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401K: Should American expats no longer living in the US close their 401k and/or IRA accounts?

Options for American's living or planning to live abroad who have been told their 401k or IRA accounts need to be shut down.

Written by E4E Editor on 16 July 2021

If you are an American living abroad, or previously lived in the US and had a 401k or an IRA account, some companies are instructing their clients to close their accounts.

However, if you do not want to close your US pension (it can result in a significant US tax hit) it’s imperative that you take independent advice before your accounts are closed to establish where there are alternatives options available that mean you can keep your 401k open.

Why are companies closing the 401k pensions of American expats?

For some time, many US 401k and IRA account providers (including Wells Fargo, Fidelity, Raymond James among others) are ‘politely’ asking their account owners to close their account once they announce that they are either leaving or have already left the USA.

This ultimately means that the pension scheme is closed and the money is sent automatically to the holder.

What is the impact for US expats?

As the closure of the account are considered a withdrawal from the pension schemes, there are potentially two major issues with companies prematurely closing an American expats 401k.

Firstly, if the holder is under 59.5 years old, there may be an initial tax penalty which could be in the region of 10% of the amount because they are not entitled to withdraw an income from their US pension before that date.

Potentially far more significant, though, is that as the closure of the account and receipt of the money is classed as a pension withdrawal, the IRS will treat the lumps sum as income and tax it accordingly.

For US expats, this means that they are likely to face the significant  “foreign withholding tax” which could be in the region of 30% - however as US tax is a complicated matter, this amount may be different depending on the individual’s circumstances.

If you would like advice or assistance with US tax matters, we can introduce you to a US tax specialist who will be able to help you.

Who is impacted?

Potentially any US citizen who no longer lives in the USA who has previously paid into a 401k/IRA account and no longer has a US bank account could be affected, regardless of the size of the pension scheme itself.

Potential options and actions

While most 401k providers may close the account, the first step is to speak to the provider directly to establish whether they will keep the account open. Unfortunately, most IRA account providers will not provide such an option – however it’s still worth speak to the provider first.

It might also be possible to transfer the funds out of the 401k or IRA account and move them into an IRA account that does not require the holder to live in the US. However, these are rare but we would be able to introduce you to one of our independent financial advisor partners, licensed to operate in the US, who have access to suitable IRA accounts.

In all cases, the partner would review your situation and, if suitable, provide recommendations based on your current and future-plans to minimise your potential tax burden and look to maximise your retirement income.

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The cost of living crisis is gripping people around the world, and among the most affected are expats who are exposed to significant currency exchange fluctuations, rising interest rates and unprecedented inflation.

We are conducting an anonymous Expat Cost of Living Survey and are seeking the views and experiences of expats around the world, especially those with connections to the UK. It takes no more than 3 minutes to complete.

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