Us Retirement Investments: Exploring The Impact For Non-Citizens

There are a number of options available for non-US citizens with US retirement investments. Non-citizens can open the most popular types of retirement accounts: a 401(k), traditional IRAs and Roth IRAs. To do so, they must be a legal resident of the US and have a Social Security Number (SSN) or Tax ID. It is also possible to open an international investing account through a local broker in your home country.

If you are a US citizen living abroad, you can have both a traditional and/or Roth IRA. However, you may not be able to add to it while overseas. It is recommended to consult a tax professional if you plan to move out of the US before retiring.

Non-citizens can open a 401(k), traditional IRA, or Roth IRA

If you're a non-US citizen who is legally able to live and work in the US, the Internal Revenue Service (IRS) considers you a nonresident alien for tax purposes. Since you're required to pay income taxes on your earnings, you might wonder if you're eligible to open a retirement account. The short answer is "yes". Non-citizens can open a 401(k), traditional IRA, or Roth IRA.

If you're working for a US-based company, your employer will likely offer a 401(k). If they don't, you can contribute to an IRA. This is important because it allows you to save for retirement during your employment in the US. If you postpone retirement savings until you return to your home country, you may miss out on years of long-term growth and be forced to play catch-up later in life.

To open a retirement account, you'll need either a Social Security number or an Individual Taxpayer Identification Number (ITIN). You can obtain these by sharing your immigration documents with the Social Security Administration or IRS, respectively. These numbers ensure that all dividends, interest, and gains on your account can be correctly reported to the IRS.

There are some special rules to be aware of when it comes to retirement accounts for non-citizens. For example, if you decide to leave the US before reaching the eligible age for distributions, you may face challenges and financial penalties. Additionally, the rules for early withdrawals and taxes may differ for nonresident aliens. It's important to understand these rules before opening an account.

When considering a retirement account, it's also worth thinking about your long-term plans. Do you intend to stay in the US permanently or return to your home country? If you plan to leave the US, make sure you understand how this will impact your retirement funds. You may be able to transfer your accounts to a similar vehicle in your home country, but this could result in financial penalties. Alternatively, you can leave your funds in a 401(k) or roll them over into an IRA until you're eligible for penalty-free withdrawals.

You need a Social Security Number or Individual Taxpayer Identification Number

If you're a non-citizen who is not eligible for a Social Security Number (SSN), you will need to apply for an Individual Taxpayer Identification Number (ITIN) to open a retirement account in the United States. An ITIN is a tax processing number issued by the Internal Revenue Service (IRS) to individuals who are required to have a US taxpayer identification number but who are not eligible to obtain an SSN from the Social Security Administration (SSA).

To obtain an ITIN, you must complete IRS Form W-7, IRS Application for Individual Taxpayer Identification Number. The Form W-7 requires documentation substantiating foreign/alien status and true identity for each individual. You may either mail the documentation, along with the Form W-7, to the address shown in the Form W-7 Instructions, present it at IRS walk-in offices, or process your application through an Acceptance Agent authorized by the IRS. Acceptance Agents are entities (colleges, financial institutions, accounting firms, etc.) who are authorized by the IRS to assist applicants in obtaining ITINs. They review the applicant's documentation and forward the completed Form W-7 to IRS for processing.

An SSN is a unique nine-digit code that's used to identify you and track your earnings over the course of your lifetime. It was first introduced in 1936 as a means of tracking earnings histories for US workers and determining their Social Security benefits once they retired. Today, it is also used for tax purposes and tracking credit reports.

To get an SSN, you must file Form SS-5 with the Social Security Administration and provide evidence of your identity, age, and US citizenship or lawful alien status. You will also need to submit an original birth certificate (photocopies are not accepted), a US passport or official hospital record of your birth if you don't have a birth certificate, and official ID, including state-issued ID cards, military ID cards, school ID cards, or health insurance ID cards.

You can invest for retirement through a 401(k) if your employer offers it

If you are a non-US citizen, you can still invest for retirement through a 401(k) if your employer offers it. A 401(k) is an employer-sponsored retirement savings program that offers significant tax benefits to participants. It is one of the most common retirement plans in the United States, allowing employees to save and invest a portion of their paychecks before taxes are taken out.

To be eligible to participate in a 401(k) plan as a non-US citizen, you must meet certain requirements:

• Your employer's plan must allow participation by non-resident alien employees (NRAs).
• You must be earning US-sourced income.
• You must meet the plan's standard eligibility requirements, such as age or length of service criteria, that apply to all employees.

If you meet these requirements, you will be able to participate in the 401(k) plan with the same rights and benefits as a US citizen or resident alien.

It is important to note that your residence status can affect your 401(k) plan in two ways: eligibility and withholding on distributions. If you are not considered a "US Person" for tax purposes, specific withholding rules will apply to distributions from your 401(k). To be considered a US person, you must have a Social Security number and a mailing address in the US or a country with a tax treaty with the US that exempts residents from US tax on retirement plan distributions.

Additionally, if you decide to leave the US and return to your home country, you will need to decide what to do with your 401(k) plan. You have several options:

• Leave the funds in the 401(k) until you reach the age of 59 1/2 and can start taking penalty-free withdrawals.
• Cash out the account, which may result in early withdrawal penalties and taxes.
• Roll over the funds into an Individual Retirement Account (IRA) or another tax-advantaged account to avoid early withdrawal penalties.

Each option has different tax implications, and the best choice will depend on your personal situation, the tax regulations in your home country, and the tax treaty between your country and the US.

You don't need to cash out your retirement account upon leaving the US

If you're a non-citizen who has been working in the US and contributing to a 401(k) retirement plan, you don't have to cash out your retirement account when you leave the country. There are a few other options to consider.

Firstly, you can leave your 401(k) with your employer in the US until you reach the age of 59 1/2 and can start taking penalty-free withdrawals. However, some employers won't allow this, especially if your balance is less than $1,000. You'll also need to ensure that your former employer can communicate with you by email or mail so that you're notified of any changes to the plan.

Another option is to roll over your 401(k) into an Individual Retirement Account (IRA). This gives you more control over your investments, but you'll need to open the IRA before funding it with your 401(k). If your contributions to your 401(k) were pre-tax, rolling over to a traditional IRA may be the best option as it won't have any immediate tax consequences. Alternatively, you could roll over to a Roth IRA, but this will result in a large tax bill if your original contributions were pre-tax.

If you do decide to cash out your 401(k) before you turn 59 1/2, your withdrawal will be taxed as income by the US, and you'll also be subject to a 10% early withdrawal penalty. However, if you wait until the following tax year to cash out, when you're no longer earning an income in the US, you'll likely fall into a lower tax bracket, reducing your tax liability.

You may still receive US Social Security payments while living outside the US

Non-citizens who are permanent residents of the US can qualify for Social Security retirement benefits. To receive these benefits, one must earn 40 work credits, which equates to about 10 years of work. Interestingly, you don't need to be a US citizen to earn these credits; you can earn them while working legally in the US on a visa. Additionally, the US has established bilateral Social Security agreements, also known as "Totalization agreements," with 26 countries to make it easier for people working in different countries to qualify for benefits. These agreements allow individuals to combine their work credits from the US and one of the 26 countries to qualify for Social Security benefits in either country.

If you are a non-citizen receiving Social Security benefits and plan to live abroad for an extended period, you must complete Form SSA-21. Generally, non-citizens cannot receive Retirement, Survivors, or Disability Insurance benefits after their sixth consecutive month outside the US. However, there are exceptions to this rule. Some countries have agreements with the US that allow their citizens to continue receiving benefits while living abroad. For example, if you are a citizen of China and meet certain additional requirements, you can continue receiving benefits after six months. Additionally, you can maintain your benefits by returning to the US for one full calendar month every six months.

It is important to note that receiving a foreign pension may reduce your Social Security retirement benefit due to the Windfall Elimination Provision (WEP). Furthermore, non-citizens are subject to different tax rates on their Social Security benefits, depending on their residency status. Resident aliens are taxed similarly to US citizens, while nonresident aliens are typically subject to a flat 30% withholding on 85% of their benefits.

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