The term 401(k) beneficiary relates to two situations. The first is an employee who participates in a 401(k) plan. The second is a person named as the recipient of the plan’s money should the original beneficiary die; however, for either possibility, the answer to this question is the same.
Non-US citizens can be the beneficiary of a 401(k) as a worker that a US company employs; likewise, non-US citizens can also be named as beneficiaries of a US worker’s 401(k) plan.
The rest of this article will discuss foreign workers who want to participate in their US employer’s 401(k) and US citizens who wish to name non-US citizens as their 401(k) beneficiaries. It will also illuminate some of the fees and taxes the plan will incur and determine when it makes financial sense for a non-US Citizen to be the beneficiary of a 401(k) plan.
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401(k) Plan Benefits for Non-US Citizens
One of the benefits of a global economy is that you can work from anywhere as long as you have a visa. Also, banks can transfer money with relative ease to almost any country, so plan beneficiaries do not need to be US citizens. However, 401(k) plan participants must recognize that there are fees and tax implications to be considered.
Many US companies hire employees from other countries. For instance, some foreign workers come to teach; others come to work for US-based research and development companies. Others come to train American workers to operate a foreign business with a base in the United States.
Non-US citizens come to work in the US for varying lengths of time, too. So, considering that Non-Immigration Work Visas last up to six years, providing the employment contract is in effect that long, a lot of money can be set aside — or lost — depending on the foreign worker’s decision to participate in the American company’s 401(k) plan or not.
Regardless of their nationality, all employees have one thing in common: retirement. Whether that retirement is due to declining health or because the worker has realized a life-long dream, they have to fund their retirement years. Therefore, it is no secret that taking even a year off from savings towards retirement can have challenging consequences to overcome.
While not every employee can participate in an employer 401(k) plan, most employees who can definitely should consider this employment benefit – even non-US citizens.
How Non-US Citizens Can Join 401(k) Plans?
As long as non-US citizens meet plan requirements, they can designate a portion of their salary to an employer-sponsored 401(k) retirement plan.
To participate in a 401(k), whether you are a US citizen or not, you must adhere to the company’s participation rules. For example, some companies require employees to work for 1,000 hours before making them eligible for this benefit. All plans are different, so you must check with your plan manager to determine when you will be eligible to contribute.
Likewise, the US government sets contribution limits based on the participant’s age and earnings.
Additionally, all employees must be legally permitted to work in the US, and they must adhere both to contribution limits and early withdrawal fees. These fees are of special consideration to non-US citizens who plan to return to their country of origin.
If you meet all of these requirements and understand the withdrawal fees and tax implications, it is advisable to consider participating in a 401(k) even if you are not a US citizen because there are ways to reduce fees and taxes.
However, if you fail to save for retirement for the years you work in America, you will have a hard time catching up when you return to your home country.
Making a Non-US Citizen Your 401(k) Beneficiary
In today’s global marketplace, it is quite possible that a US citizen may want to name a non-US citizen as a 401(k) plan’s beneficiary. This decision could happen in the event of a marriage or divorce, or in instances where children of the American worker decide to expatriate, like after studying abroad.
Regardless of the reason for naming a non-US citizen as the sole beneficiary of your 401(k), when you are planning your estate, you can certainly do so.
The question is, do you want to?
Before deciding, you should undoubtedly see a certified US tax preparer or public accountant before naming a non-US citizen as your 401(k) beneficiary. Going to this person armed with information will help you make the best decision for your unique situation.
Who Are Considered Foreigners or Non-US Citizens?
Beneficiaries who live in the US may be considered “foreigners” and therefore subject to both US taxes and their country’s taxes. Foreign persons are not limited to those who live outside the US. Spouses without US citizenship can also be considered foreigners.
It’s important to remember that beneficiaries who live in the US but are not US citizens are considered foreigners for tax purposes. This situation can happen in the case of non-resident aliens, for example.
If your spouse has not yet met citizenship requirements for permanent residency, they will be considered foreigners if they inherit your 401(k) before meeting residency requirements.
As you can see, there are many things to consider before naming a non-US citizen as the beneficiary for your 401(k), but it can certainly be done. You just have to perform your due diligence.
Fees and Taxes for a Non-US Citizen Beneficiary
One of the most important things to consider before assigning a non-US citizen as your 401(k) beneficiary is that the fund manager will withhold 30% of the 401(k) to pay for taxes and fees. In addition, if the beneficiary’s country of residence does not have a tax treaty with the US, your beneficiary will pay that country’s taxes as well.
One of the most significant aspects of a 401(k) is that you can name a beneficiary if you choose the option to receive the money you saved if you die. Selecting this option often means accepting a smaller monthly payment, but many people elect this option as a way of caring for their loved ones.
However, this option comes with tax considerations for the beneficiary — particularly beneficiaries who are non-US citizens. The key is to know the best ways to proceed so that more of your plan’s money stays with your beneficiary rather than moving it to the government.
Amazon has some books that can help you learn about 401(k) and estate planning. We like the following:
- The Tax Bomb in your Retirement Accounts: How the Roth IRA Helps You Avoid It. Written in 2018, this book is part of the Scandlen Sustainable Wealth Series. It focuses on what you can do now to avoid tax increases during your retirement. Although it doesn’t directly relate to non-US citizens as beneficiaries on 401(k) plans, it helps teach you to manage your retirement accounts now for better returns later.
- Estate Planning for IRAs and 401Ks: A Handbook for Individuals, Advisors, and Attorneys. This book goes into little known facts that will impact all beneficiaries, such as the fact that 401(k) benefits have to be paid out within ten years of the owner’s death. This fact makes avoiding tax penalties through timed distributions challenging. Written in 2020, this book has up-to-date information.
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Conclusion
Regardless of the intent of the original question, the answer is the same. Yes, a 401(k) beneficiary can be a non-US citizen. You just need to do your due diligence first to make sure as much of your money as possible stays with the beneficiary rather than going to taxes and fees.
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