What happens to your 401(k) if you leave the US

Start with what is actually yours

Your own contributions to a 401(k) — the money deducted from your salary — are always 100% yours. Employer contributions, including the match, may vest on a schedule set by the plan: some vest immediately, some fully after a fixed number of years, some in steps. Whatever has not vested on your last day is forfeited when you leave. Before you decide anything else, get a statement showing your vested balance and check whether your planned departure date sits just short of a vesting date. A few weeks can be worth a year of match.

The four options

Once you leave your employer you can do one of four things with the vested balance, and your visa status has no bearing on which:

• Leave it in the plan. Nothing changes except that contributions stop.
• Roll it to an IRA. The money moves to an account you control and stays tax-deferred.
• Cash it out. The plan pays you, less withholding, and you owe tax on the taxable portion.
• A combination. For example, roll most of it over and take a smaller distribution in a low-income year.

You can also roll into a new employer’s plan, but for someone leaving the US that usually means a plan in another country, which US plans do not transfer into. So in practice the choice is between the four above.

Leaving it in the plan, or rolling it to an IRA

Leaving it is the simplest option and keeps every tax advantage. The downsides are practical: you are limited to the plan’s investment menu, you must keep the plan informed of your address for the rest of the account’s life, and some plan administrators handle foreign addresses badly. Plans can also force out small balances. If your vested balance is below the plan’s small-balance threshold, the plan can pay it out or roll it into an IRA of its choosing without waiting for your consent, so ask what the threshold is before you assume the account will sit quietly.

Rolling to an IRA keeps the money invested and tax-deferred, gives you a wider choice of investments, lets you combine several old plans into one account, and puts you in charge of the paperwork rather than a former employer’s HR department. Ask for a direct rollover: the plan pays the IRA custodian, no tax is withheld and nothing is taxable. If instead the plan pays you and you deposit the money yourself, the plan must withhold 20%, and you have 60 days to put the full pre-withholding amount into the IRA — making up the withheld 20% from your own pocket — or the shortfall is treated as a taxable distribution.

The caveat that matters most for visa holders: some IRA custodians will not open, or will restrict, accounts for people who do not live in the US. Open the IRA and get the custodian’s non-resident policy in writing while you still have a US address, then request the rollover before you leave.

Cashing out

A cash-out is a distribution paid to you. The taxable portion — all of a pre-tax 401(k) — is added to your ordinary income for the year. If you are under 59½ there is generally a 10% additional tax on top; the main exception is leaving your job in or after the year you turn 55. And the plan must withhold 20% federal tax from an eligible rollover distribution paid to you while you are a US resident, even if you tell them you plan to roll it over later.

How a distribution is taxed once you are a nonresident alien

If you take the money after you have left and become a nonresident alien for tax purposes, a different withholding regime applies. Once the plan has your nonresident status on file, it generally withholds a flat 30% on the US-source portion of the distribution instead of the domestic 20%, unless you provide Form W-8BEN claiming a lower rate under a tax treaty. Many treaties reduce or exempt periodic pension payments, but a number of them carve out lump-sum payments, so read the pension article of your treaty rather than assuming. The 10% additional tax still applies if you are under 59½.

The withholding is still a prepayment. You file Form 1040-NR for that year to report the distribution and settle up, and the plan sends you a Form 1042-S showing what it paid and withheld. How the distribution is characterised on that return matters: money earned for work you did in the US can be reported as income connected with that work and taxed at the graduated rates, while some payers and preparers treat it as flat-rate income at 30%. In a year with little other US income, the final tax under the graduated rates can be lower than the amount withheld, and the difference comes back as a refund. This is one of the places a cross-border preparer earns their fee.

Timing, and state tax on the way out

Because the tax is progressive and the withholding is a flat estimate, the year you take a distribution changes the cost more than almost anything else. Cashing out in your departure year, on top of a full salary, is usually the most expensive choice available. Waiting until the following year, when you may have no other US income, can move the same distribution into far lower brackets. Against that, weigh the plan’s small-balance rules, currency risk, and — often the largest factor — how your new country of residence taxes a US retirement distribution. Many countries tax residents on worldwide income and may or may not credit the US tax withheld, and the answer lives in the treaty between the two countries.

State tax follows a simple principle: a distribution paid while you are still a resident of a state with income tax is taxable there, and the plan may withhold state tax based on the address it has on file. A federal law generally prevents a state from taxing qualified retirement plan income paid to someone who is no longer a resident of that state. Two practical consequences: update your address with the plan before you request a payment, and do not keep a US address on file that you no longer live at — it misstates your residency to the plan and to the state.

Whatever you decide, the plan needs somewhere to send the money. Most plans pay by cheque or by transfer to a US bank account and cannot wire to a foreign bank, so keep a US checking account open — some banks close accounts when you leave, so ask yours. See the banking guide for what tends to survive a move.

If part of your balance is Roth

A Roth 401(k) balance was funded with after-tax salary, so the rules differ. A qualified distribution — after five taxable years of participation and reaching 59½ — is entirely tax-free. A distribution before that returns your contributions tax-free but taxes the earnings, with the 10% additional tax where it applies. Rolling the Roth portion to a Roth IRA preserves the tax-free growth, but note that the Roth IRA’s own five-year clock applies; the years the money spent in the Roth 401(k) do not carry over. Opening a Roth IRA early starts that clock, which is covered in the Roth IRA guide. Employer match on Roth deferrals usually lands in a pre-tax account, so a “Roth” 401(k) often has a taxable half you should not overlook.

Pre-departure checklist

1. Get a statement of your vested balance and confirm the vesting schedule against your last day.
2. Decide between leaving, rolling over, cashing out or a combination before you leave, while HR can still answer questions.
3. If rolling over, open the IRA while you have a US address and get the custodian’s non-resident policy in writing.
4. Request a direct rollover, plan to custodian, so nothing is withheld.
5. Update your address, phone number and email with the plan, and keep a US bank account open for payments.
6. Once you are a nonresident alien, give the plan a W-8BEN and check your treaty’s pension article before requesting any distribution.
7. Note the tax year of any distribution and file Form 1040-NR for it, keeping the 1099-R or 1042-S the plan sends.
8. Find out how your destination country taxes US retirement distributions before, not after, the money moves.

Other guides on this site

This page covers the retirement account. These cover the rest of the picture:

• Investing on a visa — what is allowed, what a brokerage asks for, and how tax residency changes the answer.
• Roth IRA on an H-1B — eligibility, and why the Roth’s flexibility suits people who may leave.
• Resident vs nonresident for tax purposes — the status that decides which withholding regime applies to you.