401(k) Pitfalls For

Non-U.S. Residents

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 OVERVIEW

As a U.S. citizen living abroad or a foreign national working in the United States, there are
two primary account options to consider when saving for retirement: employer-sponsored
retirement plans, such as 401(k)s, and Individual Retirement Accounts (IRAs).

When relocating from the United States to another country or ending U.S. employment, there
will be new limitations and considerations for these retirement savings accounts. This paper
discusses the considerations to make when moving abroad with a U.S.-based retirement
plan.

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 TYPES OF U.S. RETIREMENT ACCOUNTS

EMPLOYER-SPONSORED RETIREMENT PLANS

There are numerous types of retirement plan structures an employer may opt to provide as
a group benefit to employees, the 401(k) being one of the most common, or solo 401(k) for
the self- employed.

Some key benefits of these plans include:

• High annual contribution limits
• Tax-deferred growth (or tax-free growth if a Roth 401(k) is an option)
• Potential added benefits:
• May reduce taxable income for the year the contribution is made
• Often include employer-matching contributions
• Loan options may be available
• Required minimum distributions (RMDs) can be delayed if still working beyond age
70.5

INDIVIDUAL RETIREMENT ACCOUNTS (IRAs)

IRAs are the second primary type of retirement account available to individuals earning U.S.
income. An individual can fund an IRA for themselves, as well as for a spouse, in addition to
any available employer-sponsored retirement plans as long as they have at least as much
earned U.S. income for the year as their contribution amount. While contribution limits are
much lower for IRAs than employer-sponsored plans, IRAs provide much greater flexibility
and a wide variety of investment options while benefitting from tax-deferred growth.

Roth 401(k)s and IRAs

Both 401(k)s and IRAs may offer a Roth option, which would be funded with after-tax dollars
instead of pre-tax. Rather than having a tax-deduction on the front-end, Roth accounts grow
tax-free as long as they are maintained for at least five years and accessed after age 59.5.
Contributing to a Roth will be subject to income limitations.

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 401(K) OPTIONS & CONSIDERATIONS
WHEN LEAVING THE U.S.
Whether an American citizen living abroad or a foreign national residing in the U.S. and
returning to a home country, there are three options to consider for 401(k) when no longer
working in the U.S.:

• “Cash out” or withdraw money.

• “Roll it over” and transfer it to an IRA.
• Leave it in the current 401(k) account.

CASH OUT
Regardless of where the recipient lives when withdrawing funds from a 401(k) that was
created while living in the U.S., they will be subject to U.S. income taxes.

Because contributions to 401(k)s are typically made with qualified, or pretax dollars, the entire
balance of a 401(k) withdrawal is considered income by the U.S. and is taxed accordingly in
the year withdrawn.

Per the IRS, the plan provider may withhold up to 30% upon distribution if the participant
does not have a U.S. address; however, a portion of this may be refunded when taxes are
filed based on actual income tax rates.

If the participant maintains any connection to a U.S. state, such as registering a car or even
keeping some bank accounts, 401(k) withdraws may also be subject to that state’s income
taxes.

In addition to income tax, participants of a U.S. retirement account will also be subject to a
10% early withdrawal penalty if accessed prior to age 59.5.

Lastly, distributions may also be subject to the taxes of the foreign country of residence at
the time the withdrawal is taken, which may result in “double taxation.” In some cases, the
taxes owed to the U.S. may be greatly reduced by the foreign tax credits and the foreign
earned income exclusion if there is a tax treaty between the country of residence and the
United States.

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 Cashing out may be a good option if:
• Age 59.5 or older and can avoid the 10% penalty.
• An American citizen abroad or foreign national who does not have a U.S. address.
Movements and transfers may be restricted without a U.S. residence.
• No longer have U.S. income. It may be advantageous to cash out at a time when U.S.
income tax brackets are reduced.

ROLL IT OVER
U.S. tax regulations do not permit transfers of a U.S. retirement account to a retirement plan
of another country. However, transfers may be allowed between a U.S. employer-sponsored
plan to a U.S. IRA without tax consequences. This is done through a “rollover” while preserving
their tax-advantaged status and deferring taxes owed. To preserve this tax status and avoid
complications, funds should be directly transferred from the 401(k) to an IRA.

In addition to providing a wide range of investment options, IRA rollovers can help streamline
the organization of financial accounts by consolidating previous employer-sponsored
retirement plans into one.

Rolling over to an IRA may be a good option if the participant:

• Wants to maintain tax-deferred growth for retirement.
• Has multiple plans from previous employers to consolidate.
• Wants more investment options than available in a 401(k). IRAs can be invested in a wide
range of asset classes and investment vehicles, compared to 401(k)s which generally
provide a small selection of mutual funds.
• Wants to increase the tax benefits of retirement savings.

If the participant has low or no U.S. income reported in the year of rolling over to an IRA,
converting to a Roth IRA may be a strategy to consider at the same time. This would make
the funds taxable in the year of the transfer (while the individual’s income tax bracket is low),
but all future growth would be free from U.S. income tax, as long as it exists for at least five
years before accessing the funds. The 10% penalty would still apply to a Roth if accessed
prior to age 59.5.

LEAVE IT ALONE
If a plan participant is only moving temporarily, leaving the account where it is may be the
best option—if the plan allows for it to stay.

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 LIMITATIONS OF MANAGING A U.S. 401(K) ABROAD

CUSTODIANS
One difficulty some non-U.S. residents may face is that their U.S.-based retirement plan
administrator may not be willing to handle their accounts once they’re no longer residing in
the United States.

The primary function of 401(k)s is to accumulate tax-advantaged retirement savings during

the time of employment under U.S. regulations and tax laws. Funds may be able to stay in
a 401(k) after ending employment or moving out of the country; however, custodians may
have varying costs and limitations of services available since that is not the primary intent
of these plans. If the account doesn’t meet plan minimums or the participant changes the
address of record to a non-U.S. address, under The Patriot Act, the custodian may even cash
out the full balance by default (making it entirely taxable).

ADVISORS
Few financial advisors outside of the U.S. have the expertise to help manage U.S.-based
retirement accounts when living abroad. Larger financial advisory firm headquartered
internationally may simply not be interested while the smaller independent advisers may
neither be interested nor knowledgeable enough to help. As a result, an increasing number
of both Americans living abroad and foreign nationals residing in the U.S. are turning to firms
that specialized in this area of investment management.

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 CHOOSING A U.S.-BASED
GLOBAL WEALTH ADVISOR

For Americans living abroad and foreign nationals residing in the U.S, there are many
advantages to working with a U.S.-headquartered financial advisory firm that caters to the
unique challenges and implications of managing 401(k)s and other US retirement accounts.

The right firm can:

• help optimize tax efficiencies
• ensure compliance with regulations
• smoothly transition administration and custodianship
• facilitate currency exchange
• provide more flexibility for funds transfer
• offer a network of equally committed and capable partners: lawyers, bankers, insurance
that also specialize in working with Americans abroad and foreign nationals

Cross Border Wealth specializes in financial planning and investment management for the
global client. From working with Americans overseas to foreign nationals, Cross Border
Wealth helps its clients navigate international wealth management considerations and
challenges to optimize wealth and minimize taxes and fees. With a focus on global strategies
for investing, retirement, estate and tax planning, Cross Border Wealth serves clients of all
nationalities in countries across the globe. For more information about Cross Border Wealth,
visit www.crossborder-wealth.com or call the New York headquarters at +1-(646) 688-5333.

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Cross Border Wealth is dedicated to
serving the unique and specific financial
planning needs of Americans abroad
and foreign nationals working in the
United States. You need a financial plan
and professional team as flexible and
dynamic as your international lifestyle.
Our partners and wealth advisors can
help you to administer your global
wealth; from managing your investments
to setting a cross-border strategy for
your current and future generations.
Whatever your needs, we will work with
you to find a solution. Contact us today
to schedule a consultation.

12 EAST 49TH STREET

16TH FLOOR
NEW YORK, NY 10017, USA

TOLL-FREE: (888) 776-7756

P: (646) 688-5333
F: (646) 688-2839
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