Transfer of 401(k)'s and IRA’s to Australia
A 401(k) plan is usually an employer sponsored retirement plan in the United States, and it shares a number of similarities with superannuation schemes in Australia - although there are a number of plan varieties. 401(k) plans allow an employee to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. An IRA (Individual Retirement Account) doesn’t have a direct corollary in Australia, and is analogous to a private pension account although it also comes in a varieties of types.
Both accounts share some similarities, including the fact that unless an exception applies (such as being under financial hardship or over 55 and no longer a company employee) withdrawals prior to the age of 59.5 usually attract a penalty of 10% plus a withholding tax of 20 to 30%. There are situations where both the early withdrawal penalty and withholding taxes may not apply to Australians withdrawing funds, but you must discuss this in detail with our advisor who specialises in US taxes before leaving the US and becoming resident in Australia. Note that unlike UK pension transfers these balances do not need to be paid directly into a superannuation account in Australia and you should seek advice as to how the money might be best utilised.
Both 401(k) and IRA accounts can vary in nature quite considerably and you need professional advice on an individual basis regarding:
- Whether you are liable for Australian taxation on funds in either a 401(k) or IRA;
- Whether you are better placed leaving the accounts in place, and perhaps continuing to contribute to them, or proceeding to transfer the balance to Australia, even having regard to any early withdrawal charges and taxes.
If your 401K is employer sponsored then you may keep it in the US and there will be no Australian taxation issues until you actually start to withdraw the fund as a pension or lump sum when you retire. At this time the pension you withdraw will be subject to tax in Australia, less a credit for any tax paid in the US, if applicable. You should also seek confirmation from your fund that membership can be retained if non-resident - we are seeing more and more situations where US fund managers are refusing to rollover or manage plans owned by non-residents.