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Hello and welcome to Maxim's Cross-Border Wealth series. My name is Andrew Fisher, president
of Maxim Global Wealth Advisors, and today is the first part of a three-part
series on how 401(k)s work for international professionals here in the US.
The first part this three-part series we’re going to discuss the basics of how a 401(k)
works for international citizens. The agenda for the talk we will discuss first, should
a non-US citizen participate in their company’s 401(k) plan, how does a for 401(k) work generally
how to invest your for 401(k) balance at your employer and can you take it with you when
you move away from the US.
So should you invest as a cross-border person, absolutely yes! We strongly recommend that
you maximize your 401(k) every year and we find among our clients almost all international
people we work with do, do that. It really is a valuable benefit and one of the best
ways to build global retirement savings. The reason for that is most international countries
honor the tax deferral properties a 401(k). It's embedded within the tax treaties between
the US and most every international country.
What that means is even once you return home the 401(k) or IRA that you’ve left in the
US will continue to grow tax-free, it will be exempted from tax wherever you live. For
example, it’s exempt from the Wealth Tax in France or the Netherlands, so it really
is a valuable, valuable benefit. I'm in addition to that most other countries don't have, or
many other countries don't have tax-deferred retirement accounts like a 401(k) or if they
do they tend to have much smaller contribution limits.
Now we're talking about 401(k)s, I'm also talking about IRA's, SEP-IRAs, 403(b)s, 457
plan, simple IRAs and really all manner of US retirement accounts that can be rolled
over into a traditional IRA. I'm not talking, I specifically do not recommend that cross-border
families participate in Roth IRAs, 529 plans, or custodial accounts. The reason for that
is these programs tend to be relatively new and are very often not discussed within the
international tax treaties with the US and for that reason it's either a gray area how
they will be treated or the tax benefits within the US are not available abroad. So we've
seen with our clients some unusual surprises from some of those types of accounts and they
haven't worked out the way they were expected.
So how does a for 401(k) work in general? Well a 401(k) is a long-term retirement savings
program where a portion of your salary is deferred or contributed into the 401(k) program
every year. There are limits on how much can be contributed and for 2013 its 17,500 per
year, unless you’re over the age of 50, in which case its 23,000 per year. And this
does not include whatever employer matching that your employer also will put into your
plan.
The benefits are pretty well understood of a 401(k). Firstly, they avoid tax in the current
Year on whatever amount you’ve deferred into your 401(k). You also earn the benefit
of whatever employer matching that your employer offers and of course you end up with a tax-deferred
growth vehicle which can work for many, many years.
Now you are taxed eventually on the withdrawal of funds out of a 401(k) or IRA. Ideally this
is very far out in the future so that you're able to benefit from tax-deferred growth and
eventually when you do draw it, you’re maybe not working and have a much lower tax bracket.
There is a penalty for early withdrawal, if you draw any funds out before the age of 59
and ½, there's a 10 percent penalty. Then when you reach 70 and ½ years old, there's
what's called a required minimum distribution, which just means you have to start taking
a small percentage out every year from that point forward.
So, how should you invest your 401(k) account at your employer? Well while your 401(k) is
active, the account must be left inside of your employer’s for 401(k) program. And
within that program you then need to decide or choose from a limited number of options.
Usually there's a list of funds that contain both stocks, bonds, there’s often cash and
most plans these days offer what's known as lifestyle portfolios, which is a bundle stock,
bond and cash in funds that match a certain retirement date or risk tolerance level aggressive,
conservative what have you.
We found that most 401(k) plans are very poorly designed for cross-border people like you.
They tend to be extremely US centric, which really amounts to a pretty big risk for people
with a more international retirement future. Now we advise companies on how to design their
401(k) plans, particularly companies that have a high percentage international employees
working here in the US. And invariably we're recommending that they add more and more international
investment options like international stocks, international unhedged bonds, foreign currency
funds as well as international real estate and other types of investments. We really
need to be careful about an overexposure to the US dollar because that can have dramatic
consequences for a cross-border family.
I’ll give you an example, a client of ours is a Frenchwoman who works at Adidas, has
for many years, and we were analyzing her 401(k) program and her lifestyle portfolio
inside of that program. She’s in, I believe, that 2040 year retirement fund. We went and
looted at that fund and found it to be 88% invested in US dollar-denominated stocks bonds
and cash. Really a tremendous risk for someone like her who plans to retire back in France.
So can you take your 401(k) with you once you leave the US? The answer to that is no,
401(k)s must stay here in the US. Now you can withdraw the funds from the 401(k), but
you shouldn’t. Withdrawals, as we've said before, are fully taxable at your highest
tax rate and if you are under the age of 59 and ½, there's a 10 percent additional penalty
on withdrawal. What's worse is that you lose the benefits of tax-deferred growth, which,
as we said, work no matter where in the world you live.
Now once it’s inactive, once you've left your employer it can be rolled over into an
IRA, or an Individual Retirement Account, at a large brokerage firm here in the US like
Schwab, Fidelity, Merrill Lynch, what have you. What this does is it maintains the tax
deferral properties of the 401(k) but gives you much greater control over the account
and also opens up much larger universal investment options.
So that's it for the first part of this three-part series. Part two will come out shortly, it
will be about how a 401(k) is taxed when you leave the US and once you start withdrawing
from the account.
Thank you very much! For additional questions or to contact one of our advisors, please
email us or call us at 503.620.3600.