For US expats living in New Zealand, managing retirement savings can be complex. Many Americans move abroad with existing 401(k)s, IRAs, or other US retirement accounts and wonder whether they should maintain these accounts or transfer their savings elsewhere. Given the tax implications in both the US and New Zealand, it’s essential to weigh the benefits and potential drawbacks before making a decision.
Understanding US Retirement Accounts
US citizens and green card holders remain subject to US tax laws regardless of where they live. Retirement accounts such as 401(k)s, Traditional IRAs, and Roth IRAs offer tax advantages in the US, but those benefits may not always align with New Zealand’s tax system. Here’s how different US retirement accounts work:
- Traditional 401(k) & IRA: Contributions are tax-deferred, and withdrawals are taxed as ordinary income in the US.
- Roth IRA: Contributions are made post-tax, but qualified withdrawals are tax-free in the US.
- Pension Plans (TSP, SEP IRA, etc.): These follow similar taxation rules as 401(k) plans.
While these tax benefits are clear in the US, they may not always carry over seamlessly to New Zealand’s tax system.
Tax Treatment of US Retirement Accounts in New Zealand
For US citizens residing in New Zealand, the tax treatment of US retirement accounts can be quite complicated. Since there is no specific tax treaty provision between the US and New Zealand addressing these accounts, individuals may face challenges related to double taxation, especially concerning distributions from US retirement plans.
Tax on Withdrawals from US Retirement Accounts
When you withdraw funds from a US retirement account, such as a 401(k) or Traditional IRA, these distributions are generally subject to taxation by the IRS, regardless of where you live. However, since New Zealand does not have a specific provision in its tax treaty with the US that addresses US retirement accounts, these withdrawals may also be taxed by New Zealand. This means you could face double taxation—once by the US and again by New Zealand.
The way the tax works in New Zealand depends on the type of distribution and your residency status:
- Regular Withdrawals: In general, New Zealand will treat the distributions as income, and they will be taxed at New Zealand’s income tax rates. The tax you owe will depend on your total income for the year and New Zealand’s tax brackets.
- Early Withdrawals: If you take a distribution from a retirement account before reaching the typical retirement age, you may also face an additional early withdrawal penalty from the IRS. This penalty could add to the tax burden, compounding the issue of double taxation.
Roth IRA Concerns
A Roth IRA offers tax-free withdrawals in the US as long as the account holder meets certain conditions (such as being over 59 ½ and having held the account for at least five years). However, New Zealand does not recognize the tax-free status of Roth IRAs. As a result:
- Taxable Withdrawals in New Zealand: New Zealand may consider withdrawals from a Roth IRA as ordinary income, meaning these funds could be subject to New Zealand’s income tax rates. While you may not have to pay tax on the withdrawal in the US, you may still owe taxes in New Zealand, even if you’ve already paid US taxes on the same funds.
Given the lack of treaty protections for Roth IRAs, individuals must plan accordingly to avoid unexpected tax liabilities when withdrawing from these accounts.
Keeping Your US Retirement Accounts: Pros & Cons
Pros of Keeping US Retirement Accounts
- Continued US Tax Benefits – Keeping a US 401(k) or IRA allows you to maintain tax-deferred growth or tax-free withdrawals in the case of a Roth IRA.
- Access to US Investment Options – US retirement accounts provide access to a wide range of investment choices that may not be available in New Zealand.
- Avoiding Immediate Taxation in NZ – Some transfers or rollovers to foreign accounts may trigger taxation in New Zealand.
- Potential Tax Treaty Benefits – While no specific treaty provision covers US retirement accounts, the US-NZ tax treaty allows for potential foreign tax credits to offset double taxation.
Cons of Keeping US Retirement Accounts
- Currency Exchange Risk – Withdrawing funds in USD while living in NZD could lead to unfavorable exchange rates.
- Double Taxation Risk – Without clear treaty provisions, withdrawals may be taxed in both countries.
- Limited Access to Funds – Early withdrawals before age 59½ could result in penalties and taxation.
- Account Maintenance Issues – Some US brokerage firms restrict access for non-US residents, making it harder to manage accounts while abroad.
Should you transfer US Retirement Funds to New Zealand?
Transferring US retirement funds into a New Zealand superannuation fund (like KiwiSaver) is generally not advisable due to potential tax consequences. KiwiSaver does not offer the same tax deferral benefits as a US 401(k) or IRA, and transferring funds could trigger taxable events in both countries.
Alternative Strategies for US Expats in New Zealand
- Leave Accounts in the US and Withdraw Strategically – Minimize tax liability by withdrawing funds over time and utilizing foreign tax credits.
- Open an International-Friendly US Brokerage Account – Some firms, like Interactive Brokers, accommodate expats and allow continued investment in US retirement accounts.
- Use US Tax Credits to Offset NZ Tax – Work with a tax professional to determine if you can use US taxes paid on retirement income to offset New Zealand tax obligations.
- Consider a Roth Conversion – If planning to stay in New Zealand long-term, converting a traditional IRA to a Roth IRA may help manage future tax liabilities (though this could trigger an immediate tax event in the US).
For most US expats in New Zealand, keeping their US retirement accounts makes the most sense due to the lack of favorable transfer options and potential tax consequences. However, strategic withdrawals and careful tax planning are crucial to avoid double taxation. Consulting a tax professional familiar with US and New Zealand tax laws is highly recommended to optimize your retirement savings strategy.
