401Ks are the U.S work-based pension and many U.S expats have accumulated a sizeable 401k or with 12.8% of the U.S workforce suggested to be from abroad many expats might have a 401K that they are constantly adding to.
I’ll explain a bit more below about 401ks for US citizens and expats and what you can do with them if you have them and are not utilising them fully.
What is a 401K?
401K is like other international pension schemes, for example, U.K Pension or an Aus Super. The 401k is a work-based remitment plan that can be paid pre-tax and is paid by both the employer and employee. The employer makes contributions or matches the employee contribution up to a set amount. Although it is made pre-tax it is actually deferred until withdrawal.
With a 401k you can withdraw without any penalties at age 59.5 only under extreme circumstances would you be able to withdraw prior to 59.5 without a 10% tax penalty. If Also, you have to start making withdrawals by April the 1st after the year of the 72 birthday.
What are my options with my 401k?
You can just leave or opt out just like other international plans such as, RRSP, U.K pension, and Australian Super and you have at least 3 investment options.
Leave it in your 401k
One option is just to leave it, some of the disadvantages to this are that most people have a number of 401Ks and can be hard to keep track of. Also, you don’t have a clear investment strategy for you personally and they are just sitting there in pension funds that don’t really perform that well. This is very similar to UK pension funds in the fact that they are heavily regulated and their performance can be minimal.
Some of the advantages are that 401ks have to adhere to the employment remitment income security act, which means that the investment objects must be clearly stated.
Roll it over to an IRA
You have the option of withdrawing a 401k into other accounts, one for expats is an IRA (traditional). In terms of age, you can withdraw and make the required minimum distribution (RMD) is 72. One of the advantages of this is that you have a wider range of investment options, this gives you much more freedom to earn more than it being locked in a 401k that you might not pay into anymore.
An IRA will allow you to tailor your investments towards your investment goals (within reason you can’t invest in non-regulated securities). An IFA can make a portfolio that is made for your situation or they can use a Vanguard life strategy.
Roll over to 401k scheme
The two kinds of rollover direct and indirect.
Indirect will incur a 20% holding charge and you will need to fund an additional 20% of the value of the 401k however, you will get the 20% when you file your taxes in the next fiscal year. Also, you must complete the transfer within 60 days and you are allowed 1 transfer every 12 months. Essentially, that 20% tax is the IRS taking money upfront in the event the employee doesn’t deposit the money into a retirement account and ensures the IRS gets paid its taxes.
A direct transfer is when a qualified participant requested a transfer. This doesn’t occur 20% upfront fee that you will need to fund. It is usually when an employer’s plan administrator transfers the money directly to the new rollover IRA.
Can I transfer to an international scheme?
You can’t rollover to another scheme directly. The only way to do this with the scheme is to withdraw your 401k (remember this will hit a tax penalty before 59.5) and then move into the international scheme.
Conclusion
If you do have a 401k and you are living outside of the U.S. it would be advisable to review your options to see how you can maximise your 401k and your pension pot.
If you want personalised advice, please email me and I can arrange a call to understand your circumstances. Please use the form at the bottom of the page.
