Naming A Foreign 401(k) Beneficiary? ($ ?s)

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Money Questions

Q: Can I name my nephew who lives in India as my beneficiary on my 401(k) account?

Sincerely, Devoted Uncle

$ ?s answered by Matthew Illian, CFP®


Dear Devoted Uncle,

It is increasingly common for family ties to stretch around the world. But leaving your retirement account, after your death, to a loved one who is a citizen of another country is very complicated, time consuming and expensive. If your heart is set on this, my advice is to be as thorough as possible on the beneficiary form.

When naming a nonresident alien as a retirement plan beneficiary, make sure to include more information than the typical name, relationship, and date of birth. The issue here is that your human resources department must contact and verify your beneficiary. They may begin to lose patience if the person is hard to get a hold of.

The beneficiary form should list a full address, email and any other precise contact details that HR or other plan administrators need to ensure that your beneficiary, although a permanent resident of a foreign country, gets his or her due.

For offshore beneficiaries, more complications arise over the question of taxing the proceeds of 401(k)s and similar retirement plans. The money that accumulates in a 401(k) is pretax, so before it goes abroad, Uncle Sam takes his cut. This means that on top of submitting a death certificate, your nephew will have to request a U.S. tax identification number and pay taxes as a nonresident alien.

At that time, he will likely want to either distribute the entire account outright or, if the 401(k) plan allows, roll this money into an inherited IRA and take required distributions based on the single life expectancy table. If he desires, he can take out more than this minimal amount but not less.

Tax withholding for nonresident aliens can be as high as 30%. However, India is among a long list of countries that has a treaty signed with the United States preventing double taxation so this should be a small issue.

However, based on my readings of several message boards from Indian residents, India shares one thing in common with the United States: when it comes to taxes, nothing is as simple as it should be. I strongly recommend that your nephew work with an accountant who has experience in the nuances of nonresident alien tax law.

This certainly applies to many more countries than just India. After reviewing this issue with several tax authorities, I can only say that it’s a shame that nonresident aliens have such a tough time inheriting U.S. 401(k)s. The rules for withholding and tax filing are very complex and you should count these costs before naming a foreign beneficiary.

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Former Contributor

Matthew Illian was a Wealth Manager at Marotta Wealth Management from 2007 to 2016. He specialized in small business consulting, college planning, and retirement plans.