How Are 401(k) Withdrawals Taxed in Puerto Rico?

If you’re a bona fide resident of Puerto Rico, 401(k) withdrawals are taxed in Puerto Rico by both the US federal government and Puerto Rico’s Department of the Treasury (Hacienda), but a credit on your Puerto Rico return for federal tax paid keeps you from paying both in full. In practice, you pay the higher of the two rates, not the sum.

The distribution is US-sourced income because the plan sits with a US employer, so the IRS taxes it no matter where you live. Puerto Rico taxes your worldwide income once you’re a bona fide resident, so it reaches the same dollars. The credit reconciles the overlap, and it runs through the Puerto Rico return rather than the federal one.

How the Two Tax Bills Fit Together

IRS Publication 570 puts the mechanism plainly: “If you report U.S. source income on your Puerto Rico tax return, you can claim a credit against your Puerto Rico tax, up to the amount allowable, for income taxes paid to the United States.”¹

This is the reverse of the usual foreign-tax setup. The US does not give you a Foreign Tax Credit for Puerto Rico taxes on this income, because the US considers the income its own. Puerto Rico is the jurisdiction that yields.

The sequence looks like this:

Calculate and pay the federal tax on the distribution on your Form 1040.
Report the same distribution as part of worldwide income on your Puerto Rico return.
Claim the federal tax paid on that distribution as a credit against the Puerto Rico tax on the same income.

The credit is capped at the Puerto Rico tax attributable to the US-sourced income. If the federal rate on the distribution is higher, the credit erases the Puerto Rico tax and you end up paying just the federal amount. If the Puerto Rico rate is higher, the credit knocks the federal tax off the Puerto Rico bill and you send the difference to Hacienda.

What the US Takes

A 401(k) distribution is US-sourced, so bona fide residents of Puerto Rico report it on Form 1040 or 1040-SR. Section 933 of the Internal Revenue Code excludes only Puerto Rico-sourced income from US tax, and a 401(k) funded through a US employer does not qualify.² Publication 570 confirms that bona fide residents file US returns reporting all income except Puerto Rico-sourced income.¹ The distribution is ordinary income at your marginal federal rate.

The plan administrator withholds federal tax before you see the money. For an eligible rollover distribution (essentially any lump sum that could have been rolled but wasn’t), the withholding is 20% and you cannot waive it.³ For nonperiodic distributions that don’t qualify as eligible rollovers, including some hardship withdrawals, the default is 10%. Periodic installment payments are withheld based on the W-4P you file with the plan.

Whatever the administrator holds back gets reported on Form 1099-R and applied as a credit against your final federal liability when you file.⁴ If more was withheld than you owe, you get the difference back.

What Puerto Rico Takes

Puerto Rico’s progressive individual income tax runs from 0% on the first $9,000 up to a top marginal rate of 33% on net taxable income above $61,500. A 5% gradual adjustment tax applies to net taxable income over $500,000, subject to a calculated cap tied to personal exemptions. The distribution goes on a Puerto Rico individual income tax return in the 480 series, and the plan administrator files an informative return with Hacienda reporting it.

The 10% Flat Rate for Locally Invested Plans

Puerto Rico allows a preferential 10% flat rate on distributions from qualified retirement plans that hold at least 10% of assets in specified Puerto Rico securities or assets. Most US-based 401(k) plans, built around US equity and bond funds, don’t hit that threshold. Unless you have written confirmation from the plan that it meets the local investment requirement, plan on the progressive rates.

Act 60 Does Not Apply

Puerto Rico’s Act 60 (previously Acts 20 and 22) exempts qualifying interest, dividends, and long-term capital gains earned after establishing residency. A 401(k) withdrawal is ordinary income from a pre-existing US account and does not fit any of those categories. Act 60 will not shield the distribution.

Roth 401(k) Distributions

A qualified distribution from a designated Roth 401(k) is excluded from federal gross income. To qualify, you must be at least 59½ (or disabled, or taking the money as a beneficiary after death) and have held the Roth account for at least five tax years.⁵ Federal tax on a qualified Roth withdrawal is zero.

The Puerto Rico side is less settled. Puerto Rico’s Internal Revenue Code has its own rules for Roth-type accounts, and older Hacienda guidance suggests distributions from Puerto Rico Roth IRAs after age 60 can be exempt. A US Roth 401(k) is not the same instrument as a Puerto Rico Roth IRA, and the treatment may differ. Confirm the characterization with a preparer who works both systems before you assume the withdrawal is tax-free on the island.

Early Withdrawal Penalty Before 59½

Pulling money out of a 401(k) before 59½ triggers a 10% additional federal tax on top of ordinary income tax, reported on Form 5329. Puerto Rico residence does not change this.⁶ Puerto Rico does not generally impose its own separate early withdrawal penalty on US-based qualified plans, so the 10% federal charge is the penalty concern.

Several exceptions eliminate the federal 10% for 401(k) plans:⁷

You separated from the employer sponsoring the plan during or after the year you turned 55.
You take substantially equal periodic payments calculated on life expectancy, continued for at least five years or until 59½, whichever is later.
You meet the IRS definition of total and permanent disability.
You have unreimbursed medical expenses above 7.5% of adjusted gross income, up to that excess amount.
The distribution goes to an alternate payee under a qualified domestic relations order.
The IRS levies the account for a tax debt.

Don’t Roll a US 401(k) to a Puerto Rico Plan

A rollover from a US-qualified plan to a Puerto Rico retirement plan is not a tax-free transfer. The IRS treats it as a taxable distribution unless specific relief applies.⁸ Revenue Ruling 2008-40 set that default, and the limited relief in Revenue Ruling 2011-1 came with deadlines that mostly expired by 2012 or 2015. The default rule generally applies today. Keep the money in the US plan or roll it into a US-based IRA.

Filing Mechanics and Estimated Payments

Your plan administrator withholds federal tax but not Puerto Rico tax, so you’ll typically owe Hacienda at filing time. If your Puerto Rico balance will reach at least $1,000, Puerto Rico requires quarterly estimated payments due April 15, June 15, September 15, and January 15.

Both the federal and Puerto Rico returns are due April 15. Bona fide residents of Puerto Rico do not get the automatic two-month extension available to US citizens abroad; that extension requires living outside the United States and Puerto Rico.⁹ A standard six-month extension is available on either return, but it extends filing, not payment.

If you take a large distribution mid-year, work out the Puerto Rico liability, subtract the credit for federal tax paid, and start quarterly payments on what remains. Underpayment penalties from Hacienda track the federal pattern, and they compound the cost of a withdrawal that already carries two tax bills.

The Bona Fide Residency Requirement

All of the above assumes you’re a bona fide resident of Puerto Rico for the full tax year under Section 937 of the Internal Revenue Code, which uses a presence test (at least 183 days on the island), a tax home test, and a closer connection test.¹⁰ Form 8898 is used to notify the IRS when you begin or end that residency.¹¹ Without bona fide residency, Puerto Rico’s rules and the credit that prevents double taxation don’t apply, and the withdrawal is taxed like any other US resident’s 401(k) distribution.

1
Internal Revenue Service. Publication 570 (2025), Tax Guide for Individuals With Income From US Possessions
2
Office of the Law Revision Counsel. 26 USC 933 – Income From Sources Within Puerto Rico
3
Office of the Law Revision Counsel. 26 USC 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income
4
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
5
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
6
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
7
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
8
Internal Revenue Service. International Issues Affecting Retirement Plans
9
Internal Revenue Service. Automatic 2-Month Extension of Time to File
10
Office of the Law Revision Counsel. 26 USC 937 – Residence and Source Rules for Possessions
11
Internal Revenue Service. About Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a US Territory