How Does a 401(k) Work for Non-US Citizens?

Understanding how a 401(k) works for non-US citizens is crucial as the global workforce becomes increasingly mobile. For many international employees in the United States, participating in a 401(k) plan can be an efficient way to save for retirement while benefiting from employer contributions and tax advantages.

This article examines key aspects non-citizens should consider when enrolling in a 401(k), including eligibility requirements and financial implications related to taxes and penalties.

Enrollment Criteria

Non-US citizens must understand the enrollment requirements for a 401(k). Eligibility typically depends on employment with a US-based company offering a 401(k) plan. While US citizenship isn’t required, a valid work visa or employment authorization is necessary under US labor laws. The IRS does not impose citizenship restrictions for 401(k) participation, though employers may set conditions, such as a waiting period before enrollment. This waiting period can vary, ranging from immediate eligibility to up to one year. Part-time employees may also need to meet specific criteria, such as working a minimum number of hours annually.

Contribution Limits

Non-US citizens should be mindful of the IRS’s 401(k) contribution limits. In 2024, employees under 50 can contribute up to $23,000, while those 50 and older can make additional catch-up contributions of $7,500, for a total of $30,500. These limits apply equally to all participants. Employer contributions are separate from these limits, but the combined total of employee and employer contributions cannot exceed the lesser of 100% of the employee’s compensation or $68,000 for 2024. Residency status may affect tax treatment, as non-resident aliens could face different withholding rules.

Withholding and Reporting Rules

Navigating 401(k) withholding and reporting rules can be complex for non-US citizens. The IRS requires employers to withhold taxes on contributions, with specifics varying by residency status. Resident aliens generally follow the same pre-tax contribution rules as US citizens, reducing their taxable income. Non-resident aliens may face unique requirements, often influenced by tax treaties between the US and their home countries. Employers report 401(k) contributions on the employee’s W-2 form, which is essential for tax filing. Proper withholding rates must be applied, following guidelines in IRS Publication 515 for non-resident aliens.

Early Distribution Penalties

Withdrawing funds from a 401(k) before age 59½ incurs a 10% penalty in addition to regular income tax, reducing retirement savings. Exceptions exist for hardships, disability, or periodic payments, but these are strictly regulated and may not apply uniformly to non-citizens. For those returning to their home countries, both US tax implications and potential taxes in their home jurisdiction must be considered. Missteps can lead to unexpected tax liabilities, particularly for those unfamiliar with international tax treaties.

Residency Status Adjustments

Residency status plays a significant role in 401(k) taxation for non-US citizens. The IRS classifies individuals as resident or non-resident aliens based on the substantial presence test or green card status. Resident aliens generally receive the same tax treatment as US citizens, including pre-tax contributions and tax-deferred growth. Non-resident aliens may encounter different tax treatment depending on their visa type and whether their income is US-sourced. Distributions to non-residents often face a flat 30% withholding rate unless reduced by a tax treaty. Changes in residency status can alter tax obligations, and consulting a tax professional is critical to navigating these transitions.

Actions if You Leave the Country

Leaving the US adds complexity for non-citizens with 401(k) accounts. Options include maintaining the account, withdrawing funds, or rolling them into an IRA, each with distinct tax and administrative consequences. Keeping the account in the US allows for tax-deferred growth but requires compliance with US tax laws. Distributions taken abroad are subject to US withholding taxes, often at 30% for non-resident aliens unless a tax treaty reduces the rate. Some countries may also tax these distributions, potentially resulting in double taxation without a foreign tax credit.

Withdrawing funds provides immediate access but triggers significant tax consequences. Early withdrawals before age 59½ incur a 10% penalty and income taxes. Non-resident aliens are subject to a 30% withholding rate unless modified by a tax treaty. This option is generally less favorable unless funds are urgently needed or there is no intention to return to the US.

Rolling over a 401(k) into an IRA preserves tax-deferred status but may not always be available to non-residents, as some institutions restrict IRA accounts for those living outside the US. Non-citizens should confirm with their plan administrator and prospective IRA provider to determine if this option is feasible. This approach can be advantageous for those seeking greater control over investment options while maintaining tax benefits.