What Happens to Your 401k If You Renounce Your Citizenship?

If you are an American living abroad who is considering renouncing your US citizenship, you likely have many questions. One of the most common questions we are asked relates to what happens to US investments, specifically 401Ks, when you hand over your passport. We’ll explain if there are any negative consequences when renouncing your citizenship when you have a sizable 401k in the US.


Will renouncing U.S. citizenship have a negative impact on my 401K investment?

Anything to do with renouncing citizenship can get pretty complicated. So, let’s go this step-by-step. Part of the answer to this will depend on where you’re going to be a citizen. If you’re going to be a resident or citizen of a country that has a tax treaty, you should look at that specific tax treaty to see how the foreign 401K investment would be treated locally. Generally speaking, the tax treaty will say that you’ll be taxed either in your resident country or in the United States. You have to look back and forth to see which one you’re going to be taxed in.

Does your 401K savings qualify you as a covered expat?

The next thing you need to know is that on the expatriation form–the 8854–you must check box 7A, which is ‘do you have any eligible deferred compensation items’. A 401K would fall under this category. If you do have this, and if you have a sizable 401K plan, you may be considered a covered expat. To be a covered expat, you must meet one of the following requirements:

  • Your net tax liability is over $168,000 for the past 5 years
  • You have a net worth exceeding 2 million dollars
  • You failed to meet your filing requirements for the 5 preceding tax years

If you’re a covered expat, you’ll be treated differently when you renounce your citizenship. For one thing, you’ll be required to pay the exit tax. Based on this, covered expats will pay a 30% tax on retirement income when distributions are made.

The bottom line for 401K plans when renouncing citizenship

If you’re considering renouncing your U.S. citizenship, the main concern is to check whether or not it’s going to cause you to be considered a covered expat. If you do qualify, this is where you’re going to get hit with taxes. You also have to look at how your 401K will be treated locally to see if you’re going to be taxed in the U.S. as well as in your host country.

Our expert accountants are here to help!

If you would like a consultation with one of our expat experts to discuss your personal tax situation, simply contact us!