Taking a US 401(k) or IRA abroad: what to check

What changes when you move, and what does not

A 401(k) opened in Ohio is still a US account after you move to Lisbon. It stays under IRS rules and the provider's own terms, and US citizens abroad generally file income tax returns the same way as people living in the US, with the filing requirement set by income from worldwide sources.

What changes is what sits around the account. The country you live in may also tax the money, and the provider may treat a foreign address differently. Reporting forms appear because you now hold other accounts abroad. [T1] [M4]

How the IRS taxes withdrawals

Ten percent is the additional tax on the taxable part of a withdrawal before age 59 and a half, unless an exception applies. For employer plans the exceptions include separation from service in or after the year you turn 55, and disability. IRAs have a separate chart, with no hardship exception. Look up the current list for your account type rather than assuming a move changes the result.

A withdrawal from a traditional IRA is added to your taxable income for the year, and you do not have to show a hardship to take one. Pension and annuity payments from employer plans are split into a taxable part and a tax-free part, and the tax-free part is your after-tax cost in the plan. Money that went in before tax is not part of that cost, so a payment is fully taxable if you have no cost. Certain Roth IRA distributions are not taxable, on conditions set out in Publication 590-B, so read those before you assume a withdrawal is tax-free.

The foreign earned income exclusion is the tool US citizens abroad often hear about first, and it is unlikely to help here. Pension and annuity payments are on the IRS list of amounts that are not foreign earned income. [M2] [M3] [M4] [T2]

Withholding and the address on file

A US citizen or resident alien who wants to opt out of withholding on a pension or retirement distribution must give the payer a US home address. Without one, the payer must withhold federal income tax. The only other route is certifying that you are not a US citizen or resident alien, and that is not open to you.

The default rate is 10% for a non-periodic payment, and 20% on an eligible rollover distribution, where you cannot opt out. Withholding may not cover the additional tax on an early distribution.

The provider has its own policy on top of the IRS rule. Some custodians restrict or close accounts held by people with a foreign address, or limit what they will do for you online or by phone. It varies from provider to provider, and no official list says who does what. Ask yours in writing, before you move, what happens to the account, online access, withholding elections and statements if your mailing address is outside the US. [M4] [M3]

What a tax treaty can and cannot do

For a US citizen, the clause that decides most outcomes is the saving clause. In the US and Portugal treaty it says the United States may tax its citizens as if the convention had not come into effect. The same treaty's pensions article says pensions from past employment are taxable only in the state where the recipient lives. The saving clause then lists the paragraphs it does not override, and that private-pension rule is not among them. The listed exception covers social security benefits and other public pensions. A US citizen living in Portugal should therefore not assume the treaty stops US tax on a 401(k) distribution.

Treaties differ. Each has its own pensions article and saving clause, so the same account can be treated differently depending on where you live. The IRS publishes the full text of many US income tax treaties with Treasury technical explanations, and its quick-reference tables are for quick reference only, so read the treaty itself. The Spain guide and Mexico guide cover those countries' local rules, and the compare pages set them side by side: Portugal and Spain, Mexico and Portugal.

If you take the position that a treaty reduces your US tax, a fully completed Form 8833 generally has to be attached to your return, and failing to report required treaty benefits carries a $1,000 penalty for each failure. Whether a destination taxes a US retirement distribution, and at what rate, is set by its own law; its tax authority or a local adviser can say. [T3] [T4] [T5]

Tax paid abroad on the same money

Say the country you live in taxes a distribution and the IRS taxes the same money. You may be able to take a credit for the foreign tax, or an itemised deduction, and the credit is the better choice in most cases. It is claimed on Form 1116.

Two limits matter for retirement income. If a tax treaty sets a reduced rate, only the reduced amount counts toward the credit, even if more was withheld. And you cannot claim a credit for tax on income you exclude. How the credit limit by income category applies to retirement distributions is covered in Publication 514 and the Form 1116 instructions, and an adviser can run your figures. [T6]

Required minimum distributions

Age 73 is when required minimum distributions generally start for traditional IRAs and employer plan accounts, with the first due for the year you reach it. You may delay that first one until 1 April of the following year, but the second is then due by 31 December of that year, so two fall into one tax year.

Missing one is expensive. The amount not withdrawn is subject to a 25% excise tax, which drops to 10% if you correct the shortfall within two years. It is reported on Form 5329 and may be waived for reasonable error. Roth IRAs have no required minimum distributions while the owner is alive, and the same goes for designated Roth accounts. Beneficiaries of Roth IRAs are subject to the rules.

Living abroad adds a practical question. Ask the provider how it will pay you: to a foreign bank account, in which currency and at what fee, or only into a US account that you would then need to keep open. [M1]

Reporting that follows you

The retirement account itself is usually off the main foreign-account reports. The Form 8938 instructions list IRAs and 401(k) accounts as examples of accounts at US financial institutions, which are not specified foreign financial assets. A foreign financial account for the FBAR is generally an account at a financial institution outside the United States, and accounts held in an IRA or retirement plan of which you are an owner, participant or beneficiary do not need to be reported.

The forms start to matter for what you open after you move. A local bank account that receives your distributions is a foreign financial account. The FBAR is required when the combined value of your foreign accounts exceeds $10,000 at any time during the calendar year. The balances are added together and tested at any moment, so a brief spike counts. It is filed electronically with FinCEN and due on 15 April, with an automatic extension to 15 October.

Form 8938 has higher lines. For taxpayers who meet the IRS definition of living abroad, the thresholds are more than $200,000 on the last day of the year or more than $300,000 at any time, or $400,000 and $600,000 on a joint return. It is attached to your income tax return and is not needed if you do not have to file one. If your balances sit near $200,000, treat the form as applying. A foreign pension plan is reported in a separate part of the Form 8938 instructions, so a local workplace scheme belongs in the conversation with your adviser. [T7] [T8] [T9] [T10]