Your 401(k) When You Leave the US

No US tax rule requires a retirement account to be distributed because its owner has left the United States or ceased to be a US tax resident. A 401(k) can generally remain with the former employer's plan, or be rolled over, and continue its tax-deferred growth. Separately from tax law, an individual PLAN may have its own rules forcing out small balances after separation — that is a plan term with its own threshold, not a legal requirement tied to departure, and the plan administrator is the only reliable source for whether it applies to your balance.

A distribution from a qualified retirement plan, including a section 401(k) plan, taken before the owner reaches age fifty-nine and a half is generally subject to an additional tax of ten percent of the portion of the distribution that is includible in gross income. That is on TOP of the ordinary income tax the distribution attracts — the ten percent is a penalty layered over the tax, not the whole cost.

Among the exceptions to the ten percent additional tax is a distribution made after separation from service in or after the year the participant reaches age fifty-five. Other exceptions include substantially equal periodic payments over life expectancy, total and permanent disability, terminal illness, distributions to beneficiaries after death, and certain medical expenses above a share of adjusted gross income. Which exception applies, and whether it survives a rollover, is fact-specific — the list is a reason to ask, not a self-service answer.

Pensions and annuities paid from US sources to a non-resident alien are fixed, determinable, annual or periodical income, and tax applies at a rate of thirty percent unless a lower treaty rate applies. This is a WITHHOLDING rate applied at payment, not necessarily the final tax — but it means a distribution taken after leaving arrives substantially reduced, and recovering any excess means filing a US return for that year. The timing of a distribution relative to when you stop being a US tax resident therefore changes what actually lands in your account.

While still a US tax resident, a distribution is taxed as ordinary income with ordinary withholding, and the ten percent additional tax applies if taken early. Once a non-resident alien, the thirty percent FDAP withholding regime is the one that engages. Residency is decided by the Substantial Presence Test or the Green Card Test, not by having moved — someone who leaves partway through a year may still be a US tax resident for that whole year, which can make the timing of a distribution across a year boundary worth more than the investment decision inside it.