401k Estate Tax: The 40% Tax on Non-Citizens That Nobody Talks About

You have spent years building your 401(k) in America, diligently contributing from each paycheck while working on an H-1B, L-1, or other visa. Your retirement account has grown to a comfortable sum, and you feel financially secure. But here is a brutal truth that almost nobody discusses: if you die as a non-citizen, the IRS could take up to 40% of your retirement savings before your family sees a single dollar. This is not a hypothetical scenario or a scare tactic. It is the law.

The U.S. estate tax system creates a massive disparity between citizens and non-citizens. While American citizens and permanent residents enjoy an estate tax exemption of $13.99 million in 2025 (rising to $15 million in 2026), non-resident aliens receive a shockingly low exemption of just $60,000. That figure has not changed since 1976 and is not indexed for inflation. Any U.S.-situs assets above that threshold, including your 401(k), IRA, and brokerage accounts, face estate tax rates up to 40%. For a non-citizen with a $500,000 retirement account, this could mean a tax bill exceeding $170,000 that your beneficiaries must pay.

This guide breaks down everything you need to know about the 401(k) estate tax problem for non-citizens: who is affected, how much you could owe, and most importantly, what strategies exist to protect your hard-earned savings. Whether you are on a work visa, holding a green card, or married to a non-citizen spouse, understanding these rules could save your family hundreds of thousands of dollars.

The Estate Tax Exemption Gap: $60,000 vs $15 Million

The U.S. estate tax system operates on a fundamental premise: when you die, the government may tax the transfer of your assets to your heirs. For most Americans, this tax is irrelevant because the exemption is so high. In 2025, U.S. citizens and permanent residents can pass on up to $13.99 million without paying a single dollar in federal estate tax. Starting in 2026, thanks to the One Big Beautiful Bill Act (OBBBA) signed into law in July 2025, that exemption rises to $15 million and becomes permanently indexed for inflation. Married couples can effectively shield $30 million.

Non-resident aliens face a starkly different reality. If you are not a U.S. citizen and not domiciled in the United States for estate tax purposes, your exemption is just $60,000. This number was set in 1976 and has never been adjusted for inflation or changed in any way. To put this in perspective, if that $60,000 had kept pace with inflation, it would be worth approximately $330,000 today. Instead, it remains frozen at a level that provides almost no protection for modern retirement accounts.

Understanding your tax obligations as an H-1B holder becomes essential when you realize the stakes involved. Consider this mathematical reality: if you have $500,000 in U.S.-situs assets (including your 401(k), IRA, and U.S. stocks), you would have $440,000 subject to estate tax after the $60,000 exemption. At the 40% rate, your estate could owe $176,000 in federal estate tax alone. That is money your family will never see.

Why Does This Disparity Exist?

The logic behind this disparity centers on tax collection concerns. When a U.S. citizen or permanent resident dies, the IRS has a clear path to collect any taxes owed from the estate. The surviving spouse typically remains in the country, the assets are here, and the legal system provides straightforward enforcement mechanisms. Non-resident aliens present a different challenge. They may have limited assets in the U.S., their families may live abroad, and collecting taxes across international borders proves difficult.

Congress designed the system to ensure it could collect estate taxes from non-resident aliens while they still have assets within U.S. jurisdiction. The low exemption means the tax applies to a broader range of estates, and the tax is due before assets can be transferred out of the country. Whether you consider this fair or not, it is the legal reality that every non-citizen with U.S. assets must navigate.

Why Your 401(k) is a Target for Estate Tax

Not all assets face U.S. estate tax for non-resident aliens. The tax applies only to “U.S.-situs” assets, meaning property that the IRS considers to be located within the United States. Your 401(k) falls squarely into this category, making it one of the most vulnerable assets in your portfolio. The same applies to traditional IRAs, Roth IRAs, brokerage accounts holding U.S. stocks, and U.S. real estate.

The classification of retirement accounts as U.S.-situs property creates a particularly painful situation for visa holders. You contributed to your 401(k) while working legally in America, often receiving employer matching contributions. The account grew tax-deferred over years or decades. When you retire or leave the country, you might assume these savings are yours to pass on freely. The IRS sees it differently: these accounts are held by U.S. custodians, invested primarily in U.S. securities, and therefore constitute U.S.-situs property subject to estate tax.

When filing taxes as an H-1B holder, you likely focused on income tax, FICA contributions, and perhaps state taxes. Estate tax rarely enters the conversation during your working years. Yet the 401(k) balance you are proudly building could become your family’s biggest tax liability if you pass away before addressing this issue.

What Counts as U.S.-Situs Property?

The IRS categorizes assets into U.S.-situs and non-U.S.-situs property based on specific rules. Understanding this distinction is crucial for estate planning:

• U.S. stocks: Shares of U.S. corporations are U.S.-situs property, regardless of where you hold them or where you live
• U.S. real estate: Any property located in the United States, including vacation homes and rental properties
• Retirement accounts: 401(k), IRA, Roth IRA, and similar accounts held by U.S. custodians
• U.S. brokerage cash: Cash balances in U.S. brokerage accounts exceeding certain thresholds
• Tangible personal property: Artwork, vehicles, and other physical items located in the U.S.

Some assets receive more favorable treatment. Bank deposits in U.S. banks (as opposed to brokerage accounts) are generally not considered U.S.-situs property for estate tax purposes, provided they are not connected with a U.S. trade or business. U.S. Treasury bonds and most debt obligations of U.S. corporations also escape the U.S.-situs classification. This creates potential planning opportunities, though converting a 401(k) to Treasury bonds is not straightforward.

Domicile vs. Residency: Two Different Tests

One of the most confusing aspects of U.S. tax law for immigrants is the distinction between income tax residency and estate tax domicile. These two concepts use entirely different tests, and your status under one does not determine your status under the other. Many visa holders who qualify as U.S. residents for income tax purposes remain non-domiciled for estate tax purposes, creating significant exposure.

For income tax, the IRS uses clear, objective tests. The substantial presence test counts your physical days in the United States over a three-year period. If you meet the formula (at least 31 days in the current year and a weighted total of 183 days over three years), you are a U.S. tax resident regardless of your visa status. Green card holders are automatically considered tax residents from the day they receive their card.

Estate tax domicile works completely differently. The concept relates to understanding resident alien status and tax residency at a deeper level. Domicile is based on your subjective intent to remain in the United States indefinitely, combined with objective facts about your life circumstances. There is no bright-line test, no day-counting formula. Instead, the IRS examines a totality of factors to determine whether you have made the U.S. your permanent home.

Factors the IRS Considers for Domicile

When determining your domicile status for estate tax purposes, the IRS looks at numerous factors. No single factor is determinative, and the analysis considers your entire life situation:

1. Statements of intent: What you have said on immigration forms, tax returns, and legal documents about your plans to stay in the U.S.
2. Residential property: Where you own or rent your primary home, and the relative permanence of your living situation
3. Business interests: Where your primary employment or business operations are located
4. Family connections: Where your spouse and children live, where they attend school
5. Social ties: Club memberships, religious affiliations, community involvement
6. Location of assets: Where you hold the majority of your investments and property
7. Immigration status: Whether you hold a temporary visa or are pursuing permanent residence

The ambiguity of this test creates planning challenges. An H-1B holder with a pending green card application, a home in California, children in American schools, and statements about wanting to stay permanently might be considered domiciled in the U.S., qualifying for the full $13.99 million exemption. The same person on the same visa, but with a home abroad, family overseas, and documented plans to return, might remain non-domiciled with only a $60,000 exemption.

Which Visa Holders Face Estate Tax Exposure

Your immigration status significantly influences your estate tax exposure, though not in the straightforward way many assume. The key question is whether you are domiciled in the U.S. for estate tax purposes, which depends on facts and circumstances rather than your visa category alone. However, certain visa types carry higher or lower risk of estate tax problems based on typical circumstances.

Understanding the L-1 visa tax implications illustrates this complexity. L-1 visa holders are intracompany transferees, typically executives or managers sent to the U.S. for a temporary assignment. Many L-1 holders maintain strong ties to their home country, with family remaining abroad and a clear expectation of return. These individuals often remain non-domiciled for estate tax purposes, exposing their U.S. retirement accounts to the 40% tax.

High-Risk Visa Categories

Visa holders in these categories frequently face estate tax exposure because their temporary status suggests an intent to eventually leave the United States:

• H-1B specialty workers: Often intend to pursue green cards but may not have demonstrated sufficient domicile intent
• L-1 intracompany transferees: Typically on rotational assignments with expected return dates
• O-1 extraordinary ability: May maintain primary residence and career connections abroad
• E-2 treaty investors: Investment treaty status implies temporary business presence
• TN NAFTA professionals: Status tied to specific job, no direct path to permanent residence

Lower-Risk Categories

These individuals are more likely to be considered U.S. domiciled, potentially qualifying for the full estate tax exemption:

• Green card holders: Permanent residence status strongly suggests domicile intent, though not automatically determinative
• Approved I-140 with pending I-485: Active pursuit of permanent residence demonstrates intent to stay
• Long-term visa holders with family: Those who have lived in the U.S. for many years with spouse and children here

The Non-Citizen Spouse Trap

One of the most devastating estate tax surprises affects U.S. citizens and green card holders who are married to non-citizen spouses. Under normal circumstances, spouses can transfer unlimited assets to each other without triggering estate tax. This unlimited marital deduction is a cornerstone of estate planning for American couples. However, this benefit does not apply when the surviving spouse is not a U.S. citizen.

Consider this scenario: You are a U.S. citizen with a $2 million 401(k) and other assets totaling $3 million. Your spouse is from India and has a green card but has not yet naturalized. If you die, your entire estate would normally pass to your surviving spouse tax-free under the unlimited marital deduction. But because your spouse is not a citizen, that deduction does not apply. Your estate could face immediate estate tax on assets above the exemption amount.

The connection between your I-485 application and inheritance matters here. While a pending green card application shows intent to remain in the U.S., it does not grant citizenship rights for estate tax purposes. Your spouse would need to become a naturalized citizen before your death to qualify for the unlimited marital deduction.

Why Congress Created This Rule

The rationale behind denying the marital deduction to non-citizen spouses relates to tax collection concerns. When a citizen spouse inherits assets, those assets remain within the U.S. tax system. The surviving citizen spouse will eventually die, and at that point, estate tax will be assessed on whatever remains. Congress views this as a deferral rather than an exemption.

With a non-citizen spouse, the IRS worries that the survivor might leave the country, taking the inherited assets beyond the reach of U.S. tax authorities. Rather than risk losing the ability to collect estate tax entirely, the law requires the tax to be paid at the first death. This creates a cash flow crisis for many families, who must pay significant taxes immediately rather than deferring them until the second death.

QDOT: Protecting Your Non-Citizen Spouse

The Qualified Domestic Trust, commonly known as a QDOT, provides a solution for couples where one spouse is not a U.S. citizen. This specialized trust structure allows the unlimited marital deduction to apply, deferring estate tax until the surviving non-citizen spouse dies or takes distributions of principal from the trust. It is essentially a compromise: the IRS gets assurance that it can eventually collect the tax, while the surviving spouse gains access to the assets during their lifetime.

Setting up a QDOT requires careful planning and strict compliance with IRS requirements. The trust must be established either during the decedent’s lifetime or created through the will and properly elected on the estate tax return. Understanding how to structure entities properly, similar to learning about LLCs in the United States for immigrants, provides helpful context for understanding trust structures and their requirements.

QDOT Requirements

A valid QDOT must satisfy several strict requirements established by the IRS:

• U.S. Trustee requirement: At least one trustee must be a U.S. citizen or a domestic corporation
• Withholding power: The U.S. trustee must have the right to withhold estate tax from any principal distributions
• Proper election: The executor must make the QDOT election on the estate tax return (Form 706)
• Security requirement: For trusts exceeding $2 million, additional security is required (either a U.S. bank trustee, a bond equal to 65% of the trust value, or an irrevocable letter of credit)

How QDOT Taxation Works

Once a QDOT is established, the tax treatment follows specific rules. Income distributions from the trust are subject to regular income tax but not estate tax. However, distributions of principal trigger estate tax at the rates that would have applied at the first spouse’s death. When the surviving spouse dies, any remaining principal is taxed as if it were part of the first spouse’s estate.

There is an important exception for hardship distributions. Principal distributed for the surviving spouse’s immediate and substantial needs related to health, maintenance, education, or support is not subject to estate tax. This provides some flexibility for genuine emergencies without triggering the deferred tax.

Estate Tax Treaty Benefits

The United States has estate and gift tax treaties with 16 countries that can significantly reduce or eliminate estate tax exposure for non-resident aliens. These treaties were negotiated to prevent double taxation and provide reciprocal treatment for citizens of treaty partner countries. If you are a citizen of a treaty country, you may qualify for a pro-rata share of the full U.S. exemption rather than the limited $60,000 amount.

The most favorable treaties, such as those with the United Kingdom, Germany, and Canada, allow non-resident aliens to claim the same unified credit available to U.S. citizens, but on a proportional basis. The calculation typically considers the ratio of U.S.-situs assets to worldwide assets. For example, if your U.S. assets represent 30% of your total worldwide estate, you might be entitled to 30% of the $13.99 million exemption, which equals approximately $4.2 million rather than just $60,000.

Countries with U.S. Estate Tax Treaties

The following 16 countries have estate and/or gift tax treaties with the United States:

• Europe: Austria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Sweden, Switzerland, United Kingdom
• Asia-Pacific: Australia, Japan
• Africa: South Africa
• North America: Canada (separate treaty)

Notably absent from this list are major countries with large populations of visa holders in the United States, including India, China, South Korea, Mexico, Brazil, and the Philippines. Citizens of these countries must rely on other planning strategies since no treaty relief is available.

Seven Strategies to Minimize Estate Tax Exposure

While the estate tax rules for non-citizens are harsh, several legitimate planning strategies can reduce or eliminate your exposure. These approaches range from simple adjustments to your investment holdings to more complex legal structures. The right combination depends on your specific circumstances, including your visa status, citizenship, family situation, and the size and composition of your assets.

Understanding broader tax planning, including U.S. employment and self-employment taxes for immigrants, provides context for how these strategies fit into your overall financial picture. Estate tax planning should not occur in isolation but as part of comprehensive tax and financial planning.

Strategy 1: Take Lifetime Distributions from Retirement Accounts

One straightforward approach is to reduce your 401(k) and IRA balances during your lifetime. By taking distributions before death, you convert U.S.-situs retirement assets into other forms that may escape estate tax. The distributions will be subject to income tax, but at potentially lower rates than the 40% estate tax. You can then reinvest the after-tax proceeds in non-U.S.-situs assets like foreign stocks, U.S. Treasury bonds, or bank deposits.

Strategy 2: Use Non-U.S. Domiciled Investments

Non-resident aliens who invest in U.S. stocks through U.S.-domiciled mutual funds or ETFs face estate tax exposure on those holdings. Switching to non-U.S. domiciled equivalents, such as Irish-domiciled ETFs that track U.S. indices, can eliminate this exposure. The underlying investments may be similar, but the legal structure changes the situs classification. When investing in U.S. property as an H-1B visa holder, consider how ownership structure affects estate tax treatment.

Strategy 3: Life Insurance Planning

Life insurance proceeds on the life of a non-resident alien are generally not subject to U.S. estate tax, provided the policy is issued by a non-U.S. company and owned by a non-U.S. person or trust. This creates an opportunity to provide liquidity for your beneficiaries that sidesteps the estate tax entirely. The insurance proceeds can be used to pay any estate tax due on other assets or simply to replace the wealth lost to taxation.

Strategy 4: Roth IRA Conversions

While Roth IRAs remain U.S.-situs assets subject to estate tax, converting traditional retirement accounts to Roth IRAs accelerates income tax payments but eliminates future income tax liability for beneficiaries. This may make sense as part of a broader strategy, particularly if you expect your beneficiaries to be in high income tax brackets. The estate tax issue remains, but the overall tax efficiency may improve.

Strategy 5: Establish U.S. Domicile

If you genuinely intend to remain in the United States permanently, taking steps to establish domicile can qualify you for the full $13.99 million exemption. This involves more than just staying in the country. You should document your intent to remain indefinitely through actions like purchasing a permanent home, applying for citizenship, making statements of intent, and severing ties with your home country. This strategy only makes sense if you truly plan to stay; creating false documentation of domicile intent is tax fraud.

Strategy 6: Utilize Treaty Benefits

If you are a citizen of one of the 16 treaty countries, ensure you properly claim treaty benefits on any estate tax return. This requires disclosure of your worldwide assets but can dramatically increase your effective exemption. Work with a tax professional familiar with the specific treaty applicable to your situation, as the provisions vary significantly between treaties.

Strategy 7: Naturalization

The most complete solution to the non-citizen estate tax problem is becoming a U.S. citizen. Naturalization provides access to the full estate tax exemption, the unlimited marital deduction (if your spouse is also a citizen), and eliminates the uncertainty of domicile determinations. For those planning to remain in America long-term, pursuing citizenship offers significant estate tax advantages beyond the many other benefits of citizenship.

Example Scenarios

Understanding how the 401(k) estate tax works in practice requires examining specific scenarios. The following examples illustrate how different circumstances, from visa status to citizenship of origin to family situation, dramatically affect the estate tax outcome. These calculations demonstrate why planning is essential and why the $60,000 exemption creates such harsh results for non-citizens.

For those investing in stocks on F-1 visa OPT, these examples show how even modest investment accounts can create estate tax problems as balances grow over time.

Frequently Asked Questions

The intersection of estate tax, immigration status, and retirement accounts generates many questions. These frequently asked questions address common concerns and misconceptions about the 401(k) estate tax for non-citizens. For those considering becoming a naturalized U.S. citizen, understanding these issues can inform your decision timeline.

Bottom Line

The 401(k) estate tax problem for non-citizens represents one of the most significant and least discussed tax traps affecting immigrants in America. While U.S. citizens and permanent residents enjoy exemptions exceeding $13 million, non-resident aliens face a $60,000 exemption that has not changed since 1976. This disparity means a non-citizen with a $500,000 retirement account could see their family lose over $170,000 to estate taxes, money that took decades to accumulate.

The good news is that awareness enables action. Whether you pursue citizenship, establish domicile, take lifetime distributions, restructure your investments, or utilize treaty benefits, options exist to reduce or eliminate your exposure. The worst outcome is learning about this tax only after it becomes due, when planning opportunities have passed.

If you are on a work visa, hold a green card, or are married to a non-citizen, estate tax planning deserves a place on your financial to-do list. Consult with an estate planning attorney and tax professional who understand international tax issues. The conversation may be uncomfortable, but the protection it provides for your family is invaluable.

Disclaimer

This article provides general information about U.S. estate tax rules as they apply to non-citizens and is intended for educational purposes only. It does not constitute legal, tax, or financial advice. Estate tax law is complex and highly dependent on individual circumstances, including your specific visa status, domicile determination, citizenship, family situation, and the composition of your assets. Tax laws change frequently, and the information in this article reflects rules in effect as of the publication date.

You should consult with qualified professionals, including an estate planning attorney, certified public accountant, and financial advisor experienced in international tax matters, before making any decisions based on this information. The examples and scenarios presented are hypothetical illustrations and may not reflect your actual situation. VisaVerge and its contributors assume no liability for actions taken based on the contents of this article.