Transfer of 401(k)s, 403(b)s, IRAs and US Occupational Pensions to Australia
Australian expatriates working in the US will often have an involvement with US pension funds, including employer-sponsored 401(k) plans, 403(b) retirement plans sponsored by universities and colleges and individual and private pension plans, such as IRA's (Roth and non-Roth). US corporate employers may also have occupational pension funds with differing characteristics. All allow an employee to save for retirement while deferring income taxes on the saved money and earnings until withdrawal.
US pension funds can differ significantly in terms of their detail, but typically share a number of similarities, including the fact that withdrawals prior to age 59.5 usually attract a penalty of 10% plus a withholding tax of 20% if the individual is not a US tax resident and cannot claim a Tax Treaty exemption. Australia has a double tax treaty with the US and consequently it may be possible to avoid both early withdrawal penalties and US withholding tax, but individual pension fund administrators can be problematic in relation to the latter.
As we indicate above, it should be possible for Australian residents, who are not US citizens or permanent residents, to withdraw US pension funds without any withholding tax applying, as a consequence of the provisions of the Australia/US double tax agreement (DTA) which vest taxing rights in the country of residence - Australia.
Regardless of that agreement, however, it is nevertheless our understanding that the IRS has directed US pension funds to apply a withholding tax of 30% on any withdrawals (20% if aged 59.5 and above) and make access to the tax withheld contingent on submitting a subsequent US tax return.
Apart from being contrary to the DTA this approach generates additional direct costs in terms of US tax return preparation and is obviously detrimental in terms of cash flow, the extent of which will be dependent on the precise timing of the withdrawal. Obviously, every effort will be made to utilise the exemption provided by the Double Tax Agreement, but where pension fund administrators are unwilling to cooperate then there may be no option but to accept the situation and plan, as much as possible, to minimise the impact, for example through the timing of withdrawals.
As we mention elsewhere, tax advice is absolutely crucial in these situations to ensure that any withdrawal of a US pension is carried out as cost effectively as possible - and ideally professional advice should be sought prior to individuals leaving the US and again becoming Australian tax residents. Note in this regard that most US pensions will not be considered "foreign superannuation funds" (FSF) for Australian tax purposes, and therefore any earnings within the fund, if simply withdrawn whilst an Australian tax resident, may be subject to Australian marginal tax. It may be possible to both reduce an individual's tax exposure in Australia and completely eliminate any exposure in the US to taxation on withdrawal and transfer, but specific advice is required.
Please note that your situation becomes potentially more complex from a tax perspective should you be a US citizen or permanent resident (green card holder). In this situation, separate US tax advice will also be required to determine whether it is in your best interest to withdraw the funds or simply continue to maintain them in the US until retirement.
Note that if your retain your pension in the US there will be no Australian taxation issues until you actually start to withdraw the fund as a pension or lump sum when you retire, and rollovers into other funds may not give rise to tax issues, but prior tax advice is strongly recommended as individual circumstances can be relevant.
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 (e.g. Fidelity, Merrill Lynch and Wells Fargo) are refusing to manage plans owned by non-residents, largely for compliance reasons. Clients are being advised that accounts will be closed, requiring a rollover or a cash out, and often at very short notice.
If this is your situation, we do have contacts within the US that can typically arrange a roll over into an IRA fund that will maintain accounts for a non-resident - but providers can have (very high) minimum balance requirements and this will not be solution for everyone. As indicated above, this should be done prior to becoming a tax resident of Australia; rollovers which are initiated while a tax resident of Australia may have Australian tax implications and prior advice should be sought.
Thought should be given to maintaining a US bank account. US pension funds will typically only pay funds into a domestic US account, and if that is not available then they would provide US denominated cheques - which are slow, cumbersome and costly.
Finally, the most efficient approach to transferring funds from the US to Australia will not normally involve either US or Australian banks - they are usually the least economic approach in terms of both fees and exchange rates. It is worth doing some research in terms of the available options - for example, we have a long-standing relationship with OFX, a specialist transfer company listed on the Australian Stock Exchange which provides zero fees and preferential rates - but online providers will usually be the most cost-effective approach. It is normally just a matter of advising the pension fund to credit (sic) OFX's New York bank account quoting your account number and the funds will be exchanged into AUD and forwarded directly to your nominated Australian bank account.
If you would like to arrange professional advice please complete the Inquiry form below providing details and you will be contacted promptly.