A 401(k) plan is a tax-advantaged, defined-contribution retirement account offered by many employers to their employees. Workers can make contributions to their 401(k) accounts through automatic payroll withholding, and their employers can match some or all of those contributions.
When you stop working for that company, the 401K is in many cases left dormant and not actively managed, which could disrupt your future retirement plans. If you choose to let your 401(k) remain dormant, you will no longer be able to add to this and naturally your previous employer’s contributions will cease too. In many cases, employers will permit a departing employee to keep a 401(k) account in their old plan indefinitely, although the employee can't make any further contributions to it.
Why Consider a Rollover?
Wider selection of investment choice: Your 401(k) is likely limited to a small sample of the investment options that are available. Having more options can help you to develop a better long-term strategy for your retirement savings.
Flexibility for withdrawals: Rolling your money into an IRA will enable you to manage your withdrawals and taxes you'll pay on them. In addition, IRA's could offer more flexibility in determining which assets to liquidate vs a 401(k) which typically take an equal amount out of each of your investments.
More control: If you find that a fund in your 401(k) is not performing well, you may not be able to find another investment option to switch to as easily as you can with an IRA.
Wealth transfer advantages: Upon your death, there's a good chance that your 401(k) will be paid in one lump sum to your beneficiary. An IRA generally allows you to name multiple beneficiaries - or even a trust as a beneficiary.
Fewer restrictions: Understanding your 401(k) is not easy - each company has a lot of flexibility in how they set up the plan. IRAs are standardised by the IRS.
At the end of the day, there are pros and cons to both the 401(k) and IRA models. Our process will help you determine if the IRA platform is the right option for you.
Why Consider a Rollover for an Expat/Non-US Resident?
Ability to continue/resume making contributions depending on income
- Can make additional contributions if making income in excess of the Foreign Earned Income Exclusion, or are earning income and not claiming the FEIE.
- Can take up to the max $5,500 tax deduction on contributions in this case.
Limited provider options for Non-Resident 401(k)/IRA
- Notification of a foreign address usually results in inability to make any changes to investments, complexities with regards to contributions/disbursements with most advisory firms and US 401(k)/IRA providers.
No longer able to participate in US 401(k) plan, even if working for the same company prior to leaving the US
- If with the same company, US Company will provide a local pension plan for retirement benefits, cease participation in the US 401(k).
- If working for a different company than the company/companies that provided previous 401(k), even further incentive to move to self directed investment rather than leave investment decisions to a company one is no longer employed by.
Emphasis on additional investment choice compared to a US resident
- More investment products can be held in an IRA that would be more suitable to a client’s current/near future investment objectives.
- Closer to retirement age, shift towards income/principal protection oriented products, rather than limited (often 3-5) risk rated fund options from 401(k) provider.
At Renascence USA we know that making a decision on what to do with your 401(K) can be confusing, which is why our team of experienced Advisors as well as our wider network are here to help you.
What are my options with my 401(k)?