401(k)s for International Professionals – How are they Taxed?
Cross Border 401(k) Series – Part 2 of 3: How are they Taxed for International Professionals?
Join us for an informative video on the unique characteristcs of a U.S. 401(k) for international professionals. In this second video of a three-part series, Andrew Fisher, president of Worldview Wealth Advisors, will explain the unique tax ramifications of leaving a 401(k) behind in the U.S., and eventuality withdrawing money in retirement.
Key areas discussed include:
• What are the U.S. tax return requirements for your 401(k)?
• If you leave behind your 401(k), will it still grow tax-deferred?
• How are you taxed when you start drawing money from your 401(k) account?
Hello and welcome to Worldview’s Cross-Border Wealth series. My name is Andrew Fisher, president of Worldview Wealth Advisors. Today we’re going to begin the second part of our three-part series on how 401(k)s work for international families here in the US.
In this episode we’re going to discuss how 401(k)s are taxed once you’ve left the US and eventually when you start drawing from you 401(k). The agenda for today, first we’re going to discuss do you have to file a tax return to the US if you leave a 401(k) behind, next does a 401(k) left in the US still grow tax deferred, and finally how are you taxed when you eventually start to draw from your 401(k).
Let’s get going, so the US taxes citizens and legal residents on their worldwide income and assets, no matter where in the world you live, so as long as you maintain US residency you’re going to still have to file a tax return to the US. If you give up that US resident status, essentially becoming a non-resident alien living abroad, you do not have to file a tax return back with the IRS even though you may have a 401(k) or IRA sitting here in the US.
Now, do 401(k)s continue to grow tax-deferred after you’ve left the US? Absolutely. As we’ve said before 401(k) or IRA is really one of the best investments that a global citizen can have. Once it’s rolled into an IRA from a 401(k) it really becomes a terrific and flexible investment account in which you can build a global investment program.
Now as we said, most international countries honor the tax deferral properties of a 401(k) even after you’ve left the US. So what they allow you to do is really take advantage of the low-cost and transparent system here in the US with which to build your global investment program from, still taking advantage as well of tax deferred properties. Really what you end up with is a terrific globally portable account that works no matter where in the world you live.
As an example we have a long-time client who is a PhD and ship scientist with Intel, formally was with Intel. He’s now retired back to the Netherlands, where he’s from, with a very large IRA account, or a 401(k) which was rolled into an IRA. And within that account we built a globally oriented investment program that he occasionally taps, to draw on, and we will withdraw those funds, convert them the euro’s, and send them over to him. It works extremely well for him.
So next, how are you taxed when you eventually start to draw from a 401(k)? Well most countries have a tax treaty with the US that governs who has the right to tax income from different sources. They generally follow a similar template and in general the country in which you reside typically has the right to tax pension distributions like withdrawals from a 401(k).
Now there are certain short-term situations where if you moved away from the US, gave up US residency, became a non-resident alien and withdrew finds out if your 401(k) that the US would still tax those funds for the first couple years. But if you’re a non-resident alien you still do not have to file a tax return with the US. There’s a process with essentially a fixed or flat withholding tax, usually about 30%, that’s drawn as you withdraw out of the IRA or 401(k). So there is still no tax reporting required back to the US.
So the neat thing about timing the withdrawals from a 401(k) is international people can get a little bit creative about where they reside when they start drawing from there for 401(k). Often they can choose a very low-tax country to live in when they start their draws. This is one little strategy that cross-border families can employ.
For the best use of a 401(k) or IRA is to let it continue to grow and not withdraw from it, but let it grow on a tax-deferred away for many, many years, really taking advantage of the tax-deferred compound in every term. Now when it is time to start drawing we do recommend that you get professional help because it can get pretty complicated, depending on where in the world you are residing at that time.
Hopefully this is helpful! On part three of our three-part series on 401(k)s we’re going to discuss how and where to invest an old 401(k) balance.
Thank you very much! For additional questions or to contact one of our advisors please email us or call us at 503.620.3600.