What happens to my 401(k) when I move abroad?

Many US expats are wrongly advised when it comes to their 401(k) accounts.

We spoke to Melissa Eugenio and Paul Beard from our partners Alexander Beard to find out what 401(k) and pensions options are available to US citizens living abroad.

You can watch their video here:

Please be aware that this interview does not constitute financial advice and you should always speak to an independent financial advisor before making decisions about your pensions or any other financial matter.

What happens to my 401(k) when I move abroad?

Assuming your employment is terminated when you move abroad, you have three options for your 401(k) as a US expat:

1. You can take a plan distribution. However, since 401(k) plan monies are considered tax-qualified monies, meaning they haven't been taxed before they've been contributed to your 401(k) plan, there is a possible early withdrawal penalty as well as taxation involved in taking a plan distribution. There will be a 20% federal taxation right off the top, and at the time you file your taxes in April the following year, there is a 10% early withdrawal penalty if you’re under the age of 59 and a half. Additionally, state taxes of approximately 10% would apply.
2. Initiate a rollover into an individual retirement account (IRA). In doing this, you can maintain the tax qualified status of the funds in the 401(k) plan.
3. Leave the assets with the 401(k) plan provider. You can then draw down funds as needed in the future.

Can I close my 401(k) when I move abroad?

You can close your 401(k) when you move abroad, but this is not a popular choice for the reasons outlined above and most people will leave their money in the 401(k) plan once they leave the United States.

However, we see limitations in how 401(k) plan providers treat expat accounts as US disclosures apply to people living in the United States only. Therefore, if you have a 401(k) account and you move abroad, the investment disclosures that would be sent to you no longer meet the US regulatory requirements because you are no longer living in the US. As a result, the 401(k) providers may  limit an individual's access to their account.

This means if you are a US expat living abroad, you cannot transfer between funds, purchase new investments or initiate new transactions, but you will be to allowed withdraw monies as you need to. Therefore, it becomes very difficult to actively manage a 401(k) account if you are living abroad.

Can my 401(k) be transferred to a pension in another country?

The simple answer is no. This can't happen because of the tax-qualified status in the United States. While every country has a similar program, there's no reciprocity and you cannot transfer your US pension to anywhere else.

Why should US expats consult with an expert if they are facing any issues accessing their 401(k)?

The benefit of consulting with a specialist firm like ours is that we have decades of experience in looking after globally mobile expats. During this time, we've come across many situations where most professionals such as lawyers and accountants won’t have the necessary experience to help US expats.

While there is no reciprocity in the United States for incoming or outgoing pension transfers, this doesn't mean opportunities don't exist to provide US expats with an alternative that's tax efficient and allows their assets to be well managed.

When looking for an expert to help you, the most important thing is that you ensure whoever you deal with is fully regulated in both the countries you're dealing with and are aware of all the options available to you locally.

What are the potential pitfalls for US expats if they don’t consult with a 401(k) expert?

Expats commonly find themselves in complex situations where expert advice is essential.

For example, there was a period two or three years ago where advice was given in America to British expats which was product sales and commission driven. Ultimately, the advice turned out to be wrong because it broke the rules on taxation on pensions in respect of the tax treaties between both countries. This is the kind of thing that could happen if you don't go to an experienced, qualified expert who understands the nuances of your situation.

If we are unsure about any advice on pensions and underlying investments, it's important to understand that all elements are taken into consideration including getting advice from a specialist tax advisor. If you're dealing with a company that doesn't have this level of expertise and who are just focused on selling products, you're not going to get this level of service and potentially be hit with additional tax liabilities.

Request introduction to one of our approved partners >