Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

Hey all!

My wife and I have been in the US for several months now, and we're both working, so things are quite alright.

We're trying to anticipate our retirement, and try to diversify the sources of income, that's why we're looking at the 401(k) plans in the US, especially as our employers would match some of our contributions.

Disclaimer: we're both French, working in the US, and planning to retire in France. The situation is about the same as if we were Brits and planning to move back to the UK for retirement, as there are bilateral tax treaties between the US and both France and the UK :)

When comparing pre-tax 401(k) and post-tax Roth 401(k), here is what I kind of found:

- pre-tax 401(k): will be taxed in the US at a flat 30% (I heard 20% if we were US citizens) because we're non-US citizen retiring outside the US, BUT with the tax treaty between the US and UK/FR that income would NOT be taxed locally

- post-tax Roth: not much information actually! Incomes wouldn't be taxed in the US as taxes would have already been paid when contributing to the plan.
However I cannot find information about local income tax... I was thinking that because the income would be withdrawals from a plan where contributions were already income-taxed in the US, they would NOT be taxed in the UK/FR as they would be considered "taxed" for the IRS...

Am I somewhat right or just dead wrong? :)

Thanks for your advice!

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

What do you consider local income tax? State or City?

And how far in the future are you planning on retiring? Frankly, from my limited viewpoint, I would go with the 401K with the company participation and consider their portion to be the portion that will be used to pay whatever taxes are owed 20 or 30 years from now. You will get the gain on their funds but their actual contribution can be considered to be tax money being set aside for the federal government ;)

BTW someone will be along shortly as to whether the 401K will payout in installments when you do retire. I thought the account had to be fully withdrawn and closed before you leave the US.

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

I was thinking of State income tax.

Also, you might well be right 401(k)s would have to be fully withdrawn/closed BUT I think you can transfer then to an IRA? Not too sure if that's the case/what it does imply (especially if you're under 59.5 years old)

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

FWIW, here is my experience.

I am a UK/US citizen and worked for 23 years in the US and built up a good size 401k before retiring. Before moving back to the UK I rolled over my 401k into an IRA with a brokerage that allows overseas customers. There are zero taxes to pay during the rollover. Before moving back I converted much of the IRA to a Roth IRA, paying taxes on the conversions. Roth IRA withdrawals are free of tax in both the US and UK. I moved back to the UK in May 2016 and manage my IRA and Roth IRA from here, although I have kept a USA bank account to make withdrawals from those IRAs easy. The IRAs are with Vanguard and the bank account is with HSBC USA although I am sure there are other options.

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

Thanks for your reply durham_lad.

So am I right to think the UK consider withdrawals from your Roth IRA as already been taxed in the US (which they are by definition, except the compound interest that are exempt), thus non-taxable in the UK due to the bilateral tax treaty?

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

Correct, HMRC treat the Roth like a UK ISA, funded with after tax money and all gains on contributions are tax free. Forever. (or until they change the treaty)

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

Thanks! France *should* be similar as there's the same kind of treaty between both countries - I'll still ask French tax services though.

I think I'll go for a Roth 401(k) then (tax wise it'll be basically the same between the flat 30% and the 28% bracket)... Company match will be on a pre-tax basis but that's "free money" anyway so it can be taxed by the IRS, I'm fine with that.

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

It's unfortunate that this is not recirpocated. ISAs are not treated like IRAs.

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

I know, it's a real pain, and is a good reason to keep our investments USA based. We even have after-tax money invested in the USA in funds that are "HMRC reporting". There is no equivalent of overseas funds "reporting" in to the IRS.

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

I agree it's unfortunate, but it's because IRAs are counted as retirement accounts, and ISAs are not. SIPPs and the like are more comparable to IRAs.

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

ROTH IRAs are probably the most similar to ISA. ROTH IRAs really are not the main retirement vehicle for anyone. They are better used as house purchase/ education funding with a fall back that the money can be pulled out penalty free during retirement. I would not say SIPPs are similar to ROTH IRAs from a tax perspective, more like a traditional IRA. You can withdraw original contributions from a ROTH IRA penalty free, I do not believe this is the same with SIPPs.

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

Oh, yes, sorry. I agree that SIPPs are more similar to traditional IRAs, and that Roth IRAs specifically are more similar to ISAs. But they are structured differently, and Roths are primarily targeted at retirement.

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

Fact: IRA = Individual RETIREMENT Account

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

I disagree. ROTHs are a really useful retirement vehicle as they allow you to adjust your tax liability, i.e. the "mix" of taxable and non-taxable withdrawals you make in a particular year. Additionally, there are no required minimum distributions on ROTH IRAs, something that is also a useful feature for some.

Re: Retirement otuside the US for non-US citizens: 401(k) vs Roth 401(k)
 

That is true, but HSA = Health Savings Account , but I am using mine for a retirement account and a health savings account. I can withdraw the money penalty free after age 65.

I will be using my some of my kids college savings account to pay for private school K-12. Kindergarten was not college last time I looked.

Many of these financial products in the US have multiple uses.

Also not everyone is eligible to contribute directly to a ROTH IRA and the limit allowed per year is low compared to 401k and similar accounts.