Retirement Account Rules and Restrictions for Non-Resident Aliens

Roth IRAs and 401(k)s – Open to Non-Residents

Contrary to popular misperception, non-citizens can open the most popular types of retirement account: a 401(k), traditional IRAs and Roth IRAs.

This is necessary; most employers offer either a 401(k) or the option of making contributions to an IRA. This means that whatever your long-term plans you at least have the ability to save for your retirement during your period of employment in the United States.

Furthermore, if your employer runs an employee match programme, via their contributions you may be able to double or in some cases even triple the amount you put aside.

Some employers also offer a Roth 401(k), but this isn’t very common.

IRA Rules and Restrictions

Qualifying non-US citizens can open an IRA if they live and work in the country. This can be either a Roth IRA or a traditional IRA. In fact, either of these accounts can be complemented by a 401(k) if you decide this is the best option for you.

There are many advantages to investing in both as it increases the chances of you maximising your retirement income.

However, it is worth remembering that an IRA itself is not an investment per se. Instead, it is a type of account that is comprised of various kinds of investments – for example, mutual funds, stocks, bonds or certificate of deposits.

In 2019 the annual IRA contribution limit increased from $5,500 to $6,000; the catch-up contribution limit for those aged 50 and over remained the same at $1,000. However, if you are over 70 ½ you can neither open a IRA nor make contributions to the account.

It is also important remember that if you decide to make a withdrawal from your traditional IRA before you reach 59 ½, you will likely have to pay 10 percent penalty as well as the scalable rate of income tax on the sum withdrawn.

Lastly, although you can simultaneously make contributions to a traditional IRA and Roth IRA as long as they do not exceed the $6,000 limit, there is one important difference between the two types of account: unlike a traditional IRA, you can open and make contributions to a Roth IRA regardless of your age.

Some tax considerations

All contributions made to a traditional IRA are tax-deductible in the year during which you make the contribution. Although this has the effect of reducing your taxable income, it is important that you understand that the money is therefore taxable at the time of withdrawal, so you must factor this into your retirement planning.

Roth IRA rules are different, however. There are no tax deductions for contributions, which means that withdrawals made during retirement are tax-free.

Taxes on 401(k) distributions are quite easy to understand. Because contributions to this type of account are tax-deferred, distributions are taxable, with early withdrawals also attracting a 10 percent penalty.

How to Begin

If you are going to open a retirement account in the United States as a non-resident alien, there are number of things you will have to do. This includes ensuring that you have the following: either a Social Security number from the Social Security Administration or an Individual Taxpayer Identification Number (ITIN) from the Internal Revenue Service.

These numbers ensure that all dividends, interest and gains on your account can be correctly reported to the IRS. It is best to obtain both, either can be obtained by sharing your immigration documents confirming your eligibility to legally work and reside in the United States.

Leaving the US – a Loaded Question

If you decide to leave the US before the age you are eligible to start receiving distributions, you can face several challenges.

Although you have the option of transferring your accounts into other vehicles in your country of origin – for example, a SIPPs or QROPS in the UK – this can bring considerable financial penalty.

Not only will you have to pay the 10 percent early withdrawal penalty that applies to withdrawals made when you are younger than 59 ½, you will also be liable for standard rates of US income tax, meaning you could be saddled with an unenviable liability.

However, you should discuss your options with your wealth manager or financial adviser as they will be able to help you best structure your affairs and take advantage of any applicable credits and deductions.

For example, it may prove wise to time your exit from the US carefully as delaying the move by a few months may lower your tax bracket and thereby reduce your liability.

Of course, you do not have to cash out the account. You can wait until you have reached the age you qualify for penalty-free withdrawals. This option is worth investigating if you are the citizen of a country like the UK which has a tax treaty with the US and ensures you only pay US tax on the income.

You may also have the option of staggering your withdrawals. Non-resident aliens are allowed an annual personal exemption of $4,050. However, to qualify, this must be your only US-based income.

Blacktower in the US

Blacktower in the US are on hand to help you make sense of your cross-border financial interests and retirement planning in the US – this includes advice on 401k and IRA management for US non residents.

For more information about how we may be able to help, contact us today.