Can I Withdraw My 401(k) If I Leave the US?

Moving outside the United States adds complexity to managing a 401(k) plan. These employer-sponsored retirement accounts have specific rules for accessing funds, which become more intricate with an international move. This article guides you through the considerations and procedures for managing your 401(k) when relocating internationally.

Understanding Your 401(k) Access

Accessing 401(k) funds depends on qualifying events. Reaching age 59½ allows penalty-free withdrawals, subject to ordinary income tax. Distributions before this age are “early” and incur additional financial implications.

Separation from service also allows 401(k) access. If an individual separates from service during or after the calendar year they turn age 55, they may take distributions from that employer’s 401(k) plan without the 10% early withdrawal penalty. This “Rule of 55” applies only to the plan of the employer from whom the individual just separated.

Some plans permit “in-service” withdrawals while employed, usually after age 59½ or in specific circumstances. Hardship withdrawals are possible for immediate financial needs, like medical expenses or to prevent eviction. These withdrawals are subject to the 10% early withdrawal penalty unless an exception applies.

Taxation of 401(k) Withdrawals

Traditional 401(k) withdrawals are taxed as ordinary income in the year received, regardless of age. For individuals under age 59½, a 10% federal early withdrawal penalty applies to the taxable amount, discouraging early access to retirement savings.

Several exceptions exist to the 10% early withdrawal penalty, though income taxes still apply. One exception is for distributions after separation from service if the participant reached age 55 or older in that calendar year. This “Rule of 55” offers flexibility; for some public safety workers, the age threshold is 50.

Other penalty exceptions include distributions due to total and permanent disability. Payments made as part of a series of substantially equal periodic payments (SEPP), or 72(t) payments, also avoid the penalty if they continue for a specific duration based on life expectancy (at least five years or until age 59½, whichever is longer).

Penalty exceptions also apply to distributions for:
Unreimbursed medical expenses exceeding a certain adjusted gross income percentage.
Withdrawals made under a Qualified Domestic Relations Order (QDRO) to an alternate payee.
Certain higher education expenses.
Up to $10,000 for a first-time home purchase (more common with IRAs).

The Secure 2.0 Act introduced more penalty exceptions:
Up to $5,000 for qualified birth or adoption distributions.
Distributions for domestic abuse victims (limited to $10,000 or 50% of account value).
Up to $1,000 for certain financial emergencies.
Up to $22,000 for federally declared disaster areas.
While these exceptions waive the penalty, distributed amounts are still subject to federal and potentially state income tax.

Alternatives to Immediate Withdrawal

When leaving employment before retirement, alternatives to immediate 401(k) withdrawal exist. Rolling funds into an Individual Retirement Account (IRA) is common. This allows savings to grow tax-deferred, avoiding immediate taxation and penalties. IRAs often offer broader investment choices than 401(k) plans, providing greater flexibility.

Directly rolling over 401(k) funds to an IRA is not a taxable event if IRS guidelines are followed. This direct rollover maintains the funds’ tax-advantaged status. Individuals can choose a traditional IRA (pre-tax) or a Roth IRA (pay taxes now for tax-free withdrawals in retirement).

Another alternative is leaving funds in the former employer’s 401(k) plan, often permitted if the balance exceeds $5,000. This allows funds to continue benefiting from the plan’s investments and administration. However, it might limit future access if the plan restricts in-service distributions or if consolidation is preferred.

Leaving funds in a previous employer’s plan can be suitable if it offers strong performance, low fees, or unique investments. However, managing multiple 401(k) accounts can be cumbersome. Consolidating funds into a single IRA or a new employer’s 401(k) simplifies financial management and provides a clearer overview of total retirement savings.

International Tax Considerations for Distributions

When a non-resident alien receives a 401(k) distribution from a U.S. plan, specific international tax rules apply. U.S. source income for non-resident aliens is subject to a 30% federal income tax withholding rate, unless reduced by a tax treaty. This withholding applies to the gross distribution, including contributions and earnings.

To claim a reduced withholding rate or exemption under a tax treaty, the non-resident alien must submit Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), to the plan administrator before distribution. This form certifies foreign status and claims treaty benefits; without it, the 30% rate applies.

Tax treaties are agreements between the U.S. and other countries to prevent double taxation and reduce tax rates. Pension distribution provisions vary by treaty; some exempt U.S. source distributions entirely, while others reduce the withholding rate, depending on the treaty country.

Non-residents claiming treaty benefits or filing a U.S. tax return for a refund may need an Individual Taxpayer Identification Number (ITIN). An ITIN is an IRS tax processing number for individuals needing a U.S. taxpayer ID but ineligible for a Social Security number. Applying for an ITIN can take weeks or months, so start early.

The 401(k) Distribution Process

Initiating a 401(k) distribution begins by contacting the former employer’s human resources department or the plan administrator. Confirm the current administrator, as it may have changed. They provide necessary forms and guidance.

The plan administrator provides a distribution request form to specify the desired distribution type (lump sum, partial, or rollover). Tax withholding election forms are also necessary. Non-resident aliens must include Form W-8BEN to claim tax treaty benefits, completing it with accurate foreign address and tax ID details.

Once completed, submit all required forms to the plan administrator, often with supporting documentation like a passport copy or proof of foreign residency. The administrator reviews the request for completeness and compliance. Processing times vary from a few days to several weeks, depending on complexity.

Upon approval, funds can be disbursed by direct deposit or physical check. If a direct rollover is not elected, mandatory federal income tax withholding applies, even if the individual plans a 60-day rollover. The plan administrator issues Form 1099-R by January 31 of the following year, detailing the distribution and taxes withheld.