What happens to my 401K if I move to another country? There are a few different options for ex-pats who still have one or multiple old 401k plans in America. It is important to choose the right option for your situation.
If you moved abroad and still have a 401K with a previous employer you might wonder if you can keep it where it is or what options are available for ex-pats like yourself. Contributing to a 401K while working in the US is a great way to save for your retirement. In this article, I will go over the options available for American ex-pats. It is important to know the rules and regulations impacting your 401K once you make the decision to move overseas permanently.
Is your 401K at risk while living abroad?
The pandemic has accelerated the number of people living and working from abroad. It is now more acceptable globally and we see more and more people making the move before retirement. Many US large banks and investment firms have decided to stop doing business with clients living abroad. The cost of servicing the clients was not worth it for them.
In addition, the Foreign Account Tax Compliance Act (FATCA) is a compliance regulation imposed on non-US financial institutions with US clients. This places more restrictions on how non-US firms do business with American clients. It has resulted in many non-US firms not wanting to work with American citizens. In the US, the IRS is also focusing on offshore tax avoidance.
Traditional or Roth 401K
If you are a foreign worker living in the US and thinking of moving back home or an American ex-pat already living abroad, you need to make sure you understand the options available inside your 401K. Most people contribute to a Traditional 401K which is a tax-deferred investment vehicle. It is fully taxable when you withdraw the funds in retirement.
The other option is a Roth 401K. The contributions are after-tax and the growth and withdrawals are tax-free forever. It is important to know which one you have or if you have funds invested in both.
If you have contributed to a Traditional 401K you will want to wait until you reach 59 1/2 years of age before you withdraw funds from the plan. There is a 10% penalty to take an early withdrawal. There are some exceptions to the rule for example if you become disabled or if you separate from service at age 55 and start a 72(t) distribution. If you contributed to a Roth 401K the withdrawals are tax-free but there is still an early withdrawal penalty.
Option 1 – Leave it where it is
One option is to leave it with the same custodian. Most 401K plans allow you to leave it inside the same plan but there are a few things to consider.
- The employer might stop paying for some of the administrative and management fees. That could impact the cost of having your funds invested.
- Your employer could change plan administrator or investment firm at any time and while you are abroad you might not pay attention to your mail regarding this issue. It could create some administrative burden on you.
- The investment options are limited and can change without your consent or knowledge of it.
Option 2 – Rollover to an IRA and take control of the investment
This option has many great advantages.
- You can take control of the investment and the management of the funds. The investment options are unlimited inside an IRA.
- It is possible to combine many 401K into one IRA. This is a great benefit for ex-pats with multiple 401K plans at different investment firms.
- Rollovers are possible from Traditional 401K to Traditional IRA or Roth 401K to Roth IRA. In these cases, the same taxation applied to both situations.
- It is also possible to transfer a Traditional 401K directly to a Roth IRA. In this situation, the full amount moved to the Roth IRA will be considered a Roth Conversion and will be added to your taxable income for that year. It can be really costly so I suggest you talk to a tax advisor before using this strategy. You can read more about it in one of my previous articles.
Option 3 – Cash out your 401K
This option is rarely used. Some people might think they can consolidate a 401K with another tax-deferred plan overseas. It is not possible and the account needs to be liquidated and the full amount is taxable for that year.
The current top tax rate in the US is currently 37% but the current administration is proposing an increase to 39.6%. If you are under 59 ½ years old you would add a penalty of 10%. That means a lump sum cash out of your 401K might cost you almost 50% of the value. If you want to go this route I would suggest reading my last article about Roth Conversions.
Summary – The need for US Expat Financial Advice
The first step is to find the right advisor that understands your situation and can advise you on how best to approach it. At Harrison Brook, we specialize in helping Expats with their retirement needs. Having been a financial advisor for one of the largest investment firms in the US for many years gives me the experience and expertise to assist you with your US retirement needs. If you have any questions regarding your 401K while living abroad, please contact me and I will be happy to assist you.