Your 401(k) is a big part of your retirement planning, so even if you are moving out of the U.S., you will still need a sound strategy. But how does it work? Does your account remain open? Can you make contributions?
Below, you’ll learn about what 401(k) plans look like for U.S. expats, including issues you may potentially face, options if you’re leaving your U.S. employer, and tax implications for withdrawals.
Does My 401(k) Stay Open If I Move Abroad?
Your 401(k) usually stays open in the U.S. even if you decide to live in another country. However, there are some plan providers that do not support non-U.S. residents, so leaving your account as is may not be a possibility. If it is a possibility, your investment options may be limited, you might have login issues, and you could owe taxes on distributions. For specifics regarding your plan, speak to your provider.
Common 401(k) Issues When Moving Abroad
While it’s possible that your 401(k) remains open even after you move to a foreign country, you may run into issues regarding access, contributions, and tax on withdrawals depending on your country of residence.
Trouble Accessing Your 401(k)
If you’re no longer living in the U.S., you might not be able to access your account as easily as before. That can be because your provider restricts online access, only accepts U.S. mailing addresses, or requires U.S.-based verification methods.
If your provider requires a U.S. mailing address and communicates mainly by mail, you will have difficulty staying up to date on any plan changes or notices about fees. For providers that accept foreign addresses, you may be subjected to additional compliance checks, usually for fraud prevention.
Limitations from Plan Provider
Providers may have certain restrictions for non-U.S. residents, which can include limiting certain investment changes. Some might even freeze the account, so it’s important to check and see if your provider works with U.S. expats.
Foreign Taxation of 401(k) Funds
Depending on your country of residence, you may be subject to taxes on the funds in your accounts. This is in addition to the U.S. tax obligations as the U.S. taxes its citizens on income regardless of where they live in the world.
Currency Risk
While your 401(k) is likely held in U.S. dollars, you’ll probably use a different currency when you move abroad. If the U.S. dollar declines in purchasing power relative to your local currency, your account’s value could be reduced, and you could be facing currency risk.
Can I Keep Contributing While Living Overseas?
Usually, you can only keep contributing to your 401(k) if you are still working for the employer that sponsors the plan. This commonly happens when a U.S. employer sends an employee abroad. However, if you leave that employer, you cannot make any more contributions, whether you move abroad or not.
If you’re self-employed, you may be able to contribute to your own eligible plan.
What Are My Options If I’m Leaving My U.S. Employer?
If you are leaving your U.S. employer before your move aboard, you usually have four main choices to choose from: leave your 401(k) where it is, roll it over to an IRA, cash out the account, or move it to your new employer’s plan. The best choice will depend on these factors:
- Long-term goals
- Tax considerations
- Risk tolerance
- Service needs
- Your new country of residence
- Fees
Leave the 401(k) Where It Is
Your 401(k) does not close automatically as soon as you leave your employer. If your former employer’s plan has low fees and good investment options, you might find that the best move is to leave your account as is. This makes even more sense if you don’t need immediate access to funds.
You need to make sure that your plan allows foreign access, which includes completing verification from abroad. Without dependable access outside of the U.S., you will have trouble managing your retirement funds.
Roll It Over to an IRA
A rollover to an IRA is right for individuals who want more control over their investment and easier account management, though your IRA custodian might not support non-U.S. resident access. Ideally, you will want a direct rollover to avoid the mandatory 20% withholding and any missed paperwork.
Cash Out the Account
You can cash out your 401(k), though this is usually a costly choice since traditional 401(k) distributions are taxable and there is an additional 10% tax if you’re not over the age of 59 ½. However, this option makes sense for those who need immediate funds and you won’t have limited access to the funds as they’ll no longer be in the system.
Move It to Your New Employer’s Plan
If you can join a new eligible U.S. employer plan, you have another option to consider. However, your access to the account while abroad will depend on the new plan. It’s best to go over the specifics before deciding if this is the ideal option.
How Are 401(k) Distributions Taxed When I Live Abroad?
401(k) distributions are taxed differently depending on where you reside abroad and which U.S. state you last lived in.
If your new country of residence does not have a tax treaty, they may tax any distributions you make. In most scenarios, the U.S. can also tax distributions, so you may be dealing with double taxation. Keep in mind that you are still subjected to a 10% penalty in addition to the ordinary income tax if you are making an early withdrawal.
If your new country of residence has a tax treaty, they may offer tax credits or exemptions to reduce or prevent double taxation. Examples of these countries include Canada, Germany, and the U.K.
Some U.S. states tax retirement income and they may try to tax your distributions, especially if you’re still considered domiciled in that state. If you’re from one of these states, you may want to consider moving to another state that doesn’t tax income before your move abroad.
Practical Steps to Take Before Moving Abroad
Before deciding what to do with your 401(k), you should first contact your plan provider and ask about access and support for non-U.S. residents. Some providers do not work with American expats, so it’s important to figure out your provider’s policy as this will give you a better idea of what options you have.
If you plan to leave your account with your former employer, you should do the following to ensure access and communication even when you’re abroad:
- Add an international phone, backup email, or an authenticator app to log in smoothly without a U.S. number.
- Switch to electronic communications if possible or have a reliable mailing setup.
- Request the non-U.S. resident access policy in writing from your plan provider.
- Keep a record of your latest summary plan and beneficiary confirmation before your move.
Frequently Asked Questions About 401(k) for American Expats
Q: What happens with my 401(k) if I leave the country?
A: Your 401(k) usually remains open unless the plan doesn’t support you if you live abroad. If you can access your account from outside of the country, you are still subjected to the plan’s rules and any U.S. tax implications for distributions.
Q: What can I do if I can’t leave my 401(k) as is?
A: Your options include rolling your account into an IRA, moving it to your new employer’s plan if possible, and cashing it out.
Q: Can I still contribute to my 401(k)?
A: Yes, if you are eligible under a U.S. employer’s plan. This is usually a possibility if your U.S. employer sends you abroad.
Q: How are my 401(k) distributions taxed if I move abroad?
A: It depends. U.S tax rules still apply, and you may be subjected to local taxes depending on the country you move to. Some countries, like the U.K. and Canada, have tax treaties that can help reduce or prevent double taxation.
Q: Is 401(k) growth taxed locally?
A: It depends on your country of residence. Some countries tax growth in 401(k) accounts annually even if you aren’t making any distributions.
When to Get Professional Tax Advice
While your 401(k) provider may allow you to leave your account as is, you should take the time to consider your options and determine the best course of action that supports your retirement goals. If you are having difficulty figuring out a plan, consider consulting expat tax professionals for help.
At Expat CPA, we have been making taxes less taxing for American expats since 1994. We have clients living in every major country of the world, so regardless of where you’re relocating to, we can help you figure out what you should do with your 401(k). We will come up with a plan that minimizes your tax liability while allowing you to continue investing for your retirement. If you’d like more information or to speak with one of our team members, contact us today and we will get back to you as soon as possible.