Newbie1001

I'm young and entrepreneurial , from the UK and working in the USA -and I want my "pension" to not be a large lump sum in a bank paying an annuity, but a business I own, or other assets I'm in control of.

I also don't think the stock market will perform particularly well for the next 5 years, something about printing trillions and China stalling makes me a little uncertain.

But I'm paying close to 40% income tax ( single, child free, nice paying job) and my employer has a decent 401K matching policy.

Let's say I stay and work in the US for 5 years, then leave and want to extract my 401K money, pay the 10% early withdrawal fee, but then do what I wish with it by taking it as cash. I'd plan on doing this when I am in the UK.

I want to ask.
1) Assuming the income when I "cash in" is US income, but I am then based in the UK, will I pay UK income tax on this amount?
2) If I think the US stock market will do badly, is there a way to get a 401K which doesn't invest in the market but acts as a bank account paying a pathetic interest rate?
3) Any general advice or thoughts to help?
Thanks.

nun

How, and to who, you'll pat tax will depend on your citizenship and residency. Assuming you are a UK citizen, an NRA for US tax purposes and living in the UK you will then only have to pay UK tax on 90% of your withdrawal. You'll file a W-8BEN to claim exemption from US tax. You will have to pay early withdrawal penalties to the US

Your employer's 401k will have a range of investments. There might be a "Stable Value Fund" which will give you about 2% today and preserve your capital. It will probably have a short term bond fund that will minimize your interest rate risk, but you should be thinking about a growth oriented asset allocation if you are young. Trying to forecast the future and time the market is a fool's game and I think you are playing that game.

You are not really thinking very sensibly about your 401k account or saving for retirement. What the markets do in the next 5 years isn't that important for a young person and cashing in retirement accounts is very short sighted because you pay tax and a penalty on them and loose all that tax deferral. I also suggest that you look into a ROTH IRA as those are excellent tax efficient investments for people in the US and the UK. You need to read up about tax efficiency and long term investing, this is a good place to start.


http://www.bogleheads.org/wiki/Main_Page

bewildering

As your 401K contributions are pre-tax when you withdraw your 401K you will be hit by income taxes AND the 10% penalty. Probably looking at a 35-40% hit on any money.

As Nun says - think long term.

Although I do agree that the market looks overvalued, it is possible we are both wrong and we are losing money by not investing.

nun

Too many people believe that they can predict, work out or guess what the market is going to do. Active fund managers will charge you 1%, 2% or more for access to their crystal ball. They'll disguise it with terms like modeling, analysis and research and many truly believe that they can beat the market. But on average they can't and never will. The dirty little secret of Wall Street is that most of the intelligent folks there invest in index funds because they are the best value for money and give the best chance of success.

Stop trying to predict what the market will do because of a reported slow down in China. Choose an asset allocation appropriate to your circumstances and stick to it. A young person in the US might choose an 80/20 allocation of US based low cost index funds.

Newbie1001

i think the marker is over heated and also I'm pretty good at turning my own cash into profit and id rather be in control of my destiny than put it in the hands of anyone else.

Why would I pay more income tax ?
Let's say I save up $40k for my 401k, I move back to the UK. Id pay $4k the moment I take it out of my 401k but couldn't I repatriate the money to the UK in years when I have a business that runs at a loss or find other ways to bring it back slowly in times when my income appears low?

nun

Why would 401k, or IRA, money be in anyone's control but your own....I think you still have some left over UK thinking about how pensions are organized. With a US defined contribution plan you are in total control of your money and how it is invested. Beware of hubris when it comes to investing, don't believe other people's hype, but especially don't believe your own.

You said you were going to take it out all at once....that's the taxable event and taking it all at once is the most inefficient tax strategy unless you have arranged to have very low income in that year. If you are in the UK when you cash the 401k in you will pay UK tax on it at your marginal income tax rate plus a 10% penalty to the IRS. Once you cash in the 401k you have also lost years and years of tax free growth. You could cash it out in small chunks I suppose to try to stay in a lower UK tax bracket but you still pay the 10% withdrawal penalty.

The best thing for you to do is to contribute as much as you can to your 401k. Before you move to the UK roll it over to an IRA and make sure you have a ROTH IRA. As an NRA with these in place you can move money from the IRA to the ROTH and pay very little US tax and then take money from the ROTH and pay 0% US and UK tax. You defer tax now, get tax free growth and can manage the withdrawals to pay very little tax.

Newbie1001

What do you mean by " once you cash in the 401k you have also lost years and years of tax free growths" what is this tax free growth you speak of? Are you saying I will lose the growth I may have gained from when holding the money in a 401k or are you again assuming that I can make less money than a bunch of coked up bankers ( I know how hopeless most hedge fund traders are since I hang out with them ) who've Ive outperformed for the last 5 years myself many times over ?

Hotscot

You're the highly paid writer with recognition in your field, attending conferences and such?

How's it going? (What field are you in? Finance..? Since you hang out with Wall Street Traders?)

Did you ever get a Permanent Residence application worked out with your employer or did they screw you on that?

Newbie1001

I've only been working with them 3 weeks. So far so good. Not in a hurry to get green card started but will wait a few months. I work in digital transformation. Ran my own business. Now get paid to do so.

Hotscot

Digital Transformation...cool...my work at Adobe involved that, focusing on communication technologies integrating digital video, html and pdf with online commerce.

I thought you might have the Permanent Residence application ratified in your employment agreement since you said your industry is very volatile and you could be let got at a moments notice. You seemed quite adamant at the time.

nun

Money you put into the 401k goes in before it is taxed. All gains on that money are also untaxed. They can compound over the years and nothing gets taxed until you take the money out. At that point the money is taxed as income and you should arrange things so your income tax rate is as low as possible.

What you loose is tax deferred growth. If you take the money out it will be taxed thus reducing your capital. I'm sure you can invest the money just as well outside of the 401k as inside it, but outside the 401k your dividends and capital gains will be taxed....unless you keep within certain low income tax brackets. You seem to think that bankers will be controlling your 401k money. They won't, you'll be able to invest it a range of funds. If you choose active funds you are giving some control to bankers, but I would advise that you come up with an appropriate asset allocation and do your own investing using low cost passively managed index funds. You need to take a couple of steps back and learn a bit about long term investing and tax efficiency rather than trading and outperforming. Neither of those terms are used by the intelligent investor, just the speculator or the financial salesperson.

Hotscot

Taxed and a 10% penalty.

Ouch.

Newbie1001

I appreciate the help but I'm not loving these assumptions that:
1) I will be taxed in the UK as income, when in fact I may well just drip the money in, during years of low income.
2) That by not having money invested that I'm losing out on growth.

The economy is like the coyote in the roadrunner cartoons, it's only going to fall when it looks down and we realize it. We keep printing money like an addict, to stop us from looking down, but you can't fight gravity.

We've had the biggest wealth transfer of human history. The fed has printed $16,000BN of money and it's inflated assets of only the very rich. If you think somehow this is just going to work out, then you've great knowledge but a very poor imagination. I'm not saying the world is going to shit, but I am saying the absolute assumption on here of pleasantly steady growth is puzzling.

Hotscot

Not really. I'm not the very rich but my investments have done great over the past five years even just with passive mutual funds.

Something that's certain though is the market will go up or down and there will be winners and losers.

I thought you said you were a talented investor, in reference to hopeless traders, and knew a lot about finance?

My apologies if I misunderstood.

Newbie1001

So you are saying the period of time where thousands of billions of dollars being printed, while interest rates have kept low has somehow miraculously also had the effect of increasing your mutual funds, how strange.

And that seemingly inevitably has means the next 5 years should be roughly the same?

I didn't say I was a talented investor, I said that I've outperformed the majority of professionally run funds. I've been making more risky investments, and I've been lucky. That doesn't make me more talented, but it's made me more involved and agile. Again, I prefer my chances of acting in my own self interest than their chance of acting in mine.