What Will Happen to a 401k for a Non-Resident? Options and Risks Explained

This article will outline the risks associated with maintaining a 401(k) plan as a US expat and explore alternative options that may enable greater flexibility and potential tax implications and options. It will particularly focus on rolling over your 401(k) to an IRA, where appropriate, detailing the steps involved in the rollover process.

What Are the Implications for Your 401(k) Upon Becoming a US Non-Resident?

Your 401(k) account generally remains intact even after you relocate abroad and become a non-US resident (non-resident alien). While it’s possible to maintain the account while residing in another country, doing so may expose you to several risks, including:

1. Account freezes or service restrictions
2. Policy changes
3. Inability to contribute to the plan from abroad
4. Fluctuating exchange rates

Account Freezes or Closures

Certain US plan administrators and recordkeepers may be unwilling to service accounts with a non-US address or may only offer limited functionality. In some cases, your 401(k) may face restricted trading, reduced investment choices, or limited online access.

Additionally, some administrators may choose to close your 401(k) account or request that you roll it over to another eligible US retirement account if you no longer reside in the United States.

It is important to note that no US law requires 401(k) accounts to be frozen or closed when the account holder becomes a non-resident; these measures arise from individual provider or plan policies, not federal regulation.

Policy Changes

While your 401(k) administrator may currently permit non-resident account holders, these policies can change at any time. If your provider later restricts service to non-U.S. residents, you may need to act quickly to transfer or withdraw your funds—potentially triggering U.S. tax withholding or other cross-border tax consequences.

The same applies to current U.S. tax and pension regulations, which allow non-resident aliens to maintain their 401(k)s and define how distributions are taxed. Future legislative or regulatory changes could alter these rules, potentially affecting your ability to access or manage your savings from abroad.

Given this uncertainty, it is advisable to take proactive steps to confirm your provider’s non-resident policies and to consider long-term options that can help manage withholding taxes and maintain investment access.

Inability To Contribute to the Plan From Abroad

Non-residents are generally unable to continue contributing toward their 401(k) plan from abroad once they leave employment with the sponsoring US employer.

Contributions are only possible if you remain an eligible employee of the plan sponsor, such as during a temporary overseas assignment on US payroll.

The inability to contribute toward your plan as a non-resident limits the growth potential of your retirement savings and reduces opportunities to capitalise on diverse investment opportunities.

Fluctuating Exchange Rates

Traditional 401(k) plans are typically denominated in US dollars. If your living expenses are incurred in a currency other than the US dollar, you become exposed to exchange-rate movements that can either increase or reduce the value of your savings when converted to your local currency.

This exposure arises from fluctuating exchange rates, which may impact the value of your 401(k) assets when converted into your local currency. Specifically, if the currency of your country of residence appreciates against the US dollar, the real value of your retirement savings will decrease.

Can You Withdraw Your Entire 401k Account Balance?

You may withdraw the full balance of your 401(k) account; however, doing so is generally not advisable unless you require immediate access to funds.

Complete withdrawals typically trigger US income tax on the full taxable amount, which can significantly reduce the take-home amount you receive. Additionally, by liquidating your entire account, you forfeit the opportunity to generate income from investment growth.

If you are under the age of 59½, you may also be liable for a 10% early withdrawal penalty on the entire withdrawn amount, in addition to the regular US income tax that applies regardless of your age and residency.

For non-residents, 401(k) distributions are considered US-source income and are generally subject to 30% withholding tax, unless reduced or eliminated under an applicable income tax treaty and supported by the correct IRS form.

Depending on your country of residence and whether a double tax treaty exists between that country and the US, you may also be liable for income tax on the same retirement income in your local jurisdiction. If both countries tax the same income, the treaty (if one exists) will determine which country has primary taxing rights.

Can You Roll Over Your 401k to a Retirement Plan in Another Country?

Rolling over a 401(k) plan into a retirement scheme in another country is not permitted under US tax law. 401(k) plans are sponsored by US employers and governed by specific rules set forth by the Internal Revenue Code and the IRS.

Although you may withdraw the full balance of your 401(k) account and transfer the withdrawn funds to similar plans in Europe or other jurisdictions, such a transfer is treated as a taxable distribution in the US and would typically trigger US income tax and, where applicable, early withdrawal penalties.

It may also create additional local tax liabilities in your country of residence, potentially eroding the value of your accumulated retirement savings.

What Are the Two Primary Alternatives to Maintaining a 401k as a Non-Resident?

To avoid the risks of maintaining your 401(k) from abroad, you may opt for two alternative approaches:

1. Drawing down your funds
2. Rolling over your 401(k) into an IRA

Drawing Down Your Funds

While withdrawing all funds from your 401(k) account exposes you to significant tax charges and isn’t advisable, pursuing other drawdown options may help you optimise tax liability and ensure financial stability while residing abroad.

There are two key drawdown options to consider:

Roll Over Your 401(k) to an IRA

As 401(k) plans are US employer-sponsored retirement accounts, individuals who relocate abroad can no longer contribute to them and potentially accelerate the growth of their retirement savings.

For this reason, non-residents often choose to roll over their 401(k) into an individual retirement account (IRA). A rollover to an IRA is generally permitted tax-free if made directly to a traditional IRA.

However, opening or maintaining an IRA from abroad can be restricted by some US custodians, and rollovers to non-US accounts are not allowed under US law.

Why Is a 401k Rollover to an IRA a Favoured Option by US Non-Residents?

Rolling over your 401(k) plan to an IRA offers numerous advantages to US expats and non-residents, as outlined in the table below:

What Are the Options for Rolling Over a 401k to an IRA as a Non-Resident?

The type of 401(k) you hold determines the available IRA rollover options. There are three potential pathways, each with distinct rules and tax implications:

1. Rolling over a traditional 401(k) to a traditional IRA
2. Rolling over a Roth 401(k) to a Roth IRA
3. Rolling over a traditional 401(k) to a Roth IRA

Rolling Over a Traditional 401k to a Traditional IRA

Both traditional 401(k) and traditional IRA are funded with pre-tax income, allowing you to claim tax deductions on contributions in the year they are made. For this reason, the transfer of funds between these two types of accounts is generally tax-free if performed as a direct rollover.

Rolling over a traditional 401(k) to a traditional IRA allows you to retain the tax-deferred status of your retirement savings and thus postpone paying income taxes until you start withdrawing from your account.

If you decide to roll over to a traditional IRA, you will still be obligated to take required minimum distributions (RMDs) once you turn 73 (or age 75 if you were born in 1960 or later). If you don’t take RMDs, you will be exposed to a penalty of 25% of the amount you should have withdrawn. You can reduce the penalty to 10% if you withdraw the appropriate amount within two years and file Form 5329.

You can receive distributions from your IRA account once you turn 59½ without being subject to early withdrawal fees. If you need to withdraw before that age, you will be liable for a 10% penalty in addition to regular income tax.

As a non-resident, distributions from a traditional IRA will generally be subject to 30% US withholding tax unless reduced by an applicable income tax treaty and supported by Form W-8BEN.

Rolling Over a Roth 401k to a Roth IRA

Roth 401(k) and Roth IRA are both funded with after-tax contributions, so rolling over your funds from one account to the other generally does not trigger additional US tax.. By transferring to a Roth IRA, your funds will continue to grow tax-free, and you can receive tax-free distributions of your contributions at any age without penalties (since you’ve already paid tax on them).

You may also withdraw the earnings component of your balance without tax consequences, provided you meet the following conditions:

1. At least five years have passed since you created your Roth IRA and started contributing to it
2. You’re at least 59½ years of age

If you fail to meet these conditions, you will be liable for income tax on your earnings and an early withdrawal penalty on the appropriate portion of your balance (unless you qualify for exceptions).

Since 2024, Roth 401(k) accounts are no longer subject to lifetime Required Minimum Distributions (RMDs), so rolling over solely to avoid RMDs is no longer necessary. The RMD rule also doesn’t apply to Roth IRAs, giving you complete control over the frequency and amount of withdrawals.

Rolling Over a Traditional 401(k) to a Roth IRA

As traditional 401(k) plans are funded with pre-tax contributions and Roth IRAs with after-tax contributions, this type of rollover requires paying income tax on the full amount transferred at the time of the rollover—a process known as a Roth conversion.

Once you complete the conversion, you will be able to make tax-free withdrawals, provided they meet the criteria for qualified distributions.

For non-residents, US tax on the conversion is still due at the time of rollover, and the converted amount is treated as US-source income that cannot be offset by treaty.

Direct and Indirect 401k to IRA Rollovers

Regardless of the type of transferring and receiving accounts, you may choose between two rollover methods:

1. Direct rollover
2. Indirect rollover

Direct Rollover

A direct rollover involves transferring funds from your 401(k) to an IRA without an intermediary account. The administrator of your 401(k) plan either transfers the funds electronically or issues a check payable to the new IRA custodian for your benefit (FBO). The transaction is not taxable if performed correctly, unless you are rolling over a traditional 401(k) to a Roth IRA (a taxable Roth conversion).

Indirect Rollover

In an indirect rollover, your 401(k) administrator issues the funds directly to you, and you are responsible for depositing the full amount into your new IRA within 60 days of receipt.

Your plan administrator is required to withhold 20% of the eligible rollover distribution for federal income tax purposes. To avoid additional taxation, you need to deposit the full amount of your 401(k) balance—including the withheld portion—into your IRA. If you execute the rollover properly, you will be able to reclaim the withheld 20% when filing your annual tax return.

Failure to complete the rollover within 60 days will cause the entire amount to be treated as a taxable distribution to you. If you’re under 59½ years of age, you will also be liable for the 10% early withdrawal penalty unless an exception applies.

Why Immediate Action on Your 401k Matters as a Non-Resident

Relocating abroad involves numerous challenges, from arranging the move itself to getting accustomed to a new environment. In the midst of these demands, managing your 401(k) may not seem urgent, and leaving it intact might appear to be the most convenient solution.

However, delaying action and failing to confirm whether your plan administrator supports non-resident accounts may have serious consequences.

For instance, if your administrator has restrictions on servicing non-resident accounts, they may limit transactions or request that you transfer or roll over your 401(k) to another provider on short notice. While your account is subject to restrictions, you may have limited access to make changes or withdrawals, which could affect your financial stability in your new country of residence, especially as you approach retirement.

Taking timely action to review your 401(k) arrangements can help you avoid such issues and ensure your retirement savings remain secure and accessible. Obtaining written confirmation of your plan’s non-resident servicing policy and seeking qualified cross-border financial or tax advice can help you identify the option that best aligns with your long-term plans.