Can I transfer my 401(k) to an international retirement plan if I move abroad?

Thinking about transferring your 401(k) to an international retirement plan? You might want to hold that thought. When you move abroad, it makes sense to get a job, rent a home, and open a bank account in your new country. While transferring your 401(k) to an international retirement plan may seem like a good idea, it comes with consequences that may make the cost outweigh the benefits.

Before you make any moves, you should get familiar with how international retirement plans are taxed, and what options you have for your 401(k) when you no longer live in the U.S.

U.S. tax treatment of a qualified 401(k) vs. international funds

two US expats discussing transferring 401k to an international fund

The big difference between Stateside 401(k)s and international funds is the U.S. tax treatment. The U.S. offers special tax treatment on what they classify as “qualified” retirement plans. The “qualified” means it meets certain requirements in the Internal Revenue Code Section 401(a). A few examples you may be familiar with are:

  1. 401(k) plans
  2. Profit-sharing plans
  3. 403(b) plans
  4. Money purchase plans
  5. Defined benefit plans
  6. Employee stock ownership (ESOP) plans
  7. Salary Reduction Simplified Employee Pension (SARSEP)
  8. Simplified Employee Pension (SEP)
  9. Savings Incentive Match Plan for Employees (SIMPLE)

Most foreign retirement plans and foreign pensions are not considered qualified plans, and may even be classified as PFICs, or passive foreign investment companies (which triggers a whole host of other reporting requirements).

If you do choose to transfer funds from a U.S. Qualified Plan to a foreign retirement plan, it will be neither be tax free nor will it count as a qualified rollover. This means moving your 401(k) to an international fund will result in U.S. tax liability and possibly the 10% penalty for an early withdrawal.

In addition, whatever contributions you make to your international retirement plan likely won’t be tax-deductible, and you may have to pay U.S. taxes on the plan’s yearly gains.

There is some good news—the U.S. maintains tax treaties with other countries outlining special tax treatment of some pensions and retirement plans. So, if you have a foreign pension in the U.K., Canada, Germany, the Netherlands, or Belgium, you’ve got a tax treaty that basically allows your foreign pension to be taxed the same as a U.S. retirement plan.

What to do with your 401(k) when moving abroad

What should you do with your 401(k) when moving abroad? When it comes to taxes when retiring abroad, there’s never one solid answer. Each expat 401(k) transfer situation is different and what you should do depends on where you’re living, your current finances, plans for retirement, and where you are along your retirement journey.

For example, if you’ve moved abroad for good and are ready to give up your U.S. citizenship, it may be in your best interest to transfer your plan to your forever country. If you’ve got a couple decades before retirement and you know you want to remain a U.S. citizen for life, it may make much more sense (and cost you less) to just keep your U.S. 401(k).

Need help with your expat 401(k) taxes? Trust H&R Block.

If you have other retirement accounts such as a traditional IRA, Roth IRA, or a foreign pension plan, an expat tax expert from H&R Block Expat Tax Services can help you understand how these accounts might be taxed on your U.S. tax return. Additionally, they can help make recommendations for what you can do in the future to reduce your U.S. tax liability.

Have more questions about your 401(k)? Ready to file? No matter where in the world you are, we’ve got a tax solution for you. Get started with our made-for-expats online expat tax services today!