403(b), 457, and Government Retirement Plans for Expats

What a 403(b) Plan Is

A 403(b) plan is a tax-advantaged retirement plan offered by:

• public schools,
• universities,
• hospitals,
• religious organisations,
• other qualifying non-profit employers.

At a high level:

• contributions are typically pre-tax (with Roth options in some plans),
• investments are often mutual funds or annuity contracts,
• the plan is governed by IRS rules and employer documents.

From a tax perspective, 403(b) plans are often similar to 401(k)s - but operationally, they can differ significantly.

What a 457 Plan Is (and Why the Distinction Matters)

A 457 plan is a deferred compensation plan available to:

• state and local government employees, and
• certain non-governmental employers.

There are two very different types:

457(b) Governmental Plans

Offered by:

• state governments,
• municipalities,
• public agencies.

These plans:

• are held in trust for the participant,
• resemble 401(k)s in many respects,
• often allow rollovers,
• generally offer stronger participant protections.

457(b) Non-Governmental Plans

Offered by:

• certain non-profit organisations.

These plans:

• are technically deferred compensation,
• may remain assets of the employer,
• are subject to the employer’s creditors,
• have far more restrictive rollover options.

This distinction becomes critical once someone leaves the US

Why 403(b) and 457 Plans Behave Differently Abroad

For expats, the key issue is not contribution mechanics - it is post-employment access.

Differences may include:

• whether the plan permits rollovers,
• whether distributions can begin immediately after separation,
• how provider servicing works for foreign addresses,
• how non-resident withholding applies,
• whether plan assets are protected independently of the employer.

Assuming “it works like a 401(k)” is often where problems begin.

{{INSET-CTA-1}}

Leaving Employment With a 403(b) or 457 Plan

Once employment ends:

• contributions stop,
• employer influence over the plan may continue,
• access rules become plan-specific.

403(b) plans

Often allow:

• rollovers to IRAs,
• distributions subject to age and plan rules,
• continuation of the account with the provider.

However:

• annuity-based 403(b)s may impose additional restrictions,
• legacy contracts may limit flexibility.

457 plans

Behave differently depending on type:

• governmental plans may allow rollovers,
• non-governmental plans often do not.

This distinction matters enormously for expats.

Rollovers: When They Are Allowed and When They Are Not

403(b) rollovers

Often permitted to:

• Traditional IRAs,
• Roth IRAs (via conversion),
• sometimes to other employer plans.

457(b) governmental rollovers

Often permitted to:

• IRAs,
• other governmental plans,
• sometimes 401(k)s.

457(b) non-governmental plans

Often cannot be rolled into IRAs or 401(k)s.

Instead:

• distributions may only occur under specific triggers,
• assets may remain tied to the employer,
• tax treatment differs.

This is one of the most important planning differences.

Distributions After Leaving the US

For expats:

• distributions from 403(b) and 457 plans remain US-source income,
• US tax rules continue to apply,
• non-resident withholding may apply,
• US tax filing is generally required.

Living abroad does not change the fundamental character of the income.

Early Withdrawal Rules and Penalties

Early withdrawal rules depend on:

• plan type,
• age at distribution,
• separation-from-service timing,
• IRS penalty exceptions.

Important nuance:

• certain 457 plans allow penalty-free distributions after separation,
• others follow standard early withdrawal rules,
• plan documents control availability.

Expats often assume foreign residency changes penalties - it does not.

Provider Restrictions for Expats

As with 401(k)s:

• providers may restrict servicing for foreign addresses,
• some plans enter maintenance-only status,
• communication and verification can be difficult,
• documentation may be delayed.

These are not IRS rules - but they often define what is practically possible.

Why Government Plans Require Special Attention

Government plans often:

• offer stronger creditor protection,
• have more rigid rules,
• behave differently under exit and re-entry scenarios,
• interact with pensions and public service benefits.

For internationally mobile public-sector professionals, these plans deserve separate analysis, not assumptions.

Why These Plans Are Often Overlooked in Expat Planning

403(b) and 457 plans are often:

• forgotten once employment ends,
• treated as “just another retirement account,”
• left untouched for years.

But once residency changes, these plans can become:

• difficult to access,
• hard to roll over,
• expensive to manage incorrectly.

Understanding their rules early prevents problems later.

{{INSET-CTA-2}}

Tax Treatment for Expats and Non-Resident Aliens

Once someone with a 403(b) or 457 plan lives outside the United States, the tax character of distributions does not change, even though residency does.

Key principle:

• These plans remain US retirement arrangements.
• Distributions are treated as US-source income.
• US tax rules apply regardless of where the recipient lives.

For US citizens

• Worldwide income continues to be taxable.
• Distributions remain reportable on US tax returns.
• Foreign country taxation depends on local law and treaty provisions.

For non-resident aliens

• Distributions are generally subject to statutory US withholding.
• Withholding is often higher than for US residents.
• A US tax return is usually required to reconcile final tax liability.
• Treaty relief may reduce withholding in some cases.

Living abroad does not convert these distributions into foreign income.

Withholding Rules and Cash-Flow Impact

Withholding is one of the most immediate and practical issues expats encounter.

For non-resident aliens:

• Withholding may apply automatically at distribution.
• The withheld amount is a prepayment, not the final tax.
• Cash received may be significantly lower than expected.

Important nuance:

• Withholding rates are applied before foreign taxes are considered.
• Refunds or adjustments typically require filing a US tax return.
• Timing mismatches between US and foreign tax systems are common.

This can affect short-term cash-flow planning.

Reporting Obligations Continue Abroad

Holding or distributing from a 403(b) or 457 plan abroad often triggers:

• US income tax reporting,
• potential information reporting,
• coordination with other US filings.

In addition:

• related foreign bank accounts may require separate reporting,
• rollover activity may need to be documented carefully,
• plan administrators may issue US tax forms even when the individual is abroad.

Reporting obligations resume or continue regardless of residence.

Annuity-Based 403(b) Plans: A Special Case

Many older 403(b) plans are annuity-based, not mutual-fund-based.

These plans may involve:

• insurance contracts,
• surrender schedules,
• limited liquidity,
• restrictions on rollovers,
• contractual payout terms.

For expats, annuity-based 403(b)s can be particularly challenging because:

• rollovers may be restricted or delayed,
• distributions may be contractually defined,
• provider servicing may be more rigid,
• understanding the contract requires detailed review.

Treating these like a modern 401(k) is often incorrect.

Non-Governmental 457 Plans: Why They Are Riskier Abroad

Non-governmental 457(b) plans behave very differently from other retirement accounts.

Key characteristics:

• Assets often remain part of the employer’s general assets.
• They may be subject to the employer’s creditors.
• Rollovers to IRAs or other plans are typically not permitted.
• Distribution triggers are narrowly defined.

For expats:

• access may be delayed until specific events occur,
• employer stability matters more than residency,
• long-term planning flexibility is limited.

These plans require extra caution, especially when someone leaves the US

Governmental 457 Plans: More Flexible, Still Complex

Governmental 457(b) plans generally offer:

• stronger participant protections,
• clearer trust structures,
• broader rollover options.

However:

• plan documents still control access,
• provider restrictions for foreign residents may apply,
• withholding and reporting rules remain unchanged.

Even “better” plans can create complexity abroad.

Common Mistakes Expats Make With 403(b) and 457 Plans

Some recurring issues include:

• assuming all 457 plans behave the same,
• assuming rollovers are always permitted,
• ignoring annuity contract restrictions,
• underestimating withholding impact,
• failing to update residency status with providers,
• delaying review until access becomes urgent.

Most of these issues are avoidable with early awareness.

Why These Plans Often Require Separate Analysis

403(b) and 457 plans:

• are not interchangeable with 401(k)s,
• are governed by unique rules,
• behave differently under residency changes,
• can carry contractual limitations.

For expats, they should be reviewed on their own terms, not as part of a generic retirement bucket.

Why “Set and Forget” Often Fails Abroad

Leaving these plans untouched for years may seem harmless.

But over time:

• provider policies change,
• access rules evolve,
• documentation gets lost,
• international logistics become harder.

Once a distribution or rollover is needed, flexibility may be reduced.

Why Early Understanding Matters More Than Action

For expats with 403(b) or 457 plans:

• the most important step is understanding, not moving money.
• knowing what is possible - and what is not - prevents panic later.
• awareness allows realistic expectations about access and timing.

These plans reward preparation, not reaction.

Hypothetical Expat Scenarios

The following scenarios are hypothetical and provided for educational purposes only. They do not represent actual clients or outcomes.

Scenario 1 - Academic With a 403(b) Living Abroad

A university professor worked in the US for many years and accumulated a 403(b) before relocating overseas.

Key considerations:

• The 403(b) remains a US retirement account.
• Rollovers may be permitted depending on plan and contract type.
• Annuity-based restrictions may limit flexibility.
• Distributions remain US-source income.
• Non-resident withholding may apply.

Scenario 2 - Government Employee With a 457(b) Returning Home

A public-sector employee leaves the US and later accesses a governmental 457(b) plan.

Key considerations:

• Governmental 457(b) plans may allow penalty-free distributions after separation.
• Withholding may still apply.
• Reporting on US tax returns is required.
• Treaty provisions may affect net taxation.

Scenario 3 - Non-Governmental 457 Plan Held Abroad

A non-profit executive leaves the US with a non-governmental 457 plan.

Key considerations:

• Rollovers may not be permitted.
• Assets may remain tied to the employer.
• Distribution timing is limited by plan rules.
• Employer financial stability matters.
• Tax exposure occurs when distributions are made.

Scenario 4 - Legacy 403(b) With Annuity Contract

An individual holds a legacy 403(b) invested through an annuity contract and later becomes an expat.

Key considerations:

• Surrender schedules may apply.
• Contract terms may limit rollovers.
• Provider servicing for foreign addresses may be restrictive.
• Distributions are taxed under US rules regardless of residence.

Practical Checklist for Expats With 403(b) and 457 Plans

Before making assumptions about access or rollovers, individuals may wish to review:

• Whether their plan is a 403(b), governmental 457(b), or non-governmental 457.
• Whether the plan permits rollovers and to which account types.
• Whether annuity contracts apply and what restrictions exist.
• Provider policies for foreign addresses.
• Withholding rules applicable to non-residents.
• Whether penalty exceptions apply upon separation.
• Documentation required for distributions.
• How plan income fits into broader retirement planning.
• Whether treaty provisions may apply.

This checklist supports awareness and preparation, not decision-making.

How Skybound Wealth USA Assists With Government and Non-Profit Retirement Plans

Skybound Wealth USA assists individuals with:

• understanding how 403(b) and 457 plans function in an international context,
• reviewing plan documents and contract terms,
• evaluating rollover and distribution options where permitted,
• integrating these plans into broader retirement and cash-flow planning,
• coordinating discussions with tax professionals where appropriate,
• supporting globally mobile professionals with complex plan types.

Any recommendations depend entirely on individual circumstances.

Next Steps

If you hold a 403(b) or 457 plan and are living abroad - or planning to - understanding the unique rules governing these plans can help avoid incorrect assumptions and unrealistic expectations. You may schedule a discussion with Skybound Wealth USA to review how these plan types fit into your broader financial picture.

Important Disclosures

This material is provided for general informational purposes only and does not constitute personalised financial, tax, or legal advice. Plan rules, tax laws, and provider policies may change and vary by individual circumstances. Hypothetical examples are for illustration only and do not represent actual client outcomes.

Past performance does not predict future results. Skybound Wealth USA is an SEC-registered investment adviser. Registration does not imply any specific level of skill or training. Please refer to Form ADV Part 2A, Part 2B, and Form CRS for full disclosures.