Moving Your Retirement Account Overseas: What to Know

When an American moves to a foreign country, prudent financial planning should not be left behind in the United States.  One aspect of prudent financial planning is retirement planning.

This article discusses how American expats should handle their retirement accounts.

Retirement Planning for Expats

Retirement planning involves implementing financial strategies to be comfortable and secure during retirement.  By making proper investment and saving decisions when you are younger, including minimizing your taxes, you can maximize your available financial resources when you are no longer working.

Two common vehicles that are part of retirement planning in the United States are:

• 401(k) – Sponsored by your employer, a 401(k) enables you to put aside a certain amount of your wages for your retirement in a tax-preferred manner; and
• Individual retirement account (IRA) – With an IRA, you use earned funds to save for your retirement in a tax-preferred manner.

US expats must consider their specific issues with their retirement planning.

Can You Move Retirement Accounts Overseas?

When you move to a foreign country, you may be inclined to want to move everything with you, including your retirement accounts.  However, it is not easy to move your retirement accounts overseas.

Difficulty Finding Equivalent Foreign Retirement Account

One problem is finding an equivalent retirement account in your new foreign country.  With the exception of specific specially structured corporate pension plans (which are not available to most American expats), there generally is no such thing as a “non-US” 401(k) or IRA.

No Tax-Free “Rollover” to Foreign Retirement Account

A second problem is the withdrawal of funds from your US retirement account and transfer of such funds to a “non-US” retirement account will be a taxable event in the United States.  While US tax law allows certain tax-free “rollover” transfers between US retirement accounts, such tax treatment does not apply to transfers to “non-US” retirement accounts.  In addition, if you transfer your retirement account before the age of 59-1/2, you may be subject to a 10% penalty, as well as tax liability.    

What Happens To Your 401(k) When You Move Abroad?

The good news is that it’s not as complicated as it might seem. Your 401(k) and IRA accounts are portable—meaning that taking them with you if you leave the country for good is perfectly legal.

If you currently have a traditional 401(k), it will stay with your employer. If you want to transfer it into another type of retirement account—a Roth IRA or something else—you can do that anytime after leaving the company.

If you have a Roth IRA or other type of investment account at an investment firm or brokerage house, then these accounts are also portable—they’ll follow you wherever in the world you go!

Given that there are still some common problems expats face in moving their retirement accounts overseas, many US expats decide to leave their 401(k) in the United States. Some possible situations are mentioned below:

US Retirement Plan Administrators May Be Unwilling to Work with American Expats

First, some US retirement plan administrators are unwilling to work with a person who no longer lives in the United States.  In some cases, they may freeze the 401(k) (in terms of not accepting new contributions to the 401(k)), and in other cases, they may even close the 401(k).  Thus, you must retain a US retirement plan administrator who can work with US expats.

Currency Risk

Second, the 401(k) is likely held in the currency of the United States (the dollar), but the American expat ultimately will spend the funds in the 401(k) account in the different currency of the foreign country of residence.  This creates currency risk if the US dollar declines in purchasing power relative to the currency of the applicable foreign country, resulting in effect in a decline in the valuation of the 401(k).  

Foreign Taxation of Funds in 401(k) Account

Third, while the 401(k) account is subject to favorable tax treatment in the United States, such may not be the case in the foreign country of residence.  Thus, it is possible that the US expat is subject to taxation on the funds in the 401(k) account in the foreign country.   

Can Expats Contribute To A 401(k)?

In order to contribute to a 401(k), you need to have taxable earned income for United States tax purposes.  This can create unique issues for an American expat.

On the one hand, if the US expat is a US citizen, the American expat is subject to taxation on worldwide income.  Thus, it would seem that as a US citizen, an American expat with earned income should be able to contribute to a 401(k).

The issue, however, is more complex.  As described below, one technique to avoid double taxation of income for a US expat is to rely on the foreign earned income exclusion.  The foreign-earned income exclusion allows you to exclude certain income earned outside of the US from US taxation.  However, any taxable earned income that is excluded from US taxation because of the foreign earned income exclusion cannot be relied on to support a contribution to a 401(k).  Any taxable earned income of an American expat above the foreign earned income exclusion amount (in 2022, above $112,000) can support a contribution to a 401(k).

IRAs for US Expats

IRAs for US expats are subject to many of the same issues as 401(k)s, including:

• Some US retirement plan administrators are unwilling to handle an IRA for a person who no longer lives in the United States;
• There is a currency risk that the US dollar may decline in purchasing power relative to the currency of the applicable foreign country, resulting in effect in decline in the valuation of the IRA;
• it is possible that funds in the IRA are subject to taxation in the foreign country; and  
• You need taxable earned income that is not subject to the foreign earned income exclusion to support a contribution to an IRA.  

Other Considerations for Expat Retirement Accounts

A key concern for American expats with retirement accounts is double taxation – the risk of retirement account income being taxed in both the United States (as described above, based on the expat being a US citizen) and a foreign country (based on the expat residing in or deriving “foreign-source” income from such foreign country).  Taxes are bad enough in one country; you certainly do not want to pay taxes on the same income in two countries, if possible.

Fortunately, the US tax system offers the American expat three possible provisions to reduce this risk of double taxation:

1. Tax Treaties.  The US has agreed to tax treaties with many foreign countries.  These tax treaties can determine whether the US or the applicable foreign country (and most importantly, not both jurisdictions) can tax the retirement account income.
2. Foreign Earned Income Exclusion.  As described above, the foreign-earned income exclusion allows you to exclude certain income earned outside of the US from US taxation.  If applicable, the foreign-earned income exclusion can subject retirement account income to a single level of taxation in the foreign country and not in the United States.
3. Foreign Tax Credit.  The foreign tax credit affords a dollar-for-dollar credit against US tax liabilities for certain taxes you paid to a foreign government.  With the foreign tax credit, you can address the double taxation problem by, in effect, “netting” the foreign tax liability against US tax liabilities.       

Expat Retirement Accounts Don’t Have to Be Complicated

At Greenback Expat Tax Services, we specialize in helping expats manage their US tax obligations.  As part of this work, we have years of experience in helping expats with expat retirement planning.