The 3 things US expats should know when it comes to 401ks

Beacon Financial Education aims to help expats organise their personal finances and educate them on retirement plans, personal lifestyle planning and wealth management.

Making the switch to live and work abroad is an exciting time in your life. To make your experience abroad smooth and successful - from a financial and personal standpoint - it’s important to plan and prepare for your trip. One vital aspect to consider is how you will handle your savings.

One front-and-center savings issue for US expats is how to handle the 401k. 401ks are some of the US’ most popular savings accounts. Many US employers offer 401ks to their employees. Here is what you need to know when it comes to 401ks and living abroad.

Know the basics

So, before we go into how to handle your 401k if you are an expat from the US, let’s do a brief reminder on how 401ks work.

A 401k allows an employee to take a certain percentage from their pay and enter it directly into their 401k retirement account. What is beneficial about the 401k, is that these earnings are tax-exempt - the funds are entered into the 401k account exempt from income taxes meaning you save more.

Additionally, some companies offer a 401k match in which the employer matches the amount of money withheld from the paycheck.

For example, if you make 2.000 USD per paycheck and you invest 5% of your paycheck into the 401k, 100 dollars will come out of your paycheck and be entered into the 401k free of tax and another 100 dollars will come from the employer (if your employer has a 401k match program). Sometimes employers vary the amount they match (i.e. 25%, 50%, etc.).

Know the taxes and fees

Now that we’ve gone over the basics, let's talk about the taxes and fees involved with a 401k. 401ks are not like savings accounts and are relatively hard to withdraw from. Withdrawals from 401ks are subject to income taxes as well as a 10% penalty if you withdraw from the account below age 59 ½.

Know your options

So, naturally, as a US citizen who has a 401k looking to move abroad, you may wonder, “what is the best option for dealing with my 401k if I move abroad?” Here are three options for dealing with your 401k if you move to another country:

Withdraw your 401k

If you move abroad and aren’t planning on having much access to the US, it might make sense to withdraw your 401k. Keep in mind, as we discussed before, 401k disbursements are subject to income tax and a 10% penalty if you are under the age of 59 ½. This option is recommended if the balance of your 401k is fairly low or if you are in absolute need of the funds in your 401k.

Leave your 401k as is

If you aren’t entirely keen on withdrawing your 401k, you can opt to leave it as is. If this is the case, there are some benefits - you still accrue tax-deferred growth! But please know, leaving your 401k inactive doesn’t necessarily mean this is the cheapest option.

401ks are subject to administration and investment solution fees, these may be taken out of your 401k if you leave it inactive and these fees can run from 0,5% up to 2% of your account. They will be taken out of your account as disbursements.

Roll your 401k over into an IRA

A middle ground between withdrawing your 401k and leaving it inactive is to roll your 401k account over into an IRA. This may make sense because IRAs offer more flexibility in investment options than 401ks. By rolling your 401k account into an IRA, you may now be able to invest in global options which could make sense given your expat status. Additionally, you may be able to invest in a currency relevant to your place of stay.

Rolling your 401k over to an IRA may be easy if you are living in the US. However, if you are out of the country, you may experience difficulties with US-based institutions like Fidelity and Schwab, as they typically work with US-based residents only. The best case may be to roll your 401k account over into an IRA prior to leaving the US.

Leaving the country? Speak with your financial advisor!

In all, 401ks are a paramount part of a US-based retirement plan. Speak with your financial advisor about the best course of action for your 401k if you decide to leave the country.

If you have any questions or want to know what your investment options are, reach out to Beacon Financial Education to set up a free financial consultation with an independent investment advisor.

Beacon Financial Education does not provide financial, tax or legal advice. None of the information on this site should be considered financial, tax or legal advice. You should consult your financial, tax or legal advisers for information concerning your own specific tax / legal situation.