In the U.S you will have your 401k (or 403b or 457) that you and youremployer would have paid into, you might still be contributing to this under some circ*mstances (diplomatic orgovernment working), however, most U.S expats have stopped and you arelikely to have a frozen 401k that is sitting in the U.S.
An IndividualRetirement Account (IRA), is much like a 401k, they have the same age you can withdraw at which is 59.5, and RMD at 72. However, the one key difference is that you can take control of your investments. This is within reason, and the EIRSA still prohibits options trading or fine art, but, you can have a wider range of equities and fund options.
You can just leave or opt out just like other international plans such as, RRSP, U.K pension, and Australian Super and you have at least 3 investment options.
Leave it in your 401k
One option is just to leave it, some of the disadvantages to this are that most people have a number of 401Ks and can be hard to keep track of. Also, you don’t have a clear investment strategy for you personally and they are just sitting there in pension funds that don’t really perform that well. This is very similar to UK pension funds in the fact that they are heavily regulated and their performance can be minimal.
Some of the advantages are that 401ks have to adhere to the employment remitment income security act, which means that the investment objects must be clearly stated.
Roll it over to an IRA
You have the option of withdrawing a 401k into other accounts, one for expats is an IRA (traditional). In terms of age, you can withdraw and make the required minimum distribution (RMD) is 72. One of the advantages of this is that you have a wider range of investment options, this gives you much more freedom to earn more than it being locked in a 401k that you might not pay into anymore.
An IRA will allow you to tailor your investments towards your investment goals (within reason you can’t invest in non-regulated securities). An IFA can make a portfolio that is made for your situation or they can use a Vanguard life strategy.
Rollover to 401k scheme
The two kinds of a rollover, direct and indirect.
Indirect will incur a 20% holding charge and you will need to fund an additional 20% of the value of the 401k however, you will get the 20% when you file your taxes in the next fiscal year. Also, you must complete the transfer within 60 days and you are allowed 1 transfer every 12 months.Essentially, that 20% tax is the IRS taking money upfront in the event the employee doesn’t deposit the money into a retirement account and ensures the IRS gets paid its taxes.
A direct transfer is when a qualified participant requested a transfer. This doesn’t occur 20% upfront fee that you will need to fund. It is usually when an employer’s plan administrator transfers the money directly to the new rollover IRA.
Can I contribute to a 401k or an IRA as an expat?
401K yes, unless you are continuing to pay with your employer then, no.
IRA yes, but it works more like a Roth IRA. That being that the money you pay in is after-tax dollars. Also, unlike a Roth IRA you have a max limit of $960 a month. This is more than an IRA account that has a $6000 limit if under 50 and $7000 if over 50.
Can I contribute to any education plans as an expat?
In the U.S you would have your 529 plans or CESA that allow you to save tax-deferred. As an expat you will not be able to contribute to these if you are a non-U.S resident.
The options as an expat do not translate as such but you can invest in platforms set up as PFICS or a trust that allows you to set up education plans that can work tax efficiently.
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A Roth IRA is a retirement account that provides growth tax-free. Unlike an IRA and 401k that is tax-deferred, this offers a tax-free option with after-tax dollars. Furthermore, the withdrawals are tax-free. 2021, limits are $6000 and $7000 if you are older than 50.
Although, unlike with IRA and Roth IRA you do have minimums on whom can contribute to the accounts. For single filers, you have to earn less than $140,000 for single filers and $208,000 for married filing.
Those withdrawing from their Roth IRA that are over 59.5 and have held for longer than 5 years can withdraw without paying federal taxes.
With a Roth IRA, you can’t deduct taxes from your contributions made and unlike an IRA and 401k, you are not subject to RMDs at 72. Thus, giving you more flexibility over when and how you withdraw.
Here is the amount you can contribute for a single filer or head of household
- Under 50: $6000
- Over 50: $7000
If you are married then it is double.
A Roth IRA can be set up at any point during the year, but funds must be contributed by the due date of your return for that year.
Contributions are limited as the Modified Adjusted Gross Income increases (MAGI). Qualifying income includes, (not limited to), salaries, wages, income earned through self-employment, commissions, alimony, and deferred compensation.
Qualifying income does not include the amount covered by the Foreign Earned Income Exclusion or the Housing Exclusion. Lastly, qualifying income must not be less than the Roth IRA contribution.
When determining whether or not you meet the qualifications for IRA contribution, it is your modified adjusted gross income that is considered.
This MAGI number is your income plus the amount deducted according to the Foreign Earned Income Exclusion.
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Nothing, before FATCA was stopping you from investing offshore from a tax perspective and it did not make them at all viable.
Offshore bonds were one option but these without U.S tax are expensive products that hardly made anything even though they are sold on the basis by most salesmen as being tax efficient.
If someone mentions offshore bonds with companies like RL360, Generali, FPI, Quilter, or Utmost stay well clear. It’s all for commission.
The investment options are limited at best, to work out the fees you need a rocket scientist and the investments come with high lock-in periods and fees of 2%-3% just for the platform.
Add to this a 37% tax as PFICs. The only benefit I can think of is that it will help reduce your tax bill using your $3000 tax allowance each year for losses!
You can roll over your401k to an IRAas an expat. I have written a number of articles on the benefits of this. It is possible as an expat.
Now, you do have options to invest in U.S platforms with a U.S brokerage such as TD Ameritrade and Interactive brokers. These can be in a Roth IRA type with after-tax dollars of $960 a month and this is more than your Roth or IRA limit of $6000 to $7000 a year depending on your age above or below 50.
These accounts can give you flexibility over your investments and help plan accordingly for your retirement. As an expat you most likely won’t be contributing to a 401k outside the U.S.
If you are an American expat and you are looking for something to invest in or you would like some help with your 401k, IRA or Roth IRA please email me.
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