Withdrawal of 401(ki) - Foreign Citizen

[JohnH]

German citizen has been in the US working legally for 10+ years. Has been putting money into a 401(k) regularly.  He is under 59-1/2 years of age.  Has now decided to return to Germany permanently and will need to terminate the 401(k) since he will no longer have a valid US address.  Does anyone know of any provision for him to avoid the 10% early withdrawal penalty?  I've told him I know of no exception, but this is a first for me so I thought I'd ask around.

[Lion EA]

Is he separating from service after 55 years of age?

[JohnH]

He is under age 55, but thanks for asking.

[joanmcq]

Roll it into an IRA?  

[jklcpa]

There are no exceptions for a foreigner working here on a visa and leaving the country that takes an early withdraw the funds to avoid the 10% penalty. He would have to meet one of the exceptions listed for anyone else.

Two ideas that help him to minimize the overall tax impact are:

• Roll it into an IRA and then take a series of distributions each year over the longer of 5 years or the number of years to age 59 1/2. It won't give him that large payout though, if that is what he wants.  This option would avoid the penalty and may allow the distributions to be taxed at a lower rate.
• Wait to take the distribution until after he stops working here and is back in Germany so that the distribution is his only source of U.S. income. Taking it in a year while still working in the U.S. and adding the distribution to his other income, it may be taxed at a higher rate than if he waits until the distribution is taxed in a year by itself. With this option, he would still pay the early withdraw penalty.