How to Move Your U.S. Retirement Accounts to Australia

For Americans moving to Australia and returning Australians, getting 401(k) and IRA accounts out of the U.S. and into Australia is top of mind. 

If you’re looking to move your U.S. retirement accounts back to Australia, keep reading.

In this article we cover:

• The types of U.S. retirement accounts and their tax treatment
• Your options for accessing your U.S. retirement funds based on your immigration status
• How to distribute your accounts
• Strategic conversion of funds into AUD
• What you can do with your money once it is in Australia
• Superannuation contribution limits and strategies

Tax Treatment of U.S. Retirement Accounts

There are three main types of retirement plans in the United States:

• Tax-deductible Defined Contribution accounts (E.g. 401Ks, 403Bs, Traditional IRAs etc)
• Post-tax Defined Contribution accounts (E.g. ROTH 401K, ROTH IRA)
• Defined benefit accounts (E.g. Pension, Cash Balance account)

Each of these has different tax treatments during the contribution, growth, and withdrawal phases. It's important to understand the tax consequences of withdrawing your U.S. retirement account funds before deciding to move them. 

Below is an overview of the key types of retirement accounts and taxation by phase.

Note that the above chart outlines the tax treatment of these accounts within the United States.

When You Can Access Funds in a U.S. Retirement Account

If you are a U.S. tax resident, meaning you are either a U.S. citizen, green card holder, or you fulfill the substantial presence test—you generally have to wait until you are 59 ½ to access your funds or face an early withdrawal penalty. 

When you can access your 401(k):

• Penalty-free distribution starting age 59 ½.
• If withdrawn before that age, a penalty tax of 10% applies. Exceptions to the penalty tax include hardship withdrawals such as disability and some medical expenses.
• You may take out a loan (up to 50% of the account or $50,000—the lesser of the two).

When you can access your Traditional IRA:

• Rules are very similar to 401(k)s.
• You can take penalty-free distributions starting at age 59 ½.
• You face a 10% penalty tax on distributions taken before age 59 ½.
• Exception: Penalty-free distribution for first home purchase deposit up to $10,000, potentially for higher education costs, and hardship withdrawals.

Defining Hardship Distributions

You can make hardship withdrawals from your 401(k) or traditional IRA to cover certain expenses—penalty-free. 

These hardship distributions are possible only for an immediate and significant financial need, and are limited to what is necessary.

Typically, employees are automatically considered to have a hardship distribution need for the following:

• Medical expenses for employee, spouse, or dependents
• Costs related to purchase of primary residence (not mortgage)
• Tuition and related educational fees
• Eviction prevention payment
• Funeral expenses for employee, spouse, dependents, or beneficiaries
• Repair damage to principal residence 

How Your U.S. Immigration Status Impacts the Taxation of Your Retirement Accounts

Your U.S. immigration status will affect how you and your retirement accounts are taxed.

• U.S. Citizen: The United States practices citizenship-based taxation, thus U.S. citizens are always subject to U.S. taxation. You will not necessarily be double taxed, but you must file a U.S. tax return to be assessed whether any tax is owed. Informational reporting may also be required (e.g. FBAR, FATCA and PFIC filings).
• U.S. Permanent Resident: Same as above. If you are a U.S. green card holder, you are considered a United States tax resident no matter where you are physically located. You will remain a U.S. tax resident until a Form I-407 is successfully filed and your green card surrendered.
• Temporary Visa Holder: You are subject to U.S. taxes only while you fulfill the U.S. substantial presence test. Thus, once you return to Australia (and have swapped from U.S. to Australian payroll), you would no longer be considered a U.S. tax resident.

U.S. tax residents will have their retirement accounts taxed as per the aforementioned section ‘Tax Treatment of U.S. Retirement Accounts.’ 

Things differ for temporary visa holders who have exited the U.S, and have commenced tax residency back in Australia. For them, they would look to the U.S./Australian tax treaty and see in Article 18(1) “pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State.” Meaning, that only Australia has taxing rights on the U.S. retirement account. 

How does Australia tax these accounts? U.S. retirement account withdrawals get taxed as a foreign trust. How are foreign trusts taxed? Your original contribution as well as your employer’s contribution for the corpus or taxable basis of the account. Any additional growth is taxed as assessable income and subject to income tax in Australia. 

Options for Distributing Funds in Account Based on Immigration Status

There are three main options when it comes to getting your funds out of your U.S. retirement account. 

• U.S. Persons: Distribute after age 59 ½  according to regular U.S. progressive income tax rules. 
• U.S. Persons: Pay progressive U.S. ordinary income tax + 10% early withdrawal penalty by accessing the account before age 59 ½  This is generally the least tax advantageous approach, but it will depend on your income. 
• Non-U.S. Persons: You can take a treaty position of 0% withholding by filing a Form W8-BEN, and referencing 18(1) of the U.S. Australian income tax treaty.

Appropriate Withholding Amount

Generally, brokerage firms that hold custody of 401(k), 403(b), and other qualified retirement accounts withhold 30% of a non-resident’s qualified account distribution for U.S. State and Federal tax. It is up to the taxpayer to file a return and recover this amount if a tax treaty modifies the appropriate withholding.

For Aussies who were in the U.S. on a temporary visa and have since returned to Australia, you may not have to pay U.S. taxes on your retirement account at all. 

Under the U.S.-Australia Double Income tax treaty you may be exempted from withholding tax if your retirement distribution is considered a "pension distribution." This is generally thought to include periodic distributions from a 401K/IRA’s above the age of 60..

What if My Retirement Account is Overwithheld?

Generally, non-U.S. persons shouldn't have U.S. federal taxes withheld from their account as the U.S.-Australia Double Income tax treaty states at Paragraph 18 (1) that “pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State.” “The term "pensions and other similar remuneration", as used in this Article, means periodic payments made by reason of retirement or death, in consideration for services rendered, or by  way of compensation paid after retirement for injuries received in connection with past employment.”

If you are not a U.S. tax resident, and your account is being withheld, you have a few options: 

• You can try to escalate the matter with the custodian or plan administrator to release the withheld amount.
• You could hire a tax attorney to help make a case to the custodian, or most easily
• You can wait until you file a U.S. tax return to get a refund of the withheld amount.

You may want to weigh the pros and cons of these various options and make a decision that is best for you. For instance, you could wait to receive your tax refund, but you may lose out on potential gains had the money stayed invested during that time.

Considerations When Withdrawing From Your U.S. Retirement Account

Based on your immigration status and your financial situation, you will have different options for withdrawing from your retirement accounts. Yet, one of the biggest questions remains: How much should you withdraw?

Required Minimum Distributions

At age 72 you must start withdrawing the minimum amount of funds per IRS. This is called the required minimum distributions (RMDs). Regardless of whether you need the funds at the moment, you need to withdraw the minimum amount and pay taxes on those distributions. 

You could also choose to withdraw more than the required minimum distributions. If you wanted to, you could even withdraw your entire account balance starting at age 59 ½ (or earlier with a 10% penalty).

Is that the right choice for you? Let's take a look.

Distribution Considerations and Tax

Many individuals returning to Australia may wish to clear their financial ties to the U.S. and transfer their entire balance lump sum. However, this could create a large tax bill in the US. 

So, should you take a lump sum withdrawal and pay a higher tax rate? Or do you distribute your retirement over a period of time, thus lowering your tax burden?

How Much You Should Withdraw From Your Retirement Account

For U.S. persons (U.S. citizens, Green Card holders, and otherwise tax residents), in general, your most tax-effective approach is to spread your distributions to avoid having your U.S. Adjusted Gross Income (AGI) push you into a higher income tax bracket. This way your distributions would be taxed at lower average levels. 

This is a general rule of thumb, and your financial situation may warrant a different approach. Consult with your financial and tax advisor for insight into your circumstances.

Consider Your Other Sources of Income

Do you have other sources of U.S. income? Sources of income such as real estate rental income, business income, and social security payments (if you are eligible) will also impact your tax situation. U.S. taxation is progressive, so the more money you make, the higher your tax bracket.

More Tax Considerations

Stay up-to-date on new laws that may change rules around retirement accounts. For instance, the SECURE Act of 2019 has changed IRA inheritance rules. Prior to this change, you could distribute an inherited IRA throughout your lifetime, significantly reducing the tax impact. 

It is now less tax efficient as most beneficiaries are forced to take distributions over a 10-year period. This can be inefficient tax-wise when children who inherit IRAs are more likely in their highest earning years, thus the distributed IRA amount is likely pushing them into a higher tax bracket. 

Can I Just Leave My U.S. Retirement Funds in the U.S. After I Move to Australia? 

Many returning Aussies are happy with the growth of their 401(k) account and wonder, can I just leave it alone?  

Yes, absolutely. There is no reason you need to touch your retirement accounts just because you move back to Australia. You can leave the accounts untouched until you are ready to retire or have reached the age where you must take the required minimum distributions. After you reach the RMD age, then you will need to start making withdrawals. 

How to Convert Retirement Funds Efficiently Into AUD

After you've decided on your distribution strategy, you need to decide how to convert your funds into Australian dollars. Aside from the foreign exchange rate itself, the key to lowering the cost of the exchange is to find a low interbank spread rate. The interbank rate is the bank-to-bank rate for currency exchange. The interbank spread is the difference between what banks charge each other and what you will receive as a retail client.

What to Do With the Retirement Money Once It is in Australia

You've finally decided to move your retirement savings from the U.S. to Australia. Now, what do you do with it? Do you need to contribute the funds back into your Australian Superannuation account?

No, you are not obligated to move your U.S. retirement funds into your Super. However, you could if you wanted to. In fact—it might be one of the best uses of those funds but it really depends on your situation.

Because the funds were saved for retirement, and the Superannuation system offers the best tax-advantaged investment for most Australian residents—it could be a beneficial strategy for you. However, if your US retirement distributions were for your own living expenses, then there’s no benefit in first contributing them to your Super account. You are advised to consult with your financial advisor to see if this makes sense for your situation.

Superannuation Contribution Limits and Strategies

If you decide to move your U.S. retirement funds to your Australian Super, there are a few rules you need to know:

Your contribution limits are:

• Concessional contribution of $27,500 (tax deductible contribution) in FY2022/23
• Non-concessional contribution of $110,000 (after-tax contribution) in FY2022/23

Additionally, under the three-year Non-Concessional Contribution bring-forward rule, those under the age of 65 can bring forward 2 years’ worth of non-concessional contributions for a total of $330,000 AUD to apply over 3 years.

Furthermore, with the five-year retroactive Concessional Contribution carry back rule, superannuation account holders with an account balance of less than $500,000 AUD can make use of unused Concessional Contribution amounts going back up to five financial years (starting 2018/19).

Helping You Plan For Retirement

If you've worked in the United States and accumulated retirement savings, you may be wondering what to do with those funds when you move back to Australia. 

The types of retirement accounts you have will play a big role in how you can access and use those funds. So will your status as a U.S. tax resident or a non-resident. Moving to a new country can add an extra layer of complexity to your retirement planning. 

At Areté Wealth Strategists, we work with U.S. expatriates in Australia, Australians in America and Aussies returning to Australia. We can help you understand all of your options and come up with a retirement strategy you can feel confident about. Visit our website to learn more about how we can help you.