed in the Traditional IRA section.

The notable difference between the Traditional and Roth 401(k) plans are the way that the taxes are applied. A Traditional 401(k) account takes pre-tax money and taxes it on the way out, a Roth 401(k) account takes post-tax money and is tax free on the way out.

UK equivalent: The closest thing to a Traditional 401(k) plan in the UK is an employer matched Defined Contribution pension scheme. The rules on withdrawals and lifetime allowances etc differ, but the key concepts between the two are very close.

401(k) loans.

Now here is an interesting quirk that 401(k) users get that we in the UK would kill for.

In the US it is possible to draw a, usually low interest, loan against the balance of your 401(k) account(s) to assist with all manner of costly life events. These are specific to each plan manager but eligible reasons mostly include the downpayment required for a house, paying off high interest debt, funding necessary home repairs and paying medical expenses.

A 401(k) loan requires no credit check so this can really help those who have strayed too deep into debt and are struggling to get out. It’s a flexbile way to access your overall pot of funds should life require it. A very cool feature to have access to indeed, but not one that should be taken lightly – as you will of course be paying interest and clipping your retirement pot in the long run. Still, I’d rather have the ability to do this than not have the option at all.

The 403(b) plan.

The 401(k) is not the only pension plan in the US. A multitude of schemes exist for those ineligible for the 401(k) account types. The main one you’ll probably hear about is the 403(b) plan. This is nothing particularly complex, rather this is the type of plan offered to those who are in public sector or not-for-profit charity sector type roles.

The contribution limits to the SIMPLE IRA/401(k) and 403(b) plans are all individual, so it is indeed perfectly legal to contribute to all these retirement account types. As for whether or not you can set yourself up to do so is another question all together!

The 529 plan.

The 529 plan is most often discussed when considering funding tuition fees and future education. The 529 comes in two flavours, a pre-paid and an investment style account. The pre-paid plan lets the saver buy credits at participating education institutions in a tax efficient way whereas the investment style account allows the funds to grow with the stock and bond market, to be traded in for education at a later date.

529s can be used to pay up to $10,000 per year for tuition at any public, private or religious education institution.

529s are tax advantaged accounts, the money paid in is provided tax relief and the money within the plan grows tax free.

529s have no annual contribution limit but the balance cannot exceed the expected cost of the educational expenses. They hold similar rules to the IRAs, if you withdraw for a reason that is not supported, you’ll pay a 10% penalty. You can wiggle out of this is your beneficiary has earned a scholorship.

UK equivalent: We have no tax advantaged educational specific saving plans here in the UK. A junior Stocks and Shares ISA invested appropriately with the sole purpose of funding education would be the closest thing.

The HSA account.

Off track from specific retirement savings, we have the HSA or “health savings account”. This account does what it says on the tin – the contents of an HSA account may be used without penalty to foot various medical bills including optometry appointments, prescriptions, dental fees, doctor appointments and even MRIs.

The HSA allows eligible individuals to stash up to $3,500 (or families $7,000) a year of pre-tax income for use on medical bills later down the line. Employers can also contribute to an HSA for their employee, but the limits remain the same.

Withdrawing the funds for any reason other than the pre-approved list curated by the IRS will see a 20% penalty slapped on. After age 65 all withdrawals are penalty free, so the HSA could (and likely should) be used towards your overall retirement savings plan.

UK equivalent: While the UK has nothing like this in terms of health specific saving, our tax-free childcare scheme is essentially the same idea. Putting money aside in a tax free way to fund an anticipated cost later in life.

The Canada special; The TFSA

So this was mostly going to be a US list, but I thought I’d chuck this one in because I do hear about it semi-frequently. The TFSA, or “Tax Free Savings Account”, is a special type of savings account that tax resident Canadians can use to privately invest and save. The account has a maximum annual contribution of $6,000 and all the contents grow tax free. That means the contents get to dodge out on dividend, capital gain and income tax and they can be withdrawn without penalty at any age.

UK equivalent: This account is almost identical to the UK Stocks and Shares ISA, but we get a much bigger annual limit of £20,000.

Tax terminology.

Whoever said “tax doesn’t have to be taxing” has never looked at US tax law before. This is yet another minefield, so I’ll pick out the parts I hear people discuss most frequently and break them into nice, digestible chunks.

IRS.

This one many of you may already know as I think it’s fairly common knowledge. The IRS or “Inland Revenue Service” administers taxation and auditing of tax accounts for the US.

UK equivalent: HMRC.

Form W-2.

I don’t often hear this referred to by its full name, but more commonly as just “W2” and usually in the context of “I’m a W2 worker” or similar.

An individual filing form W-2 indicates that they work for an employer that pays them a wage or some compensation to them. It’s a quick and dirty way of saying “I have a job working at a company where I get a salary and other benefits, instead of working for myself as a self-employed individual or as an owner of a business”. The W-2 form itself will indicate income and taxes that have been applied to the income received. It will be used by the employee to complete their full tax return form, the somewhat dreaded Form 1040.

UK equivalent: The major distinction we make in the UK is more straight forward, we are either self-employed and thus file for self-assesment or HMRC manages everything for us through the PAYE system (this is where UK tax codes come in to play). The US system is a lot more hands off and while some taxes are still taken at source, the onus is more heavily placed on the average taxee to calculate their own tax and submit this each year in a “tax return”. In typical UK culture we are far more likely to be employed in a traditional job than serve as self-employed, so we rarely have to make the distinction. If we did it would likely be as a self-employed individual, to which “I’m self-employed” would suffice.

An equivalent UK way of saying “I’m W2” would be to say “I’m PAYE”, but that is just something we rarely bother stating as it is so common here.

Form 1099-MISC.

I hear this one banded about as frequently as the W-2 mentioned above, so I’ll touch on it.

The 1099-MISC form is used to report miscellaneous payments to nonemployees and is typically associated with contract work and work completed on a one off basis. Much like above, as someone may say “I’m W-2” indicating their employment status, someone may state “I’m 1099” as a quick way of describing their working pattern as a contractor.

N.B. For those that are interested other variants of the 1099 form exist including 1099-DIV, 1099-G, 1099-R, 1099-C and 1099-INT. I’ve never seen these discussed in detail so I won’t comment on each, but feel free to look them up yourself if you’re curious.

UK equivalent: A “1099 worker” would be most akin to someone filing self-assessment of their full time income here in the UK. As with the W-2 explanation, this is far less frequently discussed in the UK, as the vast majority are paid through the PAYE system.

The Backdoor Roth IRA.

Now this one is a bit of a doozy. If you’ve come to this section without reading the above, this is not really going to make much sense.

The gist of this is all you’re going to need – studying the ins and outs if you’re a UK tax resident is pretty pointless!

At its core this is not a type of retirement account but is an aptly named, perfectly legal, rather complex way of getting round the maximum Roth IRA income limits using other accounts and rollovers.

UK equivalent: The UK equivalent to this would be along the lines of transforming your workplace Defined Contribution Pot, or SIPP, into a special type of Lifetime ISA. That’s the closest I can get for analogies as the system is very US specific.

The 401(k) rollover.

A 401(k) rollover describes the act of redirecting the balance of one workplace 401(k) into an IRA or new 401(k) account of your choice… See what I meant earlier when I said you need to understand a lot of terminology to get your head around some of these finer points?

A 401(k) rollover into an IRA will usually come with lower fees and greater investment choices, not to mention it will be easier to manage as you’ll now have fewer accounts.

UK equivalent: While there is no specific “rollover” similar system here, we have half of this in place. In the UK we cannot roll our Defined Contribution pension accounts into our ISAs but we can roll our Defined Contribution pensions into SIPPs or new workplace pension accounts. This would be the closest thing and would serve a very similar function; you should do this to improve your ability to manage your pension accounts, to decrease fees and to improve your investment options.

Investing specific terms.

This is a bit more of a looser category than the previous ones, so here I’ll try and group phrases or words that relate to investing specifically. This will be the part that is added to the most I’m sure, so this is non-exhaustive.

DRIP.

DRIP or “dividend reinvestment plans” are really not a popular term this side of the Atlantic. The only provider I’ve ever seen use the term is Selftrade.

A DRIP does exactly what it says on the tin, setting this up with your broker will tell them to buy more shares of the things you own when they produce dividends and the cash arrives in your account.

UK equivalent: As I say, I’m surprised the terminology isn’t used more as this is perfectly accessible to a UK investor. Almost every platform that I’ve looked at offers dividend reinvesting (for a price of course!) but seldom refers to it as DRIP. Accumulation class funds and ETFs will do this by their very nature.

VTSAX, VOO and VTI.

These are probably three of the most popular investment choices I hear preached, with VTSAX maybe edging its way towards the top of the pile of popularity in recent years.

Both VTI and VOO are ETFs whereas VTSAX is a mutual fund. VTSAX has the highest minimum investment requirement of all three starting at $3,000.

VOO tracks the S&P 500.

VTSAX and VTI both track the entire US stock market.

VTSAX traditionally had two share classes “admiral” and “non-admiral” with “admiral” offered at much lower expense ratios but with a higher $10,000 minimum investment. This lead many to take the path of using VTI until they hit $10,000 then converting to admiral class VTSAX shares. However, in recent restructuring all VTSAX shares are now “admiral” class and have a much lower entry price of $3,000.

Both VTI and VTSAX have exactly the same expense ratio of 0.04%, but many will elect to use VTSAX as the Vanguard US platform does not allow automatic purchases of their ETFs.

UK equivalent: The direct UK Vanguard equivalents to these specific funds are as follows:

VOO = VUSA.

VTI = VNRT.

VTSAX = U.S. Equity Index Fund – Accumulation.

Mutual Fund.

A mutual fund is an umbrella term for a company that pools together investor cash to buy a basket of investments. This basket is then put up for sale to investors as shares.

UK equivalent: OEIC or Unit Trust.

Generic Personal Finance.

The miscellaneous category, if it doesn’t seem to fit into anything above it’ll likely end up here.

Social Security.

Though the US may lack a nationwide NHS system, that doesn’t mean it doesn’t provide any benefits for its citzens at all. “Social security” is usually used to refer to the payments one receives from the Social Security Administration in old age. It’s sometimes shortened to “social”.

Social security is a tax paid by almost all US tax residents, applied to incomes of up to $132,900 – above which no additional tax is taken. All US tax residents will be provided with a Social Security Number, to which their contributions will be applied to.

Social security currently pays out, on average, $1,413 per person, per month. This will vary on a case by case basis, based on personal income and working years before claiming.

You can typically claim your social security payments from as early as age 62 , but this will result in a reduced pay out. The standard age to begin withdrawals is age 67. Delaying your claim by up to age 70 will increase your payout.

UK equivalent: While the amounts and access routes differ, this is similar to our State Pension. There is an awful lot to cover on the topic that I can’t possibly capture in this tiny round up, but the UK system provides a flat amount with a low cap, whereas the US uses a different metric to calculate distributions altogether.

SNAP or Food Stamps.

SNAP, or the “Supplemental Nutrition Assistance Program” used to be called Food Stamps until the late 1990s.

Eligible citizens will receive an EBT (electronic benefits transfer) card with a preloaded balance that can be used to purchase various food and nutritional items including breads, fruits, vegetables, meat/fish/poultry, dairy products and even bottled water.

Eligibility will be determined on the US poverty line and your household earnings compared to this – the US poverty line sits at $1,732 of income per month in 2019.

UK equivalent: We have no direct equivalent for food specific benefits. The UK benefit system has mostly rolled into the “Universal Credit” scheme – a set amount of money is given to eligible households and they are entirely free to spend it as they wish, they are not limited to purchasing certain items as in the SNAP program.

Direct Deposit.

The US banking term “direct deposit” refers to a deposit of money by the payer into the payees account. The payer and payee can be the same individual. This is the most common manner by which peoples salaries are paid into their bank accounts and may be used to pay bills, taxes or other charges.

UK equivalent: The closest proxy we have to this would be the BACS transfer. The UK banking system has more flexibility in terms of what an individual is allowed to do – the US has no nationwide ability to set up standing orders for online accounts, for example.

PMI.

PMI, or “Private mortgage insurance”, has existed in the US for some 60 years. This is a policy that will clear the balance of your mortgage to your lender if you default. This does not mean you get the house you defaulted on for free, it simply means the lender has their backside covered and will be more likely to lend more money with less money down.

As such, PMI is part of the condition of almost every US mortgage that is above 80% LTV. PMI is widely considered a costly and unnessary expense and is best avoided, as it can be difficult to remove once you have signed up for it. For this reason, many US property aficiandos will recommend putting down at least 20% for your house in order to avoid this.

UK equivalent: We do not have a direct mortgage insurance product, thus we do not have one that you’ll be contractually bound to bolt on to a high LTV mortgage. UK homebuyers are required to hold buildings insurance to qualify for mortgage products, but this covers physical damage opposed to payment defaults. We have various insurance products that would allow you to personally continue paying your mortgage through times of hardship (life insurance, critical illness cover and income protection would all provide cash for this) but we do not have a product that covers only the lender for their loss that I am aware of.

That’s all I’ve got for now. This list will be forever updated and growing, so if you’d like anything adding just drop me a line.

7 thoughts on “The ultimate US:UK personal finance translation compendium

  1. My goodness, what a fantastic compendium! Hats off for the research, too!

    This is already so useful as I continue to only 90% comprehend US FIRE/PF podcasts, thanks!

    Liked by 1 person

    1. Thanks! It’s something I’ve been wanting to do for a while, glad it was helpful to someone.
      If you think anything else should be included, or if anything is inaccurate, do let me know! – Mr Fox.

      Like

  2. HLOC – Home Equity Line of Credit… A line of credit secured against the equity (capital value) of a residential property (typically the borrowers home / primary residence). The line of credit can be drawn down over an agreed time period up to a pre-authorised credit limit. From an FI perspective they can be helpful in addressing sequence of return risk during the early stages of decumulation by allowing the individual to borrow money against the value of their home at relatively low rates of interest to provide lifestyle funding while avoiding selling assets which have fallen significantly in value. Nearest UK equivalent would be an offset mortgage with an outstanding balance which is offset against cash in a savings account. Other similar UK products would be a second mortgage or secured loan however these are typically only provided to purchase an additional asset (eg, home extension) as opposed to funding lifestyle expenses.

    Liked by 1 person

  3. Great compendium. Maybe consider adding something on the different tax treatment of ETFs in the U.S? I get the impression a lot of people only consider ETFs for index trackers in the U.K. because they consider U.S. investment advice,.

    Liked by 1 person

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