401(k)s for International Professionals – How they Work

Updated : Sep 02, 2019 in Articles

401(k)s for International Professionals – How they Work

Hello and welcome to Maxim’s Cross-Border
Wealth series. My name is Andrew Fisher, president of Maxim Global Wealth Advisors, and today
is the first part of a three-part series on how 401(k)s work for international
professionals here in the US. The first part this three-part series we’re
going to discuss the basics of how a 401(k) works for international citizens. The agenda
for the talk we will discuss first, should a non-US citizen participate in their company’s
401(k) plan, how does a for 401(k) work generally how to invest your for 401(k) balance at your
employer and can you take it with you when you move away from the US. So should you invest as a cross-border person,
absolutely yes! We strongly recommend that you maximize your 401(k) every year and we
find among our clients almost all international people we work with do, do that. It really
is a valuable benefit and one of the best ways to build global retirement savings. The
reason for that is most international countries honor the tax deferral properties a 401(k).
It’s embedded within the tax treaties between the US and most every international country. What that means is even once you return home
the 401(k) or IRA that you’ve left in the US will continue to grow tax-free, it will
be exempted from tax wherever you live. For example, it’s exempt from the Wealth Tax
in France or the Netherlands, so it really is a valuable, valuable benefit. I’m in addition
to that most other countries don’t have, or many other countries don’t have tax-deferred
retirement accounts like a 401(k) or if they do they tend to have much smaller contribution
limits. Now we’re talking about 401(k)s, I’m also
talking about IRA’s, SEP-IRAs, 403(b)s, 457 plan, simple IRAs and really all manner of
US retirement accounts that can be rolled over into a traditional IRA. I’m not talking,
I specifically do not recommend that cross-border families participate in Roth IRAs, 529 plans,
or custodial accounts. The reason for that is these programs tend to be relatively new
and are very often not discussed within the international tax treaties with the US and
for that reason it’s either a gray area how they will be treated or the tax benefits within
the US are not available abroad. So we’ve seen with our clients some unusual surprises
from some of those types of accounts and they haven’t worked out the way they were expected. So how does a for 401(k) work in general?
Well a 401(k) is a long-term retirement savings program where a portion of your salary is
deferred or contributed into the 401(k) program every year. There are limits on how much can
be contributed and for 2013 its 17,500 per year, unless you’re over the age of 50,
in which case its 23,000 per year. And this does not include whatever employer matching
that your employer also will put into your plan. The benefits are pretty well understood of
a 401(k). Firstly, they avoid tax in the current Year on whatever amount you’ve deferred
into your 401(k). You also earn the benefit of whatever employer matching that your employer
offers and of course you end up with a tax-deferred growth vehicle which can work for many, many
years. Now you are taxed eventually on the withdrawal
of funds out of a 401(k) or IRA. Ideally this is very far out in the future so that you’re
able to benefit from tax-deferred growth and eventually when you do draw it, you’re maybe
not working and have a much lower tax bracket. There is a penalty for early withdrawal, if
you draw any funds out before the age of 59 and ½, there’s a 10 percent penalty. Then
when you reach 70 and ½ years old, there’s what’s called a required minimum distribution,
which just means you have to start taking a small percentage out every year from that
point forward. So, how should you invest your 401(k) account
at your employer? Well while your 401(k) is active, the account must be left inside of
your employer’s for 401(k) program. And within that program you then need to decide
or choose from a limited number of options. Usually there’s a list of funds that contain
both stocks, bonds, there’s often cash and most plans these days offer what’s known as
lifestyle portfolios, which is a bundle stock, bond and cash in funds that match a certain
retirement date or risk tolerance level aggressive, conservative what have you. We found that most 401(k) plans are very poorly
designed for cross-border people like you. They tend to be extremely US centric, which
really amounts to a pretty big risk for people with a more international retirement future.
Now we advise companies on how to design their 401(k) plans, particularly companies that
have a high percentage international employees working here in the US. And invariably we’re
recommending that they add more and more international investment options like international stocks,
international unhedged bonds, foreign currency funds as well as international real estate
and other types of investments. We really need to be careful about an overexposure to
the US dollar because that can have dramatic consequences for a cross-border family. I’ll give you an example, a client of ours
is a Frenchwoman who works at Adidas, has for many years, and we were analyzing her
401(k) program and her lifestyle portfolio inside of that program. She’s in, I believe,
that 2040 year retirement fund. We went and looted at that fund and found it to be 88%
invested in US dollar-denominated stocks bonds and cash. Really a tremendous risk for someone
like her who plans to retire back in France. So can you take your 401(k) with you once
you leave the US? The answer to that is no, 401(k)s must stay here in the US. Now you
can withdraw the funds from the 401(k), but you shouldn’t. Withdrawals, as we’ve said
before, are fully taxable at your highest tax rate and if you are under the age of 59
and ½, there’s a 10 percent additional penalty on withdrawal. What’s worse is that you lose
the benefits of tax-deferred growth, which, as we said, work no matter where in the world
you live. Now once it’s inactive, once you’ve left
your employer it can be rolled over into an IRA, or an Individual Retirement Account,
at a large brokerage firm here in the US like Schwab, Fidelity, Merrill Lynch, what have
you. What this does is it maintains the tax deferral properties of the 401(k) but gives
you much greater control over the account and also opens up much larger universal investment
options. So that’s it for the first part of this three-part
series. Part two will come out shortly, it will be about how a 401(k) is taxed when you
leave the US and once you start withdrawing from the account. Thank you very much! For additional questions
or to contact one of our advisors, please email us or call us at 503.620.3600.

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