If you are a foreign worker in the U.S., planning to return home, or a U.S. citizen planning to move abroad, you may be wondering what happens to your 401(k) account when you leave the country. In this scenario, you have several different options from which to choose.
Leave Your 401(k) In The U.S.
When you leave your 401(k) in the U.S., you retain the benefits of compounding your retirement funds. Depending on your age when you leave the country, you could miss out on decades worth of growth if you cash out your 401(k) and take the funds with you. In addition, you face a 10% early withdrawal penalty if you are under the age of 59 ½, plus income taxes on a substantial lump sum payment.
There may also be tax advantages to leaving your 401(k) in the U.S., depending on where you are moving. Tax laws can vary from country to country. Other countries may or may not respect the tax benefits of U.S. based 401(k)s and IRAs. If you decide to leave your 401(k) in the U.S., you can go one of two possible ways.
Keep Your 401(k) In Your Employer’s Plan
Unless there is a specific plan provision for it, your employer’s 401(k) plan cannot expel you as long as you are a plan participant. In many cases, you can keep your 401(k) account with the plan provider even after you leave the company and the country. Our knowledgeable agent can review your plan documents to help you determine your specific plan rules. If you decide to leave your 401(k) account where it is, you will want to check in periodically to ensure your investments are being properly allocated according to your individual needs.
Roll It Over Into An IRA
Another option is to roll your 401(k) funds into a traditional Individual Retirement Account (IRA). This will give you personal control of how the funds are invested. IRA funds are tax-deferred, the same as 401(k) funds, but an IRA may offer a broader range of investment choices. The drawback is the annual contribution limit. As stated by the IRS, the IRA contribution limit in 2020 for individuals under the age of 50 is $6,000. If you are 50 or older, the limit is $7,000.
Cash Out Your 401(k)
If you choose not to leave your 401(k) in the U.S. as a long-term investment, you may face tax complications and have administrative issues to deal with. However, you are allowed to withdraw your 401(k) funds when you leave the country. The funds you withdraw will be considered taxable income, and if you are under the age of 59 1/2, you will also pay a 10% early withdrawal penalty.
It may be wise to want until the following year after you leave the U.S. or later to cash out your 401(k) account. In this case, your U.S. taxable income will only amount to what you withdraw from your 401(k), which could put you in a lower tax bracket than when you were earning a full-time salary in the U.S.