Exit Tax on 401(k), IRA, and Retirement Accounts
For a covered expatriate, retirement accounts are not handled by the mark-to-market gain rule. They have their own regimes. A "specified tax-deferred account" like an IRA or 401(k) is treated as fully distributed the day before you expatriate, included in income, but without the 10% early-withdrawal penalty. Pensions are taxed differently again.
This is one of the most misunderstood parts of the exit tax. The headline $910,000 exclusion does not shield your IRA. Retirement and deferred compensation sit in separate buckets under IRC §877A, and the treatment depends on the type of account. Note: all of this applies only if you are a covered expatriate.
Specified tax-deferred accounts: deemed fully distributed
IRAs, 401(k)-type plans, 529 plans, health savings accounts, Archer MSAs, and Coverdell accounts are "specified tax-deferred accounts." On expatriation, the entire balance is treated as distributed to you the day before you leave. You report it as income that year. The relief: the 10% additional tax on early distributions does not apply.
Covered = full balance deemed distributed
Eligible deferred compensation: 30% withholding later
For "eligible" deferred compensation, typically a US pension where the payer is notified of your covered status and you waive any treaty rate, nothing is taxed at expatriation. Instead, the payer withholds 30% on each taxable payment when you receive it in the future. This spreads the tax out rather than front-loading it.
Ineligible deferred compensation: deemed received now
If the deferred compensation does not meet the eligibility conditions, the present value of your accrued benefit is treated as received the day before expatriation and taxed then. As with the accounts above, the early-distribution penalty does not apply.
Why the bucket matters
| Asset type | Treatment for covered expatriate |
|---|---|
| Brokerage, real estate, business | Mark-to-market deemed sale, gain above $910,000 (2026) taxed |
| IRA, 401(k), 529, HSA | Deemed fully distributed, no early-withdrawal penalty |
| Eligible deferred comp (pension) | 30% withholding on future payments |
| Ineligible deferred comp | Present value deemed received now |
Because a deemed full distribution of a large IRA can create a big one-year tax bill, retirement accounts often drive expatriation timing. Model your situation in the calculator, and review planning options with a professional before choosing a date.
Sources: IRC §877A(c)-(e); IRS Form 8854 instructions. See sources.