Expert Guidance to Transfer Your 401(k) into an IRA with Confidence
For US expats, rolling over an old 401(k) into an IRA can provide greater control, broader investment choice, and more flexible long-term retirement planning.
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Open the GuideWhat Pension Options do US Expats Have?
Unlike UK expats, US expats don’t have the option to transfer their pensions overseas without the implication of a considerable tax charge. However, there are still very attractive onshore options, such as rolling over your 401(k) to an IRA.
Do You Have a 401(k) With an Old Employer?
A 401(k) is a US retirement savings vehicle that allows employees to pay a portion of each paycheck directly into a long-term investment. These become dormant when you leave your previous employer, with the option of leaving it where it is or rolling it over to another plan.
A 401(k) plan often offers no investment advice and limited investment options unless you work for a company with a very high-quality plan, such as a Fortune 500 firm.
Some companies strongly encourage participants to invest heavily in the company’s stock. Others may be funded with a variable annuity contract that provides an added layer of protection for the assets in the plan, which can cost up to 3% per annum.
Once you have left the United States, you can roll over your 401(k) to an IRA.
Rollover to an IRA
You can rollover multiple 401(k)s into an IRA. IRAs are usually much cheaper, with some charging 0% per annum for holding funds in the account and instead charging a small trading fee per trade.
This can be an excellent option for long-term investors, as trading volumes tend to be low, meaning more profit goes back into the investor’s pocket rather than the pension provider.
IRAs also offer a broader range of investment options such as ETFs, mutual funds, stocks and shares, and bonds.
They also provide the option to appoint an investment adviser, provided the adviser is regulated in the US and your country of residence.
Cash-out your 401(k)
If you withdraw the money from your 401(k) plan, your cash distribution will be subject to state and federal taxes, as well as taxes in your country of residency if you live outside of the US.
The taxable portion of your withdrawal is eligible for rollover into an IRA and is subject to 20% mandatory federal income tax withholding unless it is directly rolled over to an IRA.
If you are younger than 59½, the taxable portion of your withdrawal may also be subject to a 10% early withdrawal penalty unless you qualify for an exception.
Be sure you understand the tax consequences and your plan’s distribution rules before you initiate a distribution.
The main issue US expats face is finding a firm that is both regulated in the US and their country of residence, with the expertise to advise in this space. SJB can fill that void and offer investment and pension advice to US-connected individuals.
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