A lot of Americans who move abroad or non-U.S. personnel who have worked in the U.S. and then move abroad may have a 401k in the US and left it behind. Most people would have a 401K account, even if they don’t think they do. Some companies advise closing these accounts.
Although this can result in a tax penalty it is imperative to take advice before your accounts are closed as you have options where you can keep your 401k and actually be advantageous for you in certain situations.
Please be aware that investing can and does involve risk and you can get back less than what you invested. If you have any questions throughout the article, please email info@investmentsforexpats.com
Why are Companies Closing the 401k pensions of American Expats?
Many large name investment companies have been asking clients to close their accounts once they have left the U.S. meaning that the pension scheme will be closed and the money is sent to the holder.
If the money is sent to the holder, this can cause issues depending on the situation. From experience, some close accounts when they’ve been notified by employee or employer.
What is the impact?
Closure of the account, is considered a withdrawal from the scheme. With a 401k account, if you are under 59.5 years old an inital tax penalty of 10% tax is due on the amount as you are not entitled to take income (unless under extreme circumstances) before this date.
The second issue of closure and withdrawal from the account is classified as withdrawal. The IRS will then treat this as a lump sum as income and tax it accordingly.
Meaning that U.S. expats are likely to face foreign withholding tax which could be in the region of 30% although, this could vary depending on individual circumstances.
Potentially any US citizen who no longer lives in the U.S who has previously paid into a 401k/IRA account and no longer has a US bank account could be affected, regardless of the size of the pension scheme itself.
What to do?
- Talk to the provider to see if you can keep the account open. It will be likely that you can with 401K while IRAs will be subject to the provider.
- See what options you have as I have written in a number of my blogs about transferring your 401k into IRA at Investments for Expats and we are able to aid with this. It could help you minimise your tax potentially and take control of your investment risk.
If you have lived and worked in the U.S. and are unsure about your options for your 401K please feel free to ask me some questions on info@investmentsforexpats.com
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