U.S expats normally have some sort of retirement account(s) whether that be IRA or 401k. The questions of many U.S. expats are, what can I do with these accounts now that I have moved abroad? You can rollover your 401k as a US expat and many do this to save themselves tax, I will explain more below..
As a U.S. expat the chances are you have some sort of U.S.-based retirement account, whether that’s a 401k or IRA. But what happens if you live abroad and want to make a 401k withdrawal overseas or an IRA withdrawal overseas?
The tax on 401K and IRAs when abroad?
If you live overseas, the U.S. still imposes taxes on the retirement accounts, the taxes are the same as if you were in the states. Both 401k and IRA accounts are tax-deferred, thus meaning you will pay taxes on the withdrawals that are taxed on income.
Although, Roth IRAs are paid with after-tax dollars, as if you have had the account for 5 years you can withdraw tax-free even if you are living abroad.
In regards to the early withdrawals, they are still the same as in the U.S., if you make withdrawals before 59.5, on 401k and IRA and penalities will occur regardless of where you are living.
The penalities are one of two options the IRS holding withholding incomes taxes on an early 401k withdrawal. This is based on your income tax level.
Second, you might be penalized 10% on the account. These are subject to exceptions, such as hardship and medical difficulties. This is dependant on your situation and if deemed feasible.
Regular IRA and 401k withdrawals for expats
When you have reached 59.5 years old you can take withdrawals with no penalties. These however are still taxed as income when you are living abroad. The taxes are treated as unearned income thus not able to claim as Foreign earned income exclusion.
To see how it is impacted on the country where you are living look at the DTA (Double Taxation Agreement) with the country where you are presently residing. This could lower or even fully eliminate foreign taxes on an expat IRA or 401K withdrawal.
Transferring a 401k to Roth IRA can be a smart option, that can give your more flexibility over investments, tax, beneficiary options. I have done a number of separate blogs on this option.
If you want to look at your options in regards to your 401k when abroad feel free to get in touch and email me at info@investmentsforexpats.com
