• Alexander Beard Group

Is your 401(k) or Individual Retirement Account (IRA) at risk if you don't live in the USA anymore?


As working from anywhere becomes more and more acceptable globally, it is understandable that many US citizens are opting for working or living abroad. In 2015 alone, there were an estimated 181,000 US citizens living just in the UK. Fast forward six years, with a pandemic expediting the working nomad lifestyle globally and foreign workers leaving the US, you could potentially triple that number.


Many large US financial institutions and pension providers reviewed the complexities of servicing US clients living abroad with bespoke solutions and ultimately decided to cut ties with international accounts. Many banks followed suit, with some prompting their US clients to close their accounts once it became clear that they will be leaving or have already left the USA.


These requests are a result of US financial institutions and pension providers, for compliance purposes, preferring their clients to have a US address and/or a US bank account to receive any withdrawals the client may request. However, some 401(k) providers may allow existing participants to keep their accounts in their former employer’s plan and so it is always worth checking with your US 401(k) provider first.


Conversely, an increasing number of IRA providers do not want to continue servicing US clients abroad and could request that you transfer/rollover to another provider or in some cases, close your IRA with them. This, of course, can cause a lot of difficulty for anybody that has spent many years building up a US pension and has now moved abroad, since a US pension cannot be transferred abroad.


In addition, Foreign Account Tax Compliance Act (FATCA) compliance regulations, imposed on non-US financial institutions with US clients has resulted in many non-US financial institutions refusing to assist US Expats. Subsequently, the IRS is focusing more on offshore tax enforcement than ever before, placing more restrictions on non-US residents. These restrictions vary between institutions, ranging from very high account minimums, bans on mutual US funds, or even closure of accounts.


If you have been requested to close your account, it is best to speak to a specialist cross-border financial adviser who can help make the best of this complex situation.


Closing your pension account could have significant ramifications since the lump sum you will receive would be perceived as a total pension withdrawal and so the IRS will treat it and tax it as income for that US tax year. Citizens living abroad and who are not considered tax residents in the US may be required to pay “foreign withholding tax” on any funds, which could be around the 30% mark, depending on the individual’s circumstances.


Apart from the income tax, if you are under the age of 59.5, closing your account could also result in a tax penalty for early pension withdrawal, which is only allowed under certain restricted circumstances until retirement age. This penalty could be an additional 10% reduction in your fund. Clearly, with a possible 40% reduction in total of your US pension fund, this could have an enormous impact on your retirement plans. Reinvesting these funds would be the logical solution to securing your retirement, but with so many companies unable or unwilling to assist US Expats, many are left in the lurch. Finding a wealth management expert willing to take on non-US residents (ex-US residents) is an essential step in planning your retirement. A US tax specialist with knowledge of the tax system of the destination country would be ideal. Find an expert here.


The potential closures of accounts will affect US citizens and foreign workers alike. The size of the pension plan or company is irrelevant. If you worked and paid into an IRA or 401(k) plan but no longer have a US bank account or live in the US, you could be affected.


As a result, many individuals who work sporadically in various jurisdictions have sought advice from lawyers and accountants. Unfortunately, the advice offered cannot, in practice, be implemented at large institutions since they do not cater to such complex financial situations.


For the most part, these companies do not offer bespoke solutions to expats or foreign workers who have left the US. With options dwindling, it is best to speak to a specialist cross-border financial adviser firm who are well versed in the complexities of FATCA and other global taxing regulations - click here.


Many asset-wealthy individuals may want to opt for self-investing these funds; however, chances are they are hard-pressed for the time needed that it would take to do so and maintain the needed attention in managing a growing portfolio. And you would still have the pitfalls of taxes to mitigate. Overall, this increases risk and is not an ideal situation.


What would be the best way to approach this problem?


The first suggestion would be to speak to your current 401(k) or IRA provider and request them to keep your account open. There may be a low probability that they would be willing to do so, but you may be able to negotiate an extension to allow more time to find a solution that works for your situation. If you can find an institution that is willing to provide a US pension for non-US residents, you might be able to transfer/rollover your current funds to that account without paying any penalties.


A financial adviser firm specialized in US matters, who have access to institutions that are still willing to work with non-US residents, could either transfer your retirement funds or help to mitigate the tax burdens for their clients. Ultimately, the goal is to keep your retirement income as high as possible.


Alexander Beard Group’s financial advisers can assist you in this process and offer a free consult to assess how they can help. To request a free consult email info@abg.net, or visit the website here for more information on all the services offered domestically and internationally. If you would prefer an adviser to contact you, complete the contact form on the website here. One of our experienced advisers will contact you as soon as possible.


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