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Subject:  Re: 401k and immigration Date:  2/28/2001  2:28 PM
Author:  berglaufer Number:  28205 of 75340

Regarding getting your paws on your 401K money after leaving the USA:

After leaving your employer, you should be able to move your 401K into an IRA account (not Roth IRA... yet). This is a commonly done conversion, and it gives you control over the money, but that money is still "pre-tax".

Then you do a Roth Conversion to convert the regular IRA to a Roth IRA. You will pay tax on this, but unless you are making real good money back home, your US income tax rate will be at or near zero (* see below). This Roth IRA money is now "post-tax".

Then check on the Roth IRA withdrawal policies. I believe, but do not quote me on this, and anyone correct me if they know better, that you can then wait five years and remove that money from your Roth IRA without penalty; however, any growth/gains/interest acrrued during that time must remain until you are 59.5 years old, or the 10% penalty will apply to that portion. You might not care, and just pay the penalty if you have escaped tax.

If you have a substantial amount in the 401K now, investigate whether you would be able to do the normal-IRA to Roth-IRA conversion in modest, annual parcels to keep yourself under the lowest US income tax bracket, keeping in mind that the latest amounts to hit the Roth IRA will have to stay in there for five years to avoid the 10% penalty. With modest income, living overseas, you can utilise your entire standard deduction and exemptions to convert about $13k per year tax free at current rates for a married couple, filing jointly.

I found myself in a wonderful situation related to this. I worked overseas but found myself with plenty of the $70K income exclusion to spare. I converted my whole IRA that year, which counted as US income and used up my standard deduction and exemptions, and more, but we still only paid 5.6% total tax on the conversion. And now the money is in "post tax" form. If I did that now, with income in the USA this year, I'd be up for a 28% tax hit doing it. Your situation is similar, but you're headed in the other direction, out of the country instead of in, so you have no tight deadlines for the conversion.

Investigate this procedure thoroughly, but I believe it will provide you a way to get your 401K money intact, as long as you have patience, especially if you are of modest/moderate income. Note, however, that I have no idea at all how your home country would treat the "income taxable" IRA-->Roth conversion, or if they even care.

Good luck!

(*) For your US income tax rate to be zero while you are overseas, you'll need to qualify as not tax resident (easy, since you'll be living back home), use the $76k Foreign Earned Income Exclusion (see form 2555), perhaps Foreign Tax Credit (form 1116), and any dividends/interest/other-income should be below the tax threshhold. The tax threshold for a married couple for year 2000 is $7200 for singles and $12950 for married cuples. This could actually go up nicely if latest proposed tax plans actually come to fruition.
