Working In The U.S. Temporarily? Here’s What You Need To Know About Retirement
January 04, 2024We get many retirement benefits questions on our financial coaching line from professionals working in the United States but plan to return eventually to their home countries or take another ex-pat assignment. Frequent questions include: should I participate in my company’s 401(k) plan, and if so, should I choose to make a pre-tax, Roth, or after-tax voluntary contribution? In addition, how can I access my savings when I leave the US?
Get professional tax advice
If you’re a professional from another country working legally in the United States and do not have permanent resident status (e.g., a “green card”), the US taxation system can seem like a maze: one wrong move, and you’re stuck in a corner. Do not try and navigate this yourself. Instead, seek professional tax advice from a tax preparer experienced in ex-pat/non-citizen issues. You’ll need guidance on federal and state withholding, tax treaties, tax filing, benefits choices, and what to do when you leave the US.
Ask ex-pat colleagues first for referrals to a tax professional with experience working with people like you. It’s not expensive and could save you from financial and legal problems later. For a basic overview of types of US tax preparers, see How to Find a Good Tax Preparer.
What do I need to know about US retirement savings programs?
The US retirement savings system is made up of Social Security, defined contribution plans (401(k), 403(b) or 457), traditional pension plans (defined benefit), and individual retirement accounts (IRA and Roth IRA).
Social Security
This is the government-sponsored retirement system, similar to what’s often called a “public pension” in other countries. As a non-citizen employee, you will likely pay the same taxes as US citizens into Social Security and Medicare, which you will not recoup unless you continue to be a US resident. Your employer will also make contributions on your behalf.
If you do not plan to live in the US when you retire, you may or may not be able to receive Social Security income benefits. It depends on how long you paid into the system, your immigration status, country of residence, and whether you started receiving payments before leaving the US.
401(k), 403(b), and 457 plans
Most large employers offer employer-sponsored retirement savings plans, such as 401(k) and 403(b) plans. Employees may contribute a percentage of their gross pay each period to a tax-advantaged account. Frequently, the employer will match up to a set percentage of what you contribute or will sometimes make contributions regardless of whether you make your own contributions.
In addition, you’ll get to choose how your contributions are invested from a menu of mutual funds or other investment vehicles. You may also choose whether you contribute your money into a pre-tax (traditional), after-tax (Roth), or after-tax voluntary account. See tips below for determining what works for you.
IRA and Roth IRA
If you are considered a resident for US tax purposes (have US earned income, have a Social Security number, and meet the substantial presence test), you may open a traditional or Roth IRA. However, if you are a non-citizen and don’t plan to seek US citizenship or permanent residency, you may not be able to reap all the benefits of an IRA or Roth. If you’re eligible, you may contribute up to certain limits.
| IRA limit | IRA catch-up amount | 401(k)/403(b) limit | 401(k)/403(b) catch-up amount | SIMPLE limit | SIMPLE catch-up amount | SEP | |
| 2024 | $7,000 | $1,000 | $23,000 | $7,500 | $16,000 | $3,500 | $69,000 |
| 2023 | $6,500 | $1,000 | $22,500 | $7,500 | $15,500 | $3,500 | $66,000 |
Traditional pension plans
These are no longer widely available to new employees, but some larger companies and state/local government jobs still offer them. A pension may be fully funded by employer contributions or by combining employer and employee contributions. Typically, it takes 10-20 years to be “vested” in a pension, where the employee is eligible to receive a fixed monthly payout at retirement.
Should I enroll in my 401(k)?
Saving in your employer-sponsored retirement plan has multiple benefits, even if you don’t plan to continue working and living in the US later in your career. If there’s a match on your contributions, that’s like earning additional income. There’s the potential for tax-deferred or tax-free growth, depending on the type of contributions you make. Plus, you can’t beat the ease of contributions deducted automatically from your paycheck!
Always consider your future taxes.
For non-citizens making decisions about which retirement contribution type to choose, you’ll need to consider where you will be living when you withdraw the money, how old you will be when you plan to withdraw it, and whether you think you’ll be a US permanent resident or citizen at that time. If you still expect to be a non-citizen when you withdraw the money, note that you must file a US tax return in any year in which you have US income, including retirement plan withdrawals. According to the IRS, “Most U.S.-source income paid to a foreign person are subject to a withholding tax of 30%, although a reduced rate or exemption may apply if stipulated in the applicable tax treaty. You may or may not owe that rate in taxes, but the funds will be withheld from the distribution regardless.
If you’ve overpaid through the withholding, you will get a refund after filing your tax return for that year. See this IRS US Tax Guide for Aliens for in-depth reading. Now, do you see why I say you need a tax advisor if you’re an ex-pat working in the US?
If by the time you withdraw the money, you have become a US citizen or a permanent resident but are living overseas, you won’t be subject to the 30 percent withholding. You will, however, have to file a US income tax return every year regardless of your income.
For U.S. citizens, check out this article about what you need to know about taxes while working and living abroad.
Pre-tax, Roth, or After-tax voluntary contributions?
The financial planning goal is to minimize taxes and penalties. Your company’s matching or profit-sharing contributions to your retirement plan are always pre-tax, so they will be taxed when you withdraw them. How much of your retirement contributions will be taxed depends on how you contribute:
Traditional pre-tax contributions are deducted from your taxable income, so you’ll pay less in income taxes today. Earnings grow tax-deferred for retirement. After age 59 1/2, you may withdraw them without penalty, paying US income taxes on whatever you take out. Before that, you may withdraw them only if you a) retire, b) leave the firm, or c) have an extreme financial hardship.
Roth contributions: Roth 401(k) contributions are made after-tax and grow tax-free for retirement if withdrawn 1) after 5 years and 2) after age 59 ½. Therefore, if you meet those requirements for distribution, your Roth distribution would not be included in your taxable US income. See this IRS tool to see if your Roth distribution could be taxable. However, your home country (or country of residence) could tax it, depending on the tax treaty with the US.
If your plan allows, you can leave the funds in the account until after age 59 ½. If you must take an earlier distribution after leaving the firm, you will only be taxed and penalized on the related growth and company contributions, not your original contributions. See this IRS Guide to Roth 401(k)s for more information.
After-tax voluntary contributions: Many employer-sponsored plans permit after-tax voluntary contributions above, or as a substitute for, Roth or pre-tax contributions. This will give you some flexibility, as you may withdraw those contributions at any time (although the growth of your funds will be subject to tax). If you plan to withdraw contributions after leaving the firm, taxation is similar to the Roth 401(k). Your retirement plan may also permit you to convert after-tax voluntary contributions to the Roth account, which could come in handy if you end up staying in the US, or roll them over to a combination of a traditional IRA and Roth IRA when you leave the firm.
On the downside, you typically won’t receive an employer match on voluntary contributions. Your original contributions can be withdrawn at any time tax-free, but any earnings or growth made in the account will be taxed when withdrawn. (That means gains withdrawn before 59 ½ will be taxed and subject to an additional 10 percent penalty.)
If you leave the US, are you required to take distributions?
If you leave to work and reside overseas, you would be able to take a distribution from your company’s retirement plan but are generally not obliged to take any until age 73. If possible, leave it to continue to grow, protected from taxes. Pre-tax contributions later distributed are included in your taxable income and, if taken before age 59 1/2, may be subject to an additional 10% penalty.
Ask for guidance
If your company offers a workplace financial wellness benefit, talk through the pros and cons of your choices with a financial coach. Your financial coach can help you understand the implications of your options, given your personal situation. Also, while you’re working in the US, don’t forget to use a tax advisor experienced in non-resident taxation., such as a certified public accountant or an enrolled agent. This is well worth the relatively low cost of getting good tax advice.