You Made Aliyah. Options for your U.S. Retirement Plan
Updated: Oct 25
Moving country brings plenty of financial decisions, from opening local bank accounts to understanding a new tax system. But one important piece of your financial picture may still be sitting in the United States: your retirement savings from a previous employer.
Perhaps you worked in the U.S. for years before moving. You contributed regularly to a 401(k), 403(b), or another employer-sponsored retirement plan, and when you left your job, you simply left the account where it was.
But just because you've left your employer, or even the United States, doesn't mean you should stop paying attention to those savings.
What Are Your Options?
According to the Financial Industry Regulatory Authority (FINRA), individuals leaving an employer generally have four options for their retirement savings.
Each has its own advantages, limitations, and potential tax consequences. For Americans who have made Aliyah, these decisions can be particularly complicated because there may be two tax systems to consider.
Option 1: Leave Your Money in Your Former Employer's Plan
In many cases, you can leave your retirement savings in your former employer's plan after leaving your job, provided the plan permits it.
There can be good reasons to do so. Some employer-sponsored plans offer a selection of well-diversified investments, competitive fees, and features that may be difficult to replicate elsewhere.
However, employer-sponsored plans generally offer a restricted selection of investment options. While this isn't necessarily a disadvantage, it's worth reviewing whether the investments available remain appropriate for your financial goals and risk tolerance.
You should also consider the fees associated with the plan, whether you can continue accessing and managing the account from outside the US, and whether the plan administrator has restrictions or additional requirements for participants living overseas.
Option 2: Roll Your Retirement Savings Into an IRA
Another possibility is to roll the retirement funds into an Individual Retirement Account (IRA).
An IRA may provide access to a wider range of investment choices, potentially allowing you to build a portfolio more closely aligned with your individual investment objectives, time horizon, and risk tolerance.
It can also be useful for investors who have accumulated retirement savings through several former employers and would prefer to consolidate eligible accounts.
However, a rollover is not automatically the best choice.
Before making a decision, it's important to compare the features of your existing employer-sponsored plan with those of the proposed IRA. These include investment choices, fees, account services, distribution rules, and any benefits or protections that might be lost by leaving the employer's plan.
When considering a rollover, it's important to work with a qualified financial professional to ensure the transfer is handled correctly and, where eligible, preserves the tax-deferred status of your retirement savings.
Option 3: Transfer the Funds Into Another Employer's Retirement Plan
For individuals who return to work for a U.S. employer, transferring retirement savings into a new employer-sponsored plan may be another option.
Not all plans accept incoming rollovers, and the rules vary between employers.
As with the other options, investors should review the investment choices, fees, and features of the receiving plan before deciding whether a transfer makes sense.
For many people who have permanently relocated, this option may be less relevant, but it remains worth understanding.
Option 4: Withdraw the Funds
Depending on the plan's rules, you may also be able to take a distribution from your retirement account.
However, withdrawing retirement savings can have significant tax consequences.
Under U.S. tax rules, distributions from traditional retirement accounts are generally subject to income tax. In addition, withdrawals made before age 59½ may be subject to a 10% additional tax unless an exception applies.
For someone living in Israel, the situation can be even more complicated, as the withdrawal may have Israeli tax implications as well.
Withdrawing retirement funds can also mean giving up the opportunity for those assets to continue growing within a tax-advantaged retirement account.
This doesn't mean withdrawals are never appropriate. Rather, they should be carefully considered in the context of an individual's broader financial circumstances and with a clear understanding of the possible tax consequences.
Making an Informed Decision
There is no single answer that works for everyone. For some investors, leaving retirement savings in their former employer's plan may be entirely appropriate, while others may benefit from exploring different arrangements.
For Americans living in Israel, any decision involving U.S. retirement savings should take into account both investment considerations and potential U.S. and Israeli tax implications. Before making changes, consult qualified tax professionals familiar with both countries' tax systems.
The goal isn't necessarily to move your money. It's to understand your options and make sure your retirement savings continue to serve your long-term financial objectives.
Disclaimer: This article is intended for general educational and informational purposes only and does not constitute individualized investment, legal, or tax advice. Individual circumstances vary, and investors should consult appropriately qualified professionals before making financial decisions. We do not give legal or tax advice. Always consult a tax or legal adviser to review your individual situation. The information contained in this article reflects the opinions of the author and not necessarily those of Portfolio Resources Group, Inc. or its affiliates.
Rachel Weiss is a licensed investment professional in both the United States and Israel, with over 17 years of experience in the financial services industry. She works with clients to establish and manage U.S. investment accounts, helping them build investment portfolios aligned with their individual financial goals, circumstances, and risk tolerance.
Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI.
For more information, visit www.weissinvest.com or email rweiss@prginc.net.
Sources and Further Reading
Financial Industry Regulatory Authority (FINRA), Retirement Accounts. Click here to read more.
Internal Revenue Service (IRS), Retirement Topics – Termination of Employment. Click here to read more.
Internal Revenue Service (IRS), Rollovers of Retirement Plan and IRA Distributions. Click here to read more.
Internal Revenue Service (IRS), Topic No. 558: Additional Tax on Early Distributions from Retirement Plans Other Than IRAs. Click here to read more.
