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Expat financial advice from the experts

American Expats living Offshore

IRA

Are you among the many American expatriates that have left to retire abroad? What do you do with your pensions funds that you hold in America?

Quick facts

Under the age of 59 years and 6 months, you may be subject to 10% tax charge and your usual income tax charges if you in-cash your 401K. Your plan provider will typically keep 20% for the IRS. If you are 55 to 59 and 6 months you may be able to avoid the 10% tax charge if you terminated employment no earlier than the year you turned 55.

If you are no longer employed by the company then you can cash in or, rollover your 401K plan into an IRA. Upon on the transfer of your 401K, the tax can be deferred into a Roth IRA. This allows you to avoid the US tax as a rollover is not considered cashing in a 401K.

Key Features of 401k Plans

A key benefit of a 401k is the tax-deferred growth of contributions during your working years. A 401k will typically offer a defined set of investments to choose from. Additionally, an employer will often make matching contributions up to a certain level as an incentive for the employee to save towards retirement. These matching contributions will often vest over a period (time is set by each company). If you leave employment before becoming fully vested, your employer will keep part of their contributions.

After leaving employment, an individual has the option to maintain the funds in the 401k, rollover the 401k assets into a Rollover IRA account or rollover to another employer plan continuing the tax deferral until distribution.  401k plans will often allow loans to be taken out against your assets (for specific reasons) and paid back over a specified time with interest. While this is often not advisable, it does allow an individual to access restricted capital without being subject to early withdrawal penalties. Savings in a 401k are protected from all forms of creditor judgments, including bankruptcy. At death, undistributed assets will be passed onto your beneficiaries.

Key Features of Traditional IRAs

A key benefit of an IRA is the tax-deferred growth of assets during your working years. An IRA also offers access to many different investment choices. The account can run alongside an employer’s pension scheme if you want to make additional contributions. Alternatively, it can serve as a standalone for individuals who do not have employer pension options available to them. An IRA will generally provide an individual with bankruptcy protection as contributions are protected from creditors. At death, undistributed assets will be passed onto your beneficiaries.

The earliest age upon which you can take benefits is age 59.5 with Required Minimum Distributions (RMDs) beginning at age 70.5. RMDs are calculated using an annuity table published by the Internal Revenue Service (IRS) and IRA year-end account values. This is the minimum amount that must be withdrawn each calendar year.

Key Features of Roth IRAs

A key benefit of a Roth IRA is the tax-exempt growth and distribution of assets. A Roth IRA also offers access to many different investment choices. The account can run alongside an employer’s pension scheme if you want to make additional contributions or serve as a standalone alternative for individuals who do not have employer pension options available to them.  When an individual has both taxable and tax-deferred assets, a Roth IRA can provide some tax diversification given that future tax rates are unknown. Additionally, a Roth IRA will generally provide an individual with bankruptcy protection as contributions are protected from creditors.

Unless certain exceptions are met, the earliest age upon which you can take benefits is age 59.5. There are no Required Minimum Distributions (RMDs) beginning at age 70.5 as there are with Traditional IRAs.  This can make a Roth IRA an interesting tool to facilitate the transfer of assets to beneficiaries.

What to Do Next

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