What Happens to My 401k If I Move Abroad?

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What Happens to My 401k If I Move Abroad

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The modern workforce is turning remote all around the world, with people opting to live overseas and still work for an American company. Or you could be one of the many people who came to the US to work, but it is now time to go back to your motherland. 

But, if you have been deported and you have a 401(k), here is a detailed guide on the options you have with 401(k)

The change that comes with moving from the US can be drastic and sometimes confusing to some extent. One of the questions you might find yourself asking is what happens to your 401(k) plan when you leave the country. 

Can you transfer your 401(k) to a foreign retirement plan or is it better to leave the money behind? Let’s find out the options you have with your 401(k) when you move abroad.

What to do with your 401(k) when moving abroad?

When deciding what to do with your 401(k) plan, there are several things that you should consider. 

The first thing you should consider is the tax and penalty implications of the option you choose. For example, certain transfers and withdrawals can take out as much as 30% of your retirement money to pay taxes.

The second factor you should consider is the country you plan to relocate to. Does the country have any existing tax treaties with the United States? If there are tax treaties, it might be a good thing, but if there are no tax treaties, you may need to reconsider your options.

Here are the main options you will have with your 401(k) plan: 

Leave your 401(k) behind

As you move abroad, you could decide to leave your 401(k) with your employer, especially if you are younger than 59 ½. This option allows your money to keep growing tax-deferred until you decide to take a distribution. If you have a Roth 401(k), you will continue enjoying tax-free growth. 

One downside of this option is that your employer might not allow you to leave your 401(k) behind if your balance is below $5,000. If your balance is below $5,000, but above $5,000, the employer will close your 401(k) and transfer the money to an IRA of its choice. If your 401(k) balance is below $1,000, the employer will force a cashout, and you will receive a check with your balance. 

Another downside of leaving your 401(k) with your employer is that investment options are limited. 401(k) plans have fewer investment options than an IRA, and you won’t be able to make investments outside the employer’s pool. 

If you choose to leave your 401(k) plan with your former employer, set up an email or address with the financial institution managing your 401(K). In that way, you will always receive notifications if anything changes with your plan. You should also check on your 401(k) periodically to ensure proper allocation of your investments.

Roll over 401(k) to IRA

If you want to keep your retirement assets in the United States but not in your former employer’s 401(k) plan, you can decide to roll over 401(k) to an IRA. If you don’t have an IRA, you can set up an account with a financial institution of your choice such as a brokerage firm.

The first upside of rolling over 401(k) to an IRA is that you have total control over investments, unlike when you leave your 401(k) with your former employer.  Additionally, if you roll over from a traditional 401(k) to a traditional IRA, you won’t pay any taxes on the transfer.

A drawback, however, is that IRAs have a lower annual contribution limit than 401(k) plans. For 2023, the contributions you make to an IRA cannot be more than $6,500 ($7,500 if you are age 50 or older). On the other hand, for the same period, you can contribute up to $22,500 to a 401(k) if you are below 50, or $30,000 if you are 50 or older. 

Another drawback depends on the type of IRA account you decide to open. If your contributions are pre-taxed, a traditional IRA account would be a better choice. A Roth account, on the other hand, is funded with after-tax contributions, and your rollover amount will be taxed at your income tax bracket rate.

Cash out 401(k)

Unlike the other two options, this one has the most downsides. The first downside is that your cash out will be considered a taxable distribution, and you will owe income taxes and potential tax penalties if you are under 59 ½. 

If you have no other option but to cash out your 401(k), it might be wise to cash it out once you have left the US. When you cash out the 401(k) when you are not earning a full-time salary, you will be in a lower tax bracket, which means you will pay less taxes. 

How is my 401k taxed if I live abroad?

If you have reached age 59 ½ or older, you can start taking penalty-free distributions from 401(k). But, you will still owe income taxes on the withdrawals. 

You could withdraw it as a lump sum distribution or a monthly pension. Both options have different tax implications before you can take your money.

Monthly distributions

Before you start taking monthly distributions, there are a few things that you should consider.

First, you should check the status of a tax treaty between your country and the US. For countries without a treaty, the brokerage holds 30% of the monthly distribution. If you come from countries like Spain, Italy, France, or Germany, tax charges are the same as in the US. You are more likely to pay taxes at home if the country requires you to declare and pay taxes on worldwide income.

Additionally, you will be required to file US tax returns even as a non-resident. The best thing to do is to consult your tax advisor to help you figure out the best strategy to use. 

Lump sum distribution

Since you are a non-resident, the brokerage will withhold 30% of your proceeds from a lumpsum withdrawal. The taxes from your 401(k) proceeds are used to pay the taxes due in the United States. 

If the actual taxes you owe are more than the amount withheld for taxes, you will be required to top up the additional taxes. But, if your taxes are less than the withheld taxes, you can file a Form 1040-NR to claim a refund since you are no longer a US tax resident. 

Depending on your home country’s tax rules, you may also be required to pay local income taxes on foreign incomes; you can declare the lumpsum as a gross income in your country, less any credits or exemptions.

You can also claim actual tax payments in the US as a tax credit in your home country if there is an existing treaty between your country and the US. You could consult a tax advisor to help you determine the taxes you can expect to owe when you make your lumpsum retirement withdrawal.

Can I rollover my 401(k) to a retirement plan in my home country?

When you are a foreigner, rolling over a 401(k) to a retirement plan in your home is not allowed due to legal and taxation reasons. Depending on your country’s laws and regulations, rollover might be impossible. Plus, rolling over a 401(k) to a foreign retirement plan might hit a legal snag.

Furthermore, the financial institution managing your 401(k) plan may have specific restrictions on a rollover. These restrictions may end up adding extra fees associated with the transfer. 

Before initiating the rollover, you need to understand the possibility of either of the two before choosing to roll over the tax. You should also be aware of the tax implications in both the US and your home country.

What to do with 401(k) when moving to Europe?

If you are moving to Europe, you have a couple of options on what to do with your 401(k)plan. 

The first option is rolling over the 401(k) to an IRA account. This option allows you to keep the investments within the same tax-deferred account. 

You could also decide to use an international retirement plan. Check if there are retirement plans that allow transfers from US retirement plans, without owing taxes, penalties, and other fees on the transaction. This can be a great option if you intend to work and stay in Europe permanently.

The last option would be to transfer funds to a European bank account. Although this is possible, it is more complicated than the other options. Additionally, the funds may be subject to different taxes and regulations.

Bottom line

Making informed financial decisions is crucial when facing choices like how to manage your 401(k) plan when relocating overseas. 

Weigh all the factors that apply to you and the country you are going to, and make sure to get an option that suits you best. Also, make sure to consult a tax specialist to make a more informed decision

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