Simmor14

Hi,
Hoping for some good advice on extracting my 401K from the USA as I'm due to leave in May for New Zealand.

I only worked for two years here in the USA whilst my husband and I were on a foreign military exchange. I finished my job in December last year.

Anyhow I can't seem to find a way to get the whole amount out without them withholding taxes on it. I'm fine with the 10% fee. I've already completed my tax for last year so I assume anything I extract now is counted as income for this year! However the amount is so small, approx $4000 USD that I wouldn't be taxed on it if it was going to be my whole income for the year, which it will be.

Also, if someone would explain the Current Balance versus Vested Balance I would be most appreciative because at the moment it also looks like I can only extract the Vested rather than the Current, which is significantly more.

anotherlimey

Your employer must have matched some of your contributions I assume. These employer contributions generally take time to "vest" before they are eligible to withdraw. That's the gist of it anyway.

Hence you will not be allowed to withdraw the full current balance.

The part in not sure on is the taxes. Maybe roll the balance over to an IRA; I did that and mine will allow me to withdraw the full amount, then I would need to pay the tax when I file my taxes. Although I've not actually done that.

On second thoughts consider waiting for a tax guru to come through this thread!

nun

If you don't need the money I would not take it out. You could leave the 401k where it is or roll it over into an IRA. This will avoid the 10% early withdrawal penalty and maintain the tax deferred growth....assuming wherever you are gong to be resident now recognizes the tax deferral of US retirement plans; the UK does.

You should talk to your employer about the vesting schedule on your 401k, but usually it is either none or very short.

If you do withdraw the money the administrator is required by the IRS to withhold 30% tax if the payment is made to a foreign person or outside the US, or 20% if paid to a US tax resident. You can avoid the withholding by claiming a tax treaty exemption. If the US/UK tax treaty applies and you are not a US citizen there should be no tax on the 401k withdrawal (the 10% penalty still applies) but you will have to pay UK tax on 90% of the withdrawal amount.

kodokan

Current versus Vested... vesting is an anti-job hopping mechanism, to encourage long-term employees. In hubby's scheme, for example, the company puts in 50c for every $1 that we do, but it's not vested (freely ours) until some years have passed. His is a sliding scale of '20% vested funds are released after one year, 40% after two... 100% after five.'

So for us the money is building up in the fund, but a proportion of it is time locked for now as he's new to the company. If he was to leave after, say, two years, he'd only be able to keep his contributions and 40% of what the company has put in.

Every company is different; some vest immediately or after a year, for some it's 3 years, etc. It'll all be clearly explained in the plan documents.

Simmor14

Ho hum, that's boring kodokan, so sounds like from your post and others, I'm only going to get the vested part. I will investigate to see if any more from the current balance is likely to be transferred over, but I doubt it.
Ok, so what about avoiding taxes on it, can I transfer to an IRA fund then withdraw?
I'm not sure how to go about claiming the tax treaty exemption nun? I'm Australia but my husband is British and we are both moving to New Zealand very soon!

nun

You won't avoid at on the withdrawals, but you can decide when and where to pay it. If you are take the money out while a US tax resident it will be taxed by the US. Rolling it over to an IRA is just a tax free transfer, but any withdrawals form the IRA will be taxed. If you are moving to NZ you need to look at the US/NZ tax treaty to see the tax treaty tax rate and how NZ would tax your US retirement accounts.

thinbrit

So, you do realize that your contributions were made with pre-tax dollars, and you didn't pay taxes on those contributions, right?

There is a 10 percent early withdrawal penalty, and then you need to pay taxes on it when you withdraw it.

I'm not sure what tax bracket you fall in, but you may not be losing anything at all in real terms. What percentage of tax would you have paid on that 4,000 had you drawn it as a pay check instead of funding the 401k?

Simmor14

Hi Thinbrit

Yes I realise it hasn't been taxed as yet. However, I have completed my tax return for last year on all my earnings. I received a small return.

I want to withdraw the 401K money, minus the 10% fee for withdrawing early without paying tax on it, because:

That will be my only earnings for the whole of this year (I'm assuming it will be counted as this years earning?) . I'm not planning on working when I get to NZ.

The small amount that it is will be under the "tax free threshold" anyhow, for this year. So even if I did complete a tax return for this year with that amount declared on it, they wouldn't tax it.

I really don't want the hassle of doing a tax return here again for that amount and leaving a bank account open here in the US to transfer the tax the withheld into it. Unless I can withdraw it, they withhold the tax on it and I submit a tax return for this year before I leave the country...?

Do you see what I mean? Or am I over complicating it?

Simmor14

I should add that my job finished up in December last year. I have not worked at all this year.

nun

There is mandatory withholding of 20% tax on 401k withdrawals....if you make the withdrawal while overseas the amount withheld goes up to 30%. You must then file a US tax return and you will probably get the withholding back and also be able to use any foreign tax on the retirement income as a credit towards your US tax bill.

The only way to avoid this mandatory withholding is to apply for a lowering of the withholding tax rate by treaty. Your solution is in the US/NZ tax treaty Article 18.1.a. Once you are in NZ file a W-8BEN with your 401k administrator and the tax withholding should go away. You will still have to pay the 10% early withdrawal penalty and NZ tax.

In all this I'm assuming you are not a US citizen and the 401k money is not from Government service.....a 401k could not be a government retirement account anyway.

thinbrit

I understand you don't want to pay tax on it, who does

The point I was making is you are treating this money as this years "earnings", when in fact you earned it in previous years and did not pay tax on it back then.
There may be a way to avoid tax on it, I'm no tax expert. However, if you have to pay tax on it then don't feel like you are being ripped off or losing anything. You would have paid tax on it anyway. Besides, once you retired you'd be taxed on any 401k withdrawals anyway.

Excluding Roth 401k which is funded with post tax dollars so that you pay no taxes upon withdrawal, a 401k is funded tax free, and the IRS get their cut when you draw on it in retirement.



In this world nothing can be said to be certain, except death and taxes.
Benjamin Franklin

nun

You will have to pay tax on the 401k withdrawals.....there's no way around that. However, you can decide when and where you pay the tax. If you use Article 18.1.a and W-8BEN then you can avoid US taxation and will only be taxed on the withdrawal in NZ.

Of course the sensible thing to do is to leave the 401k alone and let it compound tax free.

Pulaski

This.

There several good reasons to leave pension funds invested, even if that means moving them to a different provider or investment vehicle (401k, IRA, private pension, etc.), and very few good reasons to withdraw pension funds prematurely. ..... I never recall hearing anyone (other than the terminally ill ) say that they wish they had saved less for retirement.

nun

The big unknown in all this is how NZ taxes the investment gains inside US 401k plans when owned by an NZ tax resident. That's critical here as it isn't specifically covered in the US/NZ tax treaty like it is in the US/UK treaty. I would suggest a few questions on an NZ forum.

Edit, just looking at the tax treaty and how NZ taxes foreign investments it might actually be a good idea to cash in the 401k. It looks like the 401k won't get tax free compounding in NZ as there's nothing in the treaty to that effect and the NZ foreign fund taxing rules are pretty draconian. So a question on an NZ specific forum is definitely required.

MsElui

CHECK the dates very carefully. My husband found out he lost a tonne of vested cash by leaving a company a month or so early (or in your case withdrawing it early). if we had understood we would have had him give notice a bit later on(or get the value from the future employer like we did the potential bonus loss).

and be very clear - if they say the vest date is say 1st april, dont even make the request until april 2nd so there is no way HR can F it up and cause issues that are difficult/imopossible to resolve. We were told to do that with any contractual date - go properly passed it - never say give 2 weeks notice banking on them holding to that date or you could find yourself out the door/funds moved etc that same day and losing the benefit you were trying to preserve.