Leaving the United States: A Practical Guide to 401(k)s

Understanding Your Tax Status After Leaving the United States

The first consideration when relocating is determining your U.S. tax status.

1. U.S. Citizens

U.S. citizens remain subject to U.S. taxation on worldwide income even after leaving the country.

They continue to file:

• annual U.S. tax returns,
• foreign account reporting (if applicable),
• FBAR/FATCA (depending on thresholds).

Citizenship, not residency, drives taxation.

2. Green Card Holders

Green-card holders remain U.S. tax residents unless they:

• voluntarily surrender their green card, or
• are treated as non-residents under a treaty tie-breaker (which may affect immigration status), or
• meet specific criteria under expatriation rules.

3. Visa Holders / Former Residents

Once a foreign national leaves the U.S. and does not meet the Substantial Presence Test, they generally become non-resident aliens (NRAs) for U.S. tax purposes.

NRAs are typically taxed only on:

• U.S.-source income,
• effectively connected income (ECI),
• U.S. investment income (with withholding),
• U.S.-situs assets for estate tax purposes.

4. Part-Year Residency

The year of departure may require:

• dual-status tax filings,
• split-year treatment,
• careful documentation of residency periods.

What Happens to Your 401(k) When You Leave the U.S.?

Your 401(k) remains a U.S. retirement account governed by U.S. rules, regardless of where you live.

Moving abroad does not:

• close your 401(k),
• force liquidation,
• trigger penalties,
• change tax deferral,
• restrict investment growth under U.S. law.

However, there are practical considerations.

1. You Can Keep Your 401(k) After Leaving the U.S.

Most individuals retain their 401(k) after moving abroad.

2. You Cannot Contribute to a Former Employer’s 401(k)

Contributions end when employment ends.

This applies globally.

3. Some Providers Restrict Foreign Residency

Although a 401(k) stays intact, some record keepers may:

• limit online access,
• restrict account changes,
• require a U.S. address,
• request U.S. phone-based verification.

These are provider policies, not IRS rules.

4. Rollover Options May Still Apply

Individuals may evaluate whether:

• keeping the 401(k) is appropriate,
• transferring to a new employer 401(k) is possible,
• rolling into a Traditional IRA is suitable,
• Roth conversions may be evaluated depending on circumstances.

Conflict Disclosure:
‍Skybound Wealth USA may receive advisory fees when assets are managed under advisory programs.

Individuals should evaluate all available options, including leaving assets in existing plans.

What Happens to Your IRA When You Leave the U.S.?

IRAs are U.S. retirement accounts governed by U.S. tax law.

You may keep:

• Traditional IRAs
• Roth IRAs
• SEP IRAs
• SIMPLE IRAs

after leaving the United States.

1. You Can Maintain IRAs Abroad

Foreign residency does not eliminate your ability to hold an IRA.

2. Custodian Access Rules Vary

Some custodians:

• allow full servicing abroad,
• allow servicing only in certain countries,
• require a U.S. mailing address,
• limit certain account actions.

This varies widely.

3. Contribution Rules Depend on U.S.-Taxable Earned Income

To contribute to an IRA while abroad:

• you must have U.S.-taxable earned income,
• FEIE-excluded income may not count as eligible compensation,
• MAGI limits apply for Roth contributions.

4. Roth IRA Rules Remain Under U.S. Law

Qualified withdrawals remain U.S.-tax-free.

Local tax treatment depends on the country of residence.

U.S. Brokerage Accounts and Investments After Leaving the U.S.

Foreign residency can affect servicing of U.S. brokerage accounts.

Some institutions:

• allow continued investing,
• restrict new purchases,
• allow only liquidations,
• require accounts to move to “restricted status”,
• require updates to address forms.

Restrictions vary by:

• platform,
• country of residence,
• internal policies,
• licensing requirements.

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What Happens to U.S. Mutual Funds and ETFs When Living Abroad?

Some foreign regulators (e.g., EU) restrict certain U.S. products for residents of their jurisdictions.

U.S. Taxation After Leaving the United States

U.S. citizens:

Taxed on worldwide income regardless of residence.

Green-card holders:

Taxed until they formally cease residency or meet treaty / expatriation rules.

Non-residents:

Taxed only on:

• U.S.-source income
• effectively connected income (ECI)
• U.S. investment income (withholding)
• U.S.-situs assets (estate tax)

Understanding classification is essential.

Common Income Types After Leaving the U.S.

1. U.S. Dividends

NRAs typically pay:

• 30% withholding,
• unless reduced by treaty.

2. Capital Gains From U.S. Stocks

NRAs generally do not pay U.S. capital gains tax unless:

• gains relate to U.S. real property (FIRPTA),
• trading constitutes a U.S. trade or business.

3. U.S. Rental Income

Options include:

• flat withholding
• tax return to elect net taxation

4. Pension and Retirement Income

4.1 Default IRS treatment (no treaty applied)

Federal tax

• 401(k) distributions are U.S.-source income
• Taxed as U.S. fixed or determinable annual or periodical (FDAP) income
• Subject to 30% federal withholding at source

This applies to:

• Lump-sum withdrawals
• Periodic distributions
• Required Minimum Distributions (RMDs)

The payer (plan administrator or custodian) withholds the tax automatically.

4.2 Early withdrawal penalty (before age 59½)

• The 10% early withdrawal penalty generally does NOT apply to NRAs
• Why: the penalty applies only to individuals subject to U.S. income tax under IRC §72(t), and NRAs are typically excluded

This is one of the most misunderstood points — many custodians incorrectly assume the penalty applies.

4.3 State tax

• Depends on the state where the 401(k) is administered
• Some states withhold tax; others don’t
• Many NRAs can reclaim state tax if no longer resident

This is separate from IRS rules.

4.4 Tax treaty impact (very important)

Many U.S. tax treaties reduce or eliminate the 30% withholding.
Common treaty outcomes:

• 15% withholding (very common)
• 0% withholding (less common, but exists)
• Taxation only in country of residence (rare but powerful)

Examples:

• UK–U.S. treaty: pension income generally taxable only in the UK
• Canada–U.S. treaty: pensions taxable in Canada, with reduced U.S. withholding
• Australia–U.S. treaty: shared taxing rights, usually reduced rate

To claim treaty benefits:

• NRA must file Form W-8BEN with the plan administrator
• Treaty article must explicitly cover pensions / retirement income

4.5 Filing requirements

Even with withholding:

• The NRA may need to file Form 1040-NR to:
• Reclaim excess withholding
• Apply treaty benefits retroactively
• Recover state tax

5. Social Security

5.1 Default IRS rule for NRAs

For an NRA, U.S. Social Security benefits are treated as U.S.-source FDAP income.

Federal tax treatment

• 30% federal withholding
• Applied to 85% of the Social Security benefit
• Effective tax rate = 25.5% of the gross benefit

This withholding is usually done automatically by the SSA.

This is very different from the progressive formula used for U.S. persons.

5.2 Tax treaties (often eliminate U.S. tax)

Many U.S. tax treaties override the default rule and allocate taxing rights solely to the country of residence.

Examples:

• UK–U.S. treaty
  1. Social Security taxable only in the UK
  2. 0% U.S. withholding
     

• Canada–U.S. treaty
  1. Taxable in Canada, with partial U.S. taxation eliminated

• Germany / France / Netherlands / most of Europe
  1. Typically taxable only in residence country

• Australia–U.S. treaty
  1. Generally taxable only in Australia

Treaty wording matters — not all treaties treat Social Security the same way.

5.3 How treaty benefits are claimed

• File Form W-8BEN with the SSA
• Cite the pensions / social security article of the treaty
• If over-withheld:
• File Form 1040-NR to reclaim U.S. tax

5.4 State tax

• No U.S. state tax applies to Social Security for NRAs
• Social Security is federally administered

5.5 Filing requirements

• If only Social Security is received and correct treaty withholding applies, a return may not be required
• If tax is withheld or treaty is misapplied → 1040-NR required

Foreign Pensions and Savings After Leaving the U.S.

Foreign pensions are governed by:

• home-country rules,
• local tax systems,
• U.S. rules if you remain a citizen or green-card holder.

Considerations include:

PFIC Rules for Global Investors Returning Home

If an individual becomes a non-resident alien:

• PFIC rules no longer apply going forward (but may apply while resident in the U.S.).

If the individual remains a U.S. taxpayer:

• PFIC rules may continue to apply to foreign pooled funds.

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Leaving the U.S. and Selling Property or Businesses

Foreign nationals and former residents may still:

• own real estate in the U.S.
• hold U.S. businesses
• maintain partnership interests

FIRPTA rules apply to U.S. real property dispositions.

Income tax rules vary based on residency and presence of a U.S. trade or business.

U.S. Estate Tax After Leaving the United States

Estate tax rules depend on:

• domicile
• U.S.-situs assets
• treaty relief
• asset type
• entity structure

Key points:

• U.S. estate tax applies to U.S.-situs assets for NRAs
• the filing threshold is generally $60,000
• citizens and green-card holders have separate lifetime exemption rules

Residency and nationality determine exposure.

Double Taxation Considerations After Moving Abroad

Double taxation may arise when:

• the new country taxes foreign pension income
• the U.S. taxes worldwide income (for citizens or green-card holders)
• treaty rules are not applied
• foreign tax credits cannot offset U.S. tax

Individuals often review:

• treaty provisions
• local country tax structure
• potential FTC eligibility
• timing of residency changes

This is highly jurisdiction-specific.

Foreign Bank Accounts Once You Leave the U.S.

U.S. citizens and green-card holders must still report:

• FBAR (FinCEN 114)
• FATCA Form 8938
• foreign income earned in those accounts

Non-residents (NRAs) do not file FBAR/FATCA unless they retain U.S. tax residency.

Illustrative Examples

These examples do not represent actual clients or outcomes.

Example 1 - U.S. Citizen Retiring Abroad

Profile:

• moves to a treaty country
• keeps 401(k), IRA, U.S. investments

General considerations (high-level):

• worldwide income remains taxable
• treaty may influence treatment
• local tax rules apply

Example 2 - Foreign National Returning Home After Work Assignment

Profile:

• becomes NRA after leaving
• keeps 401(k) and U.S. investments

General considerations:

• U.S. taxes U.S.-source income
• withholding applies to dividends
• capital gains generally not taxed in the US for NRAs.

Example 3 - Former Green-Card Holder

Profile:

• returned home
• still holds green card

General considerations:

• may remain U.S. tax resident
• expatriation rules may apply
• planning depends on residency status

Example 4 - Globally Mobile Household

Profile:

• plans to live in multiple countries over 15–20 years

General considerations:

• tax treatment varies by country
• retirement account consistency matters
• multi-currency planning relevant

Practical Checklist Before Leaving the United States

How Skybound Wealth USA Supports Individuals Leaving the U.S.

Skybound Wealth USA assists individuals with:

• navigating cross-border retirement considerations,
• understanding how U.S. retirement accounts behave abroad,
• PFIC-aware investment planning,
• coordinating with tax professionals,
• long-term multi-currency planning via MoneyMap,
• aligning global assets with future residency,
• evaluating U.S.-situs asset considerations as non-residents.

Conflict Disclosure:
‍Skybound Wealth USA may receive advisory fees when assets are managed under advisory programs.

Individuals should evaluate all available options before making decisions.

Next Steps

If you are planning to leave the United States and would like to understand how your retirement accounts, investments, and tax status may interact with your new country of residence, you may schedule a discussion with Skybound Wealth USA.