For many U.S. taxpayers living abroad, planning for retirement remains a top priority. One of the most common retirement savings tools available is the 401(k) plan. But when you’re living abroad, the rules around eligibility and contributions become complex.

Understanding the Basics of a 401(k) Plan

A 401(k) plan is a U.S. based employer-sponsored retirement savings plan that allows employees to contribute pre-tax income toward retirement. Contributions grow tax-deferred, and many employers offer matching contributions, making it a popular and tax-advantageous option for retirement savings.

Can You Open a 401(k) Plan While Living Abroad?

Generally, individuals cannot independently open a 401(k) account. A 401(k) plan must be sponsored by an employer, meaning to participate, you must be employed by a company that offers such a plan.

Therefore, if you’re living abroad but not employed by a company that sponsors a 401(k), you cannot open a 401(k) on your own. However, if you are employed by a U.S. company (or a qualified foreign affiliate), you may be eligible to participate, even while working overseas.

To contribute to a 401(k) while living abroad, the following must apply:

  • You Earn U.S. Source Income – you must receive wages or salary from a U.S. employer reported on a W-2. Foreign payroll or contract income may not qualify.
  • Your Employer Offers a 401(k) Plan – your U.S. employer must have an active 401(k) plan that includes overseas employees.
  • Your Income Isn’t Fully Excluded by FEIE – income excluded under the Foreign Earned Income Exclusion (limited to exclusion amount of each year) doesn’t count as eligible compensation. If you exclude all your income, you can’t contribute to a 401(k); partial exclusion may allow limited contributions based on the non-excluded income.

Considerations if Self-Employed or Working for a Foreign Employer

  • Self‑employed abroad: You may still open a Solo (Individual) 401(k), provided the income is U.S. source and taxable in the U.S.
  • Foreign employer: U.S. 401(k) plans are generally not offered by foreign employers, which means contributions are usually not possible.

 

What happens to existing 401(k) account?

If you already have a 401(k) from a prior U.S. job:

  • You can generally leave it in place and let it grow tax deferred.
  • You won’t be able to contribute unless you meet the employment and income requirements.
  • You may choose to roll it over to an IRA, which could offer more flexibility, especially if you no longer work for the plan sponsor.

Important Tax and Reporting Considerations

  • Use the Foreign Tax Credit Instead: Elect to use the Foreign Tax Credit (FTC) instead of the FEIE. This allows to include foreign income in taxable U.S. income and still reduce double taxation through credits. By doing this, “compensation” status of income may preserve, and be eligible to make 401(k) contributions.
  • Double Taxation and Treaty Relief: Some U.S. tax treaties may affect how foreign pension and retirement accounts are treated, but they generally do not affect eligibility for U.S. based 401(k) plans.
  • Foreign Financial Account Reporting (FBAR/FATCA): 401(k) accounts are not foreign accounts and do not need to be reported on the FBAR or Form 8938.

Conclusion

While the 401(k) remains a powerful retirement tool, its availability to U.S. expats is limited by employer participation and income qualification rules. In most cases, only individuals employed by U.S. companies abroad or with U.S. source income can contribute to a 401(k) plan. It is important to carefully coordinate income reporting and tax elections, especially regarding the FEIE, to ensure eligibility and to save for retirement.

 

Disclaimer:
This information has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors or consult us regarding your own personal tax situation as this article was intended to be general in nature.

 

 

 

 

Key References

https://www.irs.gov/retirement-plans/401k-plans

https://www.irs.gov/instructions/i2555

http://blog.savvynomad.io/401k-and-ira-for-american-expats/

https://www.taxesforexpats.com/articles/retirement/what-happens-to-my-401k-when-i-move-abroad.html

What happens to my 401k when I move abroad? – Experts for Expats

401k for Expats: Contribution and Distribution Rules – Accounting Insights