Sponsored content by Guillaume Decalf from www.ouifinancial.com. First of all, each situation is different and the financial points can differ according to your personal situation. This article was written for informational purposes only and the opinions mentioned here do not constitute financial advice.
This set of information covers the questions to ask yourself when leaving the United States. I also offer a free conversation/presentation every Wednesday at 12:45 PST for people who will be returning to France within three years. I would like to point out that I am neither a tax lawyer nor an accountant (CPA) and that depending on your situation, there may be subtleties. These articles are not meant to be exhaustive, but to give you an outline of the topics to dig into.
Leaving the United States while having a Green Card?
Contrary to popular belief, you do not automatically lose your Green Card when you leave the United States, even if you have been out of the US for more than a year. You can spend several years outside the United States and never lose your Green Card.
On the other hand, you take the risk of losing it. While entering the country, the customs officer may tell you that this is the last time you will return to the United States with your Green Card.
Are there ways to leave the United States and be sure to keep my Green Card?
Yes, via the re-entry permit. The re-entry permit allows you to leave the United States for two years with the guarantee not to lose your Green Card. It is renewable twice but be careful, there are deadlines to respect.
You may not know it, but the timer went off when you received your Green Card… This timer is 8 years. If you lose or return your Green Card after 8 years, you may be subject to an exit tax. The 8-year timer includes the first year: for example, if you got your Green Card in 2020 – regardless of the date – the 8-year anniversary is January 1, 2027.
The exit tax
- The criteria for being subject to the exit tax
To be subject to the exit tax, you must have been a Green Card holder for more than 8 years out of the last fifteen years and lose or return it.
In other words, after being a Green Card holder for 7 years, you will probably have to ask yourself the question of taking dual nationality or returning your Green Card.
Please note, the 8 years do not depend on the precise date of obtaining the Green Card, but on the year in which you received your Green Card. Whether you had it in January or December doesn’t matter.
You will need to complete Form 8854 to determine if you will be subject to exit tax or not.
The following criteria are not cumulative, if you meet one of these criteria you will be considered covered expatriate and therefore subject to the exit tax.
- Your individual worldwide estate needs to be over $ 2 million or $ 4 million if you are married. Please note, this figure includes any accounts and real estate outside of the United States.
- The annual average of your net income tax over the last five years is greater than $ 171,000 (2020) – The total of your taxation over the 5/5 per year –
- Certify to be up to date in the payment and the declaration of your taxes over the last five years – form 8854. This is often where the problem lies for the French who have not or wrongly declared their account: especially their “Assurance Vie”.
- Calculation of the exit tax
Calculating the exit tax can be complicated especially if you are receiving a pension, but for simplicity, the calculation is done by “virtually” selling all of your assets (excluding 401k) at fair market value. Taxation will only be on capital gains allowance deduction, not on the entire sum. These are your worldwide assets so the calculation also includes any real estate or assets in France. There is also an inflation-adjusted allowance of $ 737,000 (2020) on capital gains.
Do not try to calculate a precise number on your own as there are subtleties, hire an accountant / CPA.
To go further, here is what the IRS says on the subject https://www.irs.gov/individuals/international-taxpayers/expatriation-tax
Leaving the United States when you have a 401K
I remind you that the penalties (10%) and the tax are on the whole amount withdrawn for the traditional 401k (pre-tax) and only on the capital gains for the Roth 401k (post-tax) … If you withdraw the money before age 59 and a half.
1. Do nothing
You can keep your 401k in the United States while being a French resident. It will grow tax-free until you withdraw the money – after 59 and a half years 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. However, the amount you withdraw will be taken into account in calculating your tax bracket.
From age 72, the IRS will require you to withdraw part of the amount (4 to 5%).
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 around $ 80,000 to $ 100,000 because this money will double on average every 10 years (for a return on investment of 7%)
- 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 impression 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).
If you choose this solution, 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 is added to your US income. If you withdraw the money in the following year or the following years, you will no longer have US income and you will only pay tax on the amount withdrawn.
You will need to file a US tax return using a 1040 NR form.
There is another way to withdraw the money with fewer 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 but here 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 a Roth IRA after you leave your business. The advantage is having access to all investments in the financial markets with the ability to buy stocks and other financial products sometimes cheaper than in your 401k. You will only be able to open a Rollover IRA if you are still considered a U.S. resident. If you are in France, it is too late to do so.
PLEASE NOTE: 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 is currently not affected by this directive, but it may depend on the financial institution. If you have IRAs / Roth IRAs, then before you go you will need to choose a fund and keep it forever unless you want to buy and sell stocks.
In my clients’ accounts, I invest in stocks so there are no problems when my clients return to France. Having said that, 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.
Leave the United States when you have other types of accounts (IRA, Roth IRA, 529, Brokerage), RSUs, and procedures to do in France.
Most financial institutions will close your investment accounts (not necessarily your checking/savings accounts) if you leave the United States. This problem does not concern 401k and accounts with RSUs but only brokerage accounts, IRAs, etc.
As of this writing, I only know of three financial institutions that will keep your investment accounts open if you leave the United States: Schwab, TD Ameritrade, and Interactive Brokers.
In any case, when you leave the United States, you can no longer buy mutual funds and ETFs. This is one of the consequences of a European directive called MifIID 2. You can keep them and sell them. You can still buy stocks, however. I clarify that it is not illegal to have mutual funds or ETFs, the financial institution will just block purchases.
Before leaving, you will therefore have two options for your IRAs and other accounts if you use funds if you are in an institution that accepts non-residents (if not, you can transfer your accounts before leaving ):
- 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.
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 only on capital gains.
For the 529 (account that allows you to save to pay for private school or university), you can either withdraw the money with a capital gains penalty or keep it if you think your child will attend an American university later. The funds can be used for some French universities but it is very limited.
For your brokerage account, you can keep it in the United States, but there are no tax advantages to doing so unless you are an American citizen where you will only be taxed in the United States but not in France. The benefit, for non-Americans, maybe have easier access to buying US stocks.
For RSUs and ESPP, I recommend that you ask for a tax simulation with a CPA (Accountant) to calculate what to do. 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 – Flat tax of 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 sell them before leaving, the total amount can put you in a higher tax bracket. Note that there is federal and state taxation when you sell them in the United States whereas 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.
Rather than listing all the steps to be taken in France, I invite you to consult the following two links:
To keep in mind
There is a waiting period of 3 months before being covered by French health coverage (aka sécurtié sociale). To avoid this period, you can either start contributing to the CFE 6 months (3 months during a Covid period) before your departure or subscribe to international health insurance.
Finally, for your departure to be official, it may be important that you take the following steps on the American side.
These are the different things to think about when you decide to leave the United States.
Guillaume Decalf from www.ouifinancial.com – email@example.com
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.