If you’re an expat, chances are you’ve toyed with the idea of moving your retirement account overseas with you.
But how do you do it, and what does it mean for your taxes and reporting requirements?
The financial implication of moving your US retirement account overseas will depend on, among other things, the type of retirement account you hold and your age.
But regardless of the differences between account types, here’s what you need to know about retirement accounts for expats.
3 options for expats to manage retirement plans
As a US expat, you generally have three options available for managing your US retirement accounts:
- Rolling over/directly transferring your US-based retirement funds to a retirement account in your country of residence,
- Withdrawing funds from your US-based retirement account and then depositing the money in a retirement account in your country of residence, or
- Maintaining your US-based retirement account and managing it from your new home.
Let’s have a look at these in more detail so you can determine which makes sense for you.
Option 1: 🔂 Rolling over your US-based retirement funds to one in your country of residence
At first glance, this looks like the best option since it seems direct and quick. And maybe it’s also familiar because you’ve had experience rolling over your 401(k) balance from one employer’s account to another’s.
☠️ But beware. This option is fraught with challenges that, unfortunately, make this option nearly impossible.
It’s no surprise that the IRS doesn’t treat foreign retirement accounts like their US counterparts. This is because foreign pension/retirement schemes do not meet the legal requirements of a qualified pension plan.
This makes rolling over your 401(k) or IRA to a foreign retirement account impossible for the average expat.
And what’s worse, your foreign retirement account may be recognized as a passive foreign investment company (PFIC) — which creates a host of additional tax filing requirements.
Read more: PFICs and US Tax for Expats
Option 2: 💸 Withdrawing from your US-based retirement account and depositing it in a foreign plan
Since directly transferring your US-based pension plan to one in your country of residence is impossible, another option is to cash out your US account, take the money, and deposit it in a pension plan in your country of residence.
🛑 But wait. While this looks like a decent option, it’s gonna cost you. Cha-ching.
If you withdraw from your retirement plan before age 59 ½, you’ll generally be stuck with the following tax bills:
- – You’ll generally pay a 10% penalty on your early withdrawal.
- – You’ll pay income tax immediately, instead of when you access your funds in retirement.
Taking your entire retirement funds out in one swoop could place you in a higher tax bracket than you usually would be in. For example, if you liquidate your $500,000 401(k) balance, you’ll be in the highest tax bracket – currently at 35%.
Beyond the US tax implications of a withdrawal, you’ll need to consider how the country you live in abroad will tax the US retirement plan withdrawal. For example, if you withdraw an amount from a US-based retirement plan and live in Canada, you must include the amount you’ve withdrawn as part of your taxable income in Canada. So this means you may be taxed in Canada and the US.
Of course, there are exemptions to the 10% penalty on early withdrawals.
Read more: Exceptions to tax on early distributions
In the end, unless you’re above 59 ½, withdrawing from a US-based retirement savings account may come with significant financial drawbacks that are ultimately worth avoiding.
Option 3: Maintaining your US-based retirement account
Lastly, expats can maintain the status quo with their retirement accounts and leave them be. You’ve heard the old saying, “Let sleeping dogs lie.” In this case, the sleeping dog is your US retirement account.
This is a reasonable option unless pressed with a serious emergency and you don’t have other savings.
The main advantage is that you can avoid paying early withdrawal penalties and accelerating your income tax bill on your tax-deferred investments.
And once you hit retirement age, you’ll be thankful you waited.
However, even this option is not fail-safe. Consequently, you may want to consider the following drawbacks.
- – You may lose access to your US-based retirement plan or other conveniences. Some US-based retirement plan managers put administrative hurdles on plan participants who have left the United States. Some may even insist that you close your account.
- – You may lose the value of your US-based savings if the Dollar depreciates. If you’ve moved to France, for instance, and the US dollar value depreciates relative to the Euro, your savings will take a hit.
- – You may lose investment diversity. Since most US-based retirement accounts limit investment options outside the US, you may not be adequately diversified if you don’t plan to return to the US.
- – You may pay additional taxes in your new home country. Your US tax-deferred retirement account may not have the same tax benefits in your new home country, and you may pay more local taxes.
What do I do next?
If you’re an expat with US-based retirement accounts:
- 🧾 Review all of your US retirement accounts, noting:
- Account type, and
- 📲 Call us to speak with an expert CPA experienced with expatriate tax matters to discuss the tax implications of moving your retirement overseas. We’ll work with you to find the ideal solution!