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Each situation is different, this article was written for informational purposes only and the opinions mentioned here do not constitute financial advice. This article will give you an overview and is not necessarily exhaustive.
What to do with your 401K?
You have 3 options for your 401k before you leave the US. The penalties and taxation are on the entire amount withdrawn for the traditional 401k (pre-tax) and only on capital gains for the Roth 401k (post-tax).
1. Do nothing
You can keep your 401k in the United States while being a French resident. It will grow without taxes until you withdraw the money – after 59,5 years old if you want to avoid the penalties.
The money you withdraw will be subject to income tax in the United States, but not in France. From age 72, the IRS will require you to withdraw part of the amount.
There will be no tax declaration to be made in France or the United States on this account before this cash withdrawal.
I recommend this solution in general if your 401k is above $ 100,000, as that money will double every 10 years on average (for a 7% ROI)
In 10 years, you will have $ 200,000
In 20 years you will have $ 400,000
In 30 years, you will have $ 800,000
2. Withdraw the money
Unfortunately, I have the feeling that this is the solution that many French people choose. You will pay income tax and a 10% penalty on the entire amount (Pre-tax 401k) or on capital gains only (Roth 401k).
I recommend withdrawing the money the year after you leave, not the year you leave. If you withdraw the money the year you leave, the withdrawal will be added to your US income. If you withdraw the money the following year or the following years, you will no longer have US income and you will pay fewer taxes.
You will need to file a US tax return using a 1040 NR form.
There is another way to get the money out with lower penalties, but it is relatively complicated and there is a five-year deadline. To put it simply, you can do an IRA rollover (see point 3) then convert the IRA to a Roth IRA and withdraw the money from the Roth IRA after five years. There are subtleties and this is a good article that gives you all the cases: https://www.doughroller.net/retirement-planning/the-5-year-rule-on-roth-ira-conversions/
3. Make a Rollover IRA or Roth IRA
You can turn your 401k into a Rollover IRA or Roth IRA after you have left your business. The advantage is that you have access to all the financial markets with more funds and the ability to buy stocks and other financial products a few times cheaper than in your 401k.
BEWARE: In 2018, a European MiFid II directive prevents European residents (American or not) from buying ETFs / ETNs on American accounts. It was already impossible to buy mutual funds. The possibilities, therefore, become limited for this type of account. Your 401k should not be affected by this directive, but it may depend on the financial institution. Before you go, you will have to choose a fund and keep it forever unless you want to buy and sell stocks.
For most of my clients, Option 1 is the best fit.
Note that during this COVID period, the CARES Act allows you to withdraw money from your accounts without penalties up to $ 100,000 provided you can prove that you have been financially affected by COVID.
What about other accounts: IRA, Roth IRA, 529, Brokerage, and RSUs?
When you leave the United States, you will no longer have access to the mutual funds and ETFs you used in your accounts. You can keep them and sell them, but you won’t be able to buy some anymore. You will still be able to buy shares.
Before you go, you will therefore have two options for your IRAs if you are using funds:
- Do nothing and make sure that the funds you use can be kept until you retire. If not, you can use target funds which will become more and more secure as retirement approaches. The number indicated in the name of these funds corresponds to the date of your retirement. The money will grow tax-free in France and the United States.
Target date mutual fund list
- Withdraw money. Please note, depending on the type of account you will have penalties on the entire amount withdrawn or on capital gains.
For the 529 (account that saves to pay for private school or university), you can either withdraw the money with capital gains penalty or keep it if you think your child will study in an American university later. The funds cannot be used for a French university.
For your brokerage account – You can keep it in the United States, but there are no tax advantages to doing so. I generally recommend opening an investment account in France once you are a resident.
For RSUs and ESPP, it is interesting to do a simulation with a CPA to calculate what to do. There are too many subtleties to have a comprehensive answer. It depends on each person’s situation and the amounts involved. Once you are a French resident, you will be subject to French capital gains tax – 30% or the progressive scale – you will also have to file a US tax return. A tax credit system between the two countries will keep you from being double-taxed.
If you resell them before you go, the total amount may take you to a higher tax bracket. Be careful, there is federal and state taxation when you resell them in the United States while there is only federal tax if you are no longer a US resident.
The situation of stock options is more complex, you will have to speak to a French-American accountant.
The French administration has set up a return simulator in France. It is therefore well done, rather than listing all the steps to be taken in France, I invite you to consult it by following this link https://www.service-public.fr/particuliers/vosdroits/R43958
There is a waiting period of 3 months before being covered by French health coverage, to avoid this period, you can either start contributing to the CFE https://www.cfe.fr/assurance-sante within 6 months (3 months during a Covid period) preceding your departure, i.e. take out international health insurance.
Guillaume Decalf from www.ouifinancial.com – firstname.lastname@example.org
After a 15-year career in the technology sector, nine of which in the United States, Guillaume changed careers by obtaining his license as a financial advisor and creating Oui Financial, a company specializing in financial planning and investments for French and Franco-American families in the United States. He is based in San Francisco, California, but serves clients all over the United States.
MerciSF is not responsible for the material contained in this article.