At any given time in the year, there are over 600,000 British expatriates living in the United States. Most of them to work for an American company. In the U.S., there is a pension plan which facilitates retirement savings called a 401k. The 401k takes pre-tax income and adds it to an account usually handled by a financial firm. Typically, U.S. companies match 401k contributions dollar for dollar (or even twice the dollars for each dollar). The 401k is the U.S.’s way of helping workers save for a retirement. As a British expat who may only be staying in the U.S. for a period of say, 5 years, it’s important to know how you can maximize your account. In this article Beacon Financial Education goes into best practices for handling 401ks as a British Expat.
As a British expatriate, you are most likely taxed under a nonresident alien status. This means you will be subject to taxes on all U.S. based income. If you sign up for a 401k with a U.S. based company, then any 401k withdrawals will be included in that bracket no matter if you are in the U.S. or back in the United Kingdom. Because 401ks can have a great effect on your retirement, its best to understand how to get the most out of your retirement plan.
Avoiding the 10% Penalty
The first step to getting the most out of your 401k plan is choosing to use it at the right time. Most– if not all– 401k plans incur a penalty for withdrawing prior to 59½. Withdrawing from your 401k plan prior to this age results in a 10% tax penalty. For example, if you withdraw $15,000 from your 401k prior to age 59½, you could be subject to a $1,500 withholding– leaving only $13,500 in net benefit. This holds true whether you are an expat or native American. Although there is a minimum non-penalized age for withdrawing, there are certain exceptions such as disability.
Checking Out the IRA
It may make sense to roll over your 401k into an IRA, an Individual Retirement Account. The Individual Retirement Account provides more benefits to withdrawing early– such as non- penalized withdraws for tuition, books, and a first home owner purchase. Speak with your financial advisor on the best practice for your account given your current financial goals.
Knowing Your Tax Bracket
Whether you are an expatriate or an American citizen, 401ks are taxed according to the same tax classification whether you are a resident or nonresident. 401ks withdraws are treated as normal income and subject to tax rates whether you are in the U.S. or abroad. This means you can expect a withholding in the form of your normal tax bracket on every 401k withdraw. Let’s say, for example, you are in the 22% tax bracket. If you withdraw for $100,000 from your 401k, you can expect a $22,000 withholding– leaving $78,000 in funds. Knowing which tax bracket you are in will give you a greater sense of what to expect when making withdraws from your 401k.
In all, there are certain best practices you can take when it comes to your 401k and retirement savings. Speak with your financial advisor today on how to optimize your account to fit your financial goals and aspirations.
Are you a British expat with a 401k? Want to know which options are available to you? Contact us for a free consultation with an independent financial advisor from the Beacon Preferred Partner Network.
By Beacon Financial Education