If you are a citizen of Canada, Mexico, the United Kingdom, or another country, and you live and work in the United States, you are considered a non-resident alien for tax purposes.
As a non-resident alien, you are legally allowed to work in the United States, but since you don’t have a green card, you don’t qualify for permanent residency.
If your employer offers a 401(k) plan, you may wonder if non-US citizens are eligible to participate and contribute to the plan. Keep reading to learn how your residence status can affect your 401(k) plan.
TLDR
The short answer is “Yes.” Non-US Citizens can have a 401(k) or any other type of retirement plan like IRA and Roth IRA if they are working for a US-based company. Non-US citizens enjoy the same rights and benefits as permanent residents, and they can contribute to a 401(k) and still receive a match.
Are non-US citizens eligible for a 401(k) plan?
You are considered a non-resident alien if you are authorized to live and work in the United States, but you don’t qualify as a permanent resident or meet the substantial presence test.
While non-resident aliens lack a green card, they are eligible to participate in workplace retirement plans like 401(k) and 403(b) as long as they meet certain requirements. These requirements include:
- The employer allows plan participation by non-resident aliens
- The employee earns US-sourced income
- The employee meets plan eligibility requirements
As long as a non-resident alien meets the above requirements, and meets the age and length of service requirements, they can participate in the 401(k) plan, and receive the same benefits as a permanent US resident or US citizen.
401(k) participation rules
Employers are not required to provide 401(k) plans to their employees, but they can do so as an incentive to attract and retain good employees.
Most employers offer a 401(k) plan to all employees, including non-US citizens. However, IRS rules allow employers to exclude non-resident aliens as well as employees who don’t have an earned income within the US.
When you are hired to work in a US-based company, you will receive information about eligibility to participate in the company’s 401(k) plan. In most cases, an employee must be at least age 21 or older and have a minimum of at least one year of service with more than 1,000 hours of service.
If you meet these eligibility requirements, you can contribute pre-tax dollars to a 401(k) plan up to the annual IRS contribution limit. For 2023, you can contribute up to $22,500, or $30,000 if you are age 50 or older.
Employers may also offer a 401(k) match on employee contributions. The employer match can be a partial or full match up to a specific limit. For 2023, the total for employee and employer contributions should not exceed $66,000 per year.
What do you need to have a 401(k) as a non-US citizen?
While you are allowed to have a 401(k) plan as a non-US citizen, you will need several things to qualify to participate in a 401(k).
You must have a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) to open a retirement plan account. You can obtain an SSN from the Social Security Administration, while the ITIN is issued by the Internal Revenue Service (IRS).
Typically, employers require workers to have an SSN or ITIN when they are hired, so that their earned income, dividends, interest, and other gains can be reported correctly to the IRS.
When applying for an SSN or taxpayer ID, you will be required to show your immigration documents to prove that you are legally in the United States and that you can live and work within the US mainland and its territories.
How Your Residence Status Affects Your 401(k)
Let’s explore how your residence status impacts your 401(k) as a non-US citizen. In this case, we use examples of two individuals, Pierre from France and Diego from Mexico
Pierre, the non-resident alien
Pierre is a talented fashion designer from France, who temporarily moved to the United States on an artist visa to showcase her art during an exhibition in New York.
During her stay, she started working part-time at a local art gallery, and her employer offered her a 401(k) plan. As a non-resident alien, Pierre joined the 401(k) plan and started contributing a portion of her earnings towards her retirement. She also receives a partial match from the employer.
Diego, the resident alien
Diego is a software engineer who traveled to the United States to attend an art exhibition in New York and fell in love with the US lifestyle. He got the green card and became a permanent resident.
Diego then landed a lucrative job with a Silicon Valley tech startup as a software engineer. He was automatically enrolled into the company’s 401(k) plan and started contributing a portion of his earnings to the plan. He also receives a company 401(k) match.
Non-US Citizen: What happens to your 401k if you leave the US?
If you leave the United States and move back to your home country, you may have several options with your 401(k) plan.
Non-resident alien
If you are a non-resident alien, and you move back to your home country, you can choose to leave the 401(k) behind or transfer the retirement savings to another retirement plan. If you decide to leave the 401(k) behind, the retirement savings will continue growing tax deferred until you reach retirement age, or decide to take a distribution. You must have at least $5,000 in your 401(k) balance to be allowed to leave the money behind.
You can also choose to roll over the money to an IRA or an equivalent retirement plan in your home country that will allow you to preserve the tax benefits. If you choose to roll over to an IRA, you can request a direct rollover to an IRA, so that you won’t owe income taxes on the withdrawal.
If you are deported and you have a 401(k), you will have access to your 401(k) money but your options will be limited.
Resident alien
If you are a resident alien (non-US citizen but has a green card or has passed the substantial presence test), you are considered a US person for federal income tax purposes. As a resident alien, you can keep the 401(k) plan as is, even if you move to another employer. If you have a new employer, you can roll over your 401(k) money to the new employer’s 401(k) plan.
Non-US Citizen 401(k) Distributions
When making withdrawals from a 401(k), your residence status can affect the tax implications of the distributions.
Non-resident alien
If you are a non-resident alien, you will face certain tax implications when making 401(k) withdrawals.
If you decide to take a distribution before age 59 ½, there could be a mandatory 30% tax withholding on the withdrawal and an additional 10% early withdrawal penalty. If you are 59 ½ or older, you will only owe the 30% tax withholding, but you won’t be subject to the 10% penalty tax. However, tax treaties between your home country and the US government could provide some tax relief.
Once you make the withdrawal, the 401(k) plan provider will issue Form 1042-S to you and the IRS, showing the tax distribution and the applicable tax withholding.
Resident alien
A resident alien will be subject to different tax rules, unlike a non-resident alien. If you are younger than age 59 ½, the 401(k) withdrawal will be subject to a 20% tax withholding and an additional 10% early withdrawal penalty. If you are 59 ½ or older, you will only be subject to the 20% tax withholding. However, you will have more control over the tax withholding as a resident alien.
When you make a 401(k) withdrawal, your employer will issue Form 1099-R to you and the IRS, showing the tax distribution and applicable taxes.
How are 401(k) distributions taxed in your home country?
When you leave the US and move back to your country, you may want to cash out your 401(k) plan and take the money. If you are younger than 59 ½, the plan will withhold 30% for federal taxes, and you will owe an extra 10% early withdrawal penalty.
However, if your home country has a tax treaty with the United States, the home country won’t consider the 401(k) withdrawal as a taxable income, and hence, you won’t owe additional income taxes. You will only pay US federal and state taxes (if any) on the 401(k) withdrawal.
Conclusion
If you are a non-US citizen working in the United States, and your employer offers a 401(k) plan, you may be allowed to participate in the plan and enjoy the same rights and benefits as resident aliens. You can contribute as much as you want, up to the annual IRS limit, and still collect an employer match.
If you plan to leave the US and go back to your home country, you should understand the options you will have. You can choose to leave your 401(k) behind, roll over to an IRA, roll over to a retirement plan in your home country, or take a distribution. If you choose to take a distribution, you should determine the income taxes and penalties you will owe on the withdrawal.