401k Withdrawal & Moving Money Abroad
- Find out what type of retirement account you have, traditional 401k or something else.
- Take advantage of the tax benefits in a 401k account.
- Before you make a full withdrawal and make an international wire transfer, check you whole portfolio and investment needs.
Should I withdraw all my 401k funds? Can I make an international wire transfer?
I am 66 and will retire this June. How can I cash out my 401K and take the money with me to my home country, Hong Kong, where I will spend my retirement years. I will pay the tax at distribution but I am concerned about moving the money out of the country. Will there be any additional taxes or penalties for taking it out of the country? I have $188,000 in the account. ed
Thank you for your question about a 401(k) withdrawal and making an international wire transfer. Before you make a large 401(k) withdrawal, consider you options carefully.
Before I deal with your particular question, I will clarify a few points about 401(k) retirement funds.
In US code, withdrawals from a retirement account such as a 401(k) are known as "distributions." Human Resources and tax professionals use that term, but the rest of us call them "withdrawals," so that is the word we will use here.
The major considerations in making a 401(k) withdrawal are the following:
- Type of retirement account
- Age of Account holder
Type of Retirement Account
A 401(k) account assists anyone authorized to work in the US to save money for retirement and reduces their overall tax burden. There are various types of retirement accounts, including a traditional 401(k) retirement account, a Roth 401(k) retirement account, IRA accounts, and other specific retirement accounts. Each type of account has its own rule regarding the taxation of contributions and withdrawals. The traditional 401(k) account allows for a tax break on current income, for contributions (up to certain limits), that are made into the account. Withdrawals are taxed as income, when presumably, the retirees income will be less, and taxed at lower marginal rates.
Acquaint yourself with the type of account you have.
Age at Time of Withdrawal
There are very specific rule regarding the age on can withdraw funds from a traditional 401 account. The IRS in publication 590 provides many details about a traditional 401(k) retirement account.
Here are the main age criteria:
Post 70½: A 401(k) retirement account holder must make Required Minimum Distribution (RMD) withdrawal at the age of 70½, or at the time of retirement, the latter of the two. The IRS has tables showing the RMD, the minimum amount of money, in percentages, that has to be withdrawn. Failure to make the required 401(k) withdrawal will result in a fine. (There are exceptions to these rules, for example, if you inherit a 401(k) account, from someone who met the RMD requirements, and you do not. In this case, you will have to make distributions).
Post 59½: A traditional 401(k) retirement account holder may withdraw funds, without a penalty, but must pay taxes on the amount withdrawn. Remember, not all retirement accounts are alike. Check with your retirement advisor or fund manager as to the exact type of retirement account you have and the applicable withdrawal rules.
Pre 59½: A traditional 401(k) retirement account holder may make an Early Distribution, and, in general, must pay a 10% penalty, in addition to paying taxes on the amount withdrawn. For more detailed information, read these four Bills.com articles:
- 401(k) Hardship Withdrawal Rules
- 401(k) Cash-Out Penalties
- 401(k) Withdrawal Rules
- Tax Obligations Due to 401(k) Withdrawal
A traditional 401(k) account defers the tax to the time of retirement. That means, when you put the money in the account, it is not taxed. There are limits to the amount you can deposit each year. In general, the employer also makes contributions to the 401(k) account. When you withdraw the money, you must pay taxes on the amount withdrawn. Note, you do not pay capital gains tax on the growth of the investment, but you will pay income tax on all amounts withdrawn.
Therefore, the traditional 401(k) retirement account eases the tax burden in two ways:
- Reduces the gross taxable income at the time you are employed and receive your salary.
- Taxes the withdrawal, at the time you are not working, when your income and your marginal tax rate are lower.
By withdrawing all of your funds at once, you will create a large tax obligation, which will mean paying taxes at a higher tax bracket. Doing so is counter-productive to the benefits offered by the 401(k) account.
Managing Your Investments
You will have to decide which type of retirement account to deposit your money into, and this will depend greatly on your age, income level and tax rate. In some cases, there is a workplace plan, which you will join, in order to benefit from your employer’s participation.
In addition, you will have to decide how to invest your money. Often, you can choose between a managed account and a self-manage account. You will need to choose the most appropriate investment alternatives, for your situation. Each person has their own level of risk, and when considering a retirement account, your age will be an important factor in deciding on the types of investments to make.
Once you reach retirement age, you should reevaluate your investment portfolio. I recommend that you speak with the 401(k) fund manager, and an investment professional. Look at your whole picture, and plan your needs accordingly.
Transferring Money Abroad - International Wire Transfer
Currently, you can transfer money from one bank to another, including international wire bank transfers. The main restrictions in making a bank transfer, including an international wire transfer, relates to money laundering laws and regulations.
Your local bank, making the international wire transfer, and your foreign bank, receiving the international wire transfer, will both need to know the nature and source of the funds. Funds coming from your 401(k) retirement account should pose no problem in making an international wire transfer. Some countries do have restrictions regarding foreign currency. You mentioned Hong Kong. Check with a local Hong Kong bank regarding Hong Kong laws, regulations, and business practices.
When moving abroad, you should consider keeping a US bank account active, if you feel that you have any kind of monetary transactions in the US. It is very difficult to open an account while living abroad.
Should I Take a Full 401(k) Cash Out?
Making a full 401(k) withdrawal from your retirement account is a major investment decision. You need to consider your overall financial picture, including assets and liabilities, and future cash flow. A withdrawal from a 401(k) retirement account involves a large tax obligation, offsetting the main advantage of the program.
Before you make a decision to cash-out your 401(k), I recommend that you consider the following points:
- Can you maximize your tax obligation by delaying withdrawals?
- Can you adjust your investments into a portfolio that will best meet your future needs?
- What will be your future tax obligations? A US citizen must still file tax returns, even when living abroad.
Although you can make a 401(k) withdrawal without a penalty, albeit at a higher tax rate, and you can transfer money abroad, I recommend that you speak with an investment expert, who can guide you through your investment, tax, and retirement decisions.
I hope this information helps you Find. Learn & Save.