What Happens to Your 401k When You Renounce US Citizenship?
When you renounce US citizenship, your 401k doesn’t disappear, but the tax treatment changes significantly. According to IRS Section 877A, 401k plans are considered “eligible deferred compensation” and are not subject to the immediate exit tax that applies to other assets. However, if you become a “covered expatriate,” you’ll face a critical decision about how your retirement savings will be taxed going forward.
For the 2025 tax year, you become a covered expatriate if your personal net worth exceeds $2 million, your average income tax liability over the past five years exceeds an estimated $208,000, or you fail to certify tax compliance on Form 8854. The good news? Most Americans living abroad won’t meet these thresholds and can keep their 401k without additional complications.
Will You Be Considered a Covered Expatriate?
The first step in determining what happens to your 401k is determining whether you’ll be classified as a “covered expatriate” under US tax law. This classification dramatically affects your tax obligations and 401k treatment.
For 2025, you become a covered expatriate if you meet any one of these three criteria:
- Your personal net worth exceeds $2 million on renunciation day
- Your average annual net income tax liability over the five tax years before expatriation exceeds an estimated $208,000
- You cannot certify compliance with US tax obligations for the past five years on Form 8854.
The income threshold refers to your tax liability (what you paid), not your salary. Many high-earning expats who use the Foreign Earned Income Exclusion or Foreign Tax Credit may have much lower tax liabilities than their salaries suggest.
For example, if you earned $200,000 annually but used the Foreign Earned Income Exclusion to exclude $130,000 (the 2025 limit) and claimed Foreign Tax Credits for the remainder, your US tax liability could be $0, keeping you well below the covered expatriate threshold.
Your 401k balance itself can push you over the $2 million net worth threshold. You’d become a covered expatriate regardless of your income or filing history if you have a $1.5 million 401k plus $500,000 in other assets.
What Are Your 401k Options as a Covered Expatriate?
If you qualify as a covered expatriate, you have three distinct options for handling your 401k, each with different tax consequences:
Option 1: Take a Full Distribution Before Renouncing
You can withdraw your entire 401k balance before your renunciation date. This triggers immediate ordinary income tax on the full amount, but you avoid future complications. If you’re under 59½, you’ll also face the standard 10% early withdrawal penalty.
Option 2: Keep the 401k with Deemed Distribution
The IRS treats your 401k as if it were fully distributed on the day before expatriation, subjecting the total amount to taxation as ordinary income. However, early-distribution penalties generally do not apply under this scenario. You’ll pay taxes as if you received the money, even though the funds remain invested.
Option 3: Keep the 401k with Future 30% Withholding
You can elect to defer the tax and keep your 401k invested, but you must waive any treaty benefits and agree to 30% withholding on all future distributions. Every dollar you withdraw in retirement will be subject to a flat 30% US tax, regardless of your tax bracket or any tax treaty between the US and your new country of residence.
Can You Still Access Your 401k After Renouncing Citizenship?
Yes, you can absolutely still access your 401k after renouncing US citizenship. You remain eligible to receive your 401k distributions, though they may be subject to US taxes and possibly taxes in your new country.
The key difference lies in the tax treatment. If you’re not a covered expatriate, your 401k distributions will generally be taxed the same as any other American’s retirement withdrawals. However, as a non-resident alien, the default withholding rate is 30% of the gross distribution amount.
You can potentially reduce or eliminate this 30% withholding through tax treaties between the US and your country of residence by filing Form W-8BEN with your 401k plan administrator before requesting distributions. Many tax treaties allow pensions to be taxed only in the recipient’s country of residence.
For covered expatriates who chose Option 3 above, the 30% withholding applies regardless of any tax treaty because you waived those benefits as part of your expatriation.
Should You Withdraw Your 401k Before or After Renunciation?
The timing of 401k withdrawals can significantly impact your total tax burden, but the best choice depends on your specific situation and covered expatriate status.
If You’re Not a Covered Expatriate:
There’s typically no tax advantage to withdrawing before renunciation. Keep your money invested and use tax treaties to minimize withholding on future distributions. The 30% default withholding can often be reduced or eliminated entirely through proper treaty claims.
If You Are a Covered Expatriate:
Compare the tax cost of immediate withdrawal against future 30% withholding. Consider factors like:
- Your current tax bracket versus the flat 30% rate
- Investment growth potential if funds remain invested
- Your expected withdrawal timeline and amounts
- Early withdrawal penalties if you’re under 59½
If you’re close to the $2 million net worth threshold, reducing your 401k balance through partial withdrawals before renunciation might keep you below the covered expatriate limit entirely.
How to Plan Your 401k Strategy Before Renouncing
Thoughtful retirement planning can save thousands in taxes and eliminate future filing complications. Here’s how to approach your 401k strategy:
- Calculate Your Covered Expatriate Status Early: Get a professional valuation of all assets, including your 401k, at least a year before your planned renunciation date. For 2025, gains up to $890,000 are exempt from the exit tax, but this doesn’t apply to 401k distributions.
- Consider Roth Conversions: If you plan to take distributions anyway, converting traditional 401k funds to a Roth IRA before renouncing might make sense. Roth IRA distributions are typically not taxed for covered expatriates at the time of expatriation, though you’ll pay taxes on the conversion.
- Review Tax Treaties: Research the specific tax treaty between the US and your future country of residence to learn how 401k distributions will be treated. Some treaties provide complete exemptions, while others offer reduced withholding rates.
- Coordinate with State Tax Obligations: Don’t forget about state tax implications. Some states may try to tax 401k distributions even after you’ve renounced citizenship and moved abroad.
- Document Everything: You must check box 7A on Form 8854, indicating you have eligible deferred compensation items. Proper documentation ensures your 401k receives the correct tax treatment.
What About Other Retirement Accounts?
While 401k plans receive special treatment as “eligible deferred compensation,” other retirement accounts face different rules:
Traditional and Roth IRAs
IRAs are classified as “specified tax-deferred accounts” and are treated as fully distributed on the day before expatriation for covered expatriates. Unlike 401k plans, you don’t get the option to defer the tax.
Foreign Retirement Plans
Foreign pensions and retirement arrangements are also subject to deemed distribution rules, though portions covering non-US source employment income before becoming a US tax resident may be excluded.
How to Get Compliant Before Renunciation
If you’re behind on your US tax filings, you must catch up before renouncing to avoid becoming a covered expatriate. The good news is that the IRS Streamlined Filing Compliance Procedures offer a penalty-free path to compliance.
The Streamlined Procedures allow you to file your last three years of tax returns and six years of FBARs without penalties, provided your failure to file was non-willful. After applying the Foreign Earned Income Exclusion and Foreign Tax Credit, most expats who catch up through this program discover they owe little to no US taxes.
You cannot use the Foreign Earned Income Exclusion to reduce your qualification as a covered expatriate based on income tax liability. The threshold is based on what you actually paid in taxes, not your gross income.
Making the Right Decision for Your Situation
Renouncing US citizenship is a permanent, life-changing decision that affects more than just your 401k. The financial implications extend far beyond retirement savings to include estate planning, gift taxes, and ongoing compliance requirements.
At Greenback, we know that every expat’s situation is unique. Our team of CPAs and Enrolled Agents living in 14 time zones includes many expats themselves who have worked through these complex decisions firsthand. They have the knowledge and patience to help you see not just the technical requirements, but the real-world implications for your financial future.
Ready to explore your options? Whether you’re considering renunciation or already in the process, having expert guidance can make the difference between paying unnecessary taxes and optimizing your financial strategy.
If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
Whether you’re years behind or just unsure about the thresholds, our team is ready to help.
This article is for informational purposes only and does not constitute legal or tax advice. Tax laws are complex and change frequently. Always consult with qualified tax and legal professionals before making decisions about citizenship renunciation or retirement account management.
