US Tax Implications for Americans Abroad with US Retirement Accounts
IJ Zemelman May-05-2015
If you were working in the United States before you moved to a foreign country, then you have most likely contributed to an American retirement account such as a 401(k) or IRA. If you are interested in managing your retirement account from abroad, you have three options from which to choose.
If you were maintaining a US retirement account and recently moved abroad to live and work in a foreign country as a US expat, you are probably wondering what should be done with your American retirement account. The ideal situation will not only meet your financial planning needs, but also prevent you from shelling out unnecessary money in tax liability. In pursuit of these goals, you have three options. They are:
- Transfer your savings to a different retirement account,
- Withdraw your savings, or
- Leave your money in your account undisturbed.
Now, let’s discuss each of these options.
1) It’s possible to transfer your savings to a foreign retirement account. The problem with this option, however, is that you will be facing some additional taxation.
Generally speaking, you won’t be able to transfer your US retirement account savings to a foreign retirement account. There may be special circumstances available with an individualized corporate pension plan, but the most likely scenario is that you will be facing tax consequences as a result of the transfer.
Keep in mind that American-based retirement accounts offer a great deal of investor protection. There is insurance with these plans which helps to protect loss in financial institution failure. You may not be offered this protection when investing in foreign financial institutions.
2) Withdrawing your savings from your retirement account also leaves you open for tax liability and potential penalties for early withdraw.
You have the option of withdrawing your savings from your retirement account. Luckily, the United States’ IRAs make it easy for an individual to access money. If you have a 401(k) account, you can roll your savings into an IRA in order to withdraw the entire amount.
If your contributions into your US retirement account(s) were out of your gross income and made on a tax deferred basis, you will owe taxes when you withdraw funds. If contributions were made with after-tax income, you will not owe any taxes on distributions. It’s important to remember that you may be subject to a penalty in the amount of 10% of your distribution for early withdrawal if you are under the age of 59½.
3) You may be able to keep your account open and save your money for retirement if the financial institution at which your account is held is willing to allow you to manage your retirement account from your host country.
You may be interested in leaving your invested money in your US retirement account and saving it for your retirement or an unforeseen emergency. The problem you may be facing, however, is that your plan administrator may not be willing to work with you after you have moved out of the United States. Some US-based plan administrators will insist that you close your account. Others may allow you to leave it as it is while refusing to allow you to manage your funds. If this is the case, your account will be frozen. If you are still living in the United States and are planning to move abroad, you are encouraged to find a brokerage firm in which asset management is allowed from overseas.
Another potential issue of leaving your invested funds in your US retirement account is the loss you may incur from currency exchange rates. Your retirement account has most likely been funded in USD. When you access your investment and spend the money in your host country, you may be spending more in foreign currency and wind up with less than you otherwise would have.
Take the time to review the tax treaty if one exists in your host country. You may be able to enjoy the same tax deferral from your country of residence, but you may be subject to taxes on your retirement account contributions.
Whether you decided to invest in a foreign country’s pension plan or you’ve decided to keep your US retirement account, it will be important to know how the United States will be taxing your own or foreign employer contributions to the foreign retirement plan..
Some countries have active treaties with the United States which allow for tax deferral from all angles. Most countries, however, either do not have no such treaty or have a treaty but have no clause for tax deferral.
I.J. Zemelman, EA is the founder of Taxes for Expats