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Is a 401k worthwhile if you're only staying a couple of years?

Is a 401k worthwhile if you're only staying a couple of years?

Old Dec 12th 2009, 1:51 pm
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Question Is a 401k worthwhile if you're only staying a couple of years?

I'm 28, all assets still in the UK, work at a high-tech startup in MA.

My understanding (correct me if I'm wrong!) is that a 401k allows you to put in a certain contribution of your salary (with or without an employer contribution) that will not be taxed until it is withdrawn. They're set up to run till you're about 60, and there are typically penalties for early withdrawal.

So, my thinking is that if I'm only planning to be in the US for a limited period (say a couple of years before returning back to UK), then it's not worth it from a hassle perspective because you'll only have put away a small amount which will be inaccessible for 30 years (and knowing me I'll forget about it).

Sound about right? Much appreciated.
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Old Dec 12th 2009, 1:59 pm
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

Originally Posted by paulwicks View Post
I'm 28, all assets still in the UK, work at a high-tech startup in MA.

My understanding (correct me if I'm wrong!) is that a 401k allows you to put in a certain contribution of your salary (with or without an employer contribution) that will not be taxed until it is withdrawn. They're set up to run till you're about 60, and there are typically penalties for early withdrawal.

So, my thinking is that if I'm only planning to be in the US for a limited period (say a couple of years before returning back to UK), then it's not worth it from a hassle perspective because you'll only have put away a small amount which will be inaccessible for 30 years (and knowing me I'll forget about it).

Sound about right? Much appreciated.

It mainly depends on whether your employer will contribute. If they contribute even 5% of your salary per year, this is free money that you'd be daft to turn down, IMO.

Also, you plan to be in the US only 2 years, but there are plenty of people who were the same and stayed a lot longer.

Even if your employer will not contribute, it still may make sense to contribute as contributions are pre-tax ... putting your money into a UK mutual fund (investment trust) while you are away will be post-tax money AND may be taxed when you withdraw any profits.

I can see your point about forgetting about it, but that's what you're supposed to do with long-term investments, to a certain extent ...
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Old Dec 12th 2009, 4:25 pm
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

Yea, basically what dunroving just said. I think there is also a way where you can borrow against your 401k if you are buying a house or going back to uni or something.

If they are giving you a match, then well, it's free money. Take it. Pay a penalty when you leave (if you want to cash out) but heck, it's still free money.
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Old Dec 12th 2009, 5:07 pm
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

There's a large tax penalty if you withdraw early, bit of an exception under certain circumstances.

Worth having though, especially if your plans change and you end up staying, or on the edge of a tax bracket and definitely if you get employer contributions.
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Old Dec 12th 2009, 5:34 pm
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

The tax penalty for early withdrawal is 10%. So you need to do the math to work out whether the company contribution will exceed this. Pay special attention to the word vested. The company contribution is often not fully vested until you have completed 5 years of service.

In addition to the 10% penalty, they will withhold regular income tax on it when it's paid out early. So you will need to file a tax return probably after you leave if you are able to reclaim any of this.
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Old Dec 14th 2009, 2:01 am
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

Agree with dunroving. Any way to reduce tax is a gift horse, especially if your employer contributes as well. Don't leave free money on the table!
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Old Dec 14th 2009, 1:25 pm
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

It **may** also be that if you cash out in a year after you leave the US, that your tax liability would be reduced because your US taxable income would be small for that year. (You'd be taxed up front, and would have to file a tax return to get $$$$ back.) But you typically don't get as many deductions as a non-resident, so you'll have to run the numbers first and see.
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Old Dec 14th 2009, 2:23 pm
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

I would agree with others here that you should seriously consider paying in to this 401K. If you pay from the beginning of your employment, you won't notice the slightly lower take-home pay. At the end of your employment you'll have an account that needs no oversight on your part; they'll probably just send you an annual statement. It will grow, compound interest, tax deferred for 30+ years; and who knows what currency movements there will be over that period. If the UK pound collapses in that period, then having a little retirement nest egg in another currency might stand you in good stead.
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Old Dec 14th 2009, 2:49 pm
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

Originally Posted by robin1234 View Post
If the UK pound collapses in that period, then having a little retirement nest egg in another currency might stand you in good stead.
Totally agree: diversification lowers your overall risk. Seeing as China and India are going to have the highest economic growth rates over next 20-50 years, probably you should be figuring out ways to invest there as well.
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Old Dec 14th 2009, 2:57 pm
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

In your situation I would first find out if you get an employer match and if so what the conditions are. Do you need to contribute anything to get a match and if so how does the match work? Also find out what kind of funds your 401k will have access to and find out their associated expenses. Then post back here.

If you don't get an employer match I would not contribute in your situation - much better to go with a Traditional (before tax) or Roth IRA (after tax) account instead at a good low cost brokerage. Which of those you might choose would depend on your current vs future tax rates among other considerations.

Cheers,
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Old Dec 14th 2009, 8:04 pm
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

This is a really good 401k calculator that might give you an idea of how much you can accrue, both with and without employer matching contributions:

http://www.bankrate.com/calculators/...alculator.aspx

Even if you only contribute to it for 2 years, it may be worth it in the end, particularly with matching contributions. Just to put it in perspective: I opened a Roth IRA back in 1997 and only contributed about $2500 during the first year. Even though I haven't contributed anything to it for 12 years now, the balance has still nearly doubled in that time. (Don't worry, I have other retirement accounts, this isn't my only one!) When I retire in 30-35 years, that initial $2500 will have grown to approximately $57,000, even with no additional contributions made to it.

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Old Dec 16th 2009, 2:25 am
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

If you surrender your residency then your 401K/IRA is taxed at an additional 30%, plus 10% early withdrawal as well as income tax.

I only learned this at a seminar a few weeks ago hosted by the British American Business Council in SF, who had tax and legal professionals give the talk.

It does assume one makes full disclosure when liquidating.........
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Old Dec 16th 2009, 2:34 am
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

Originally Posted by scotch03 View Post
If you surrender your residency then your 401K/IRA is taxed at an additional 30%, plus 10% early withdrawal as well as income tax.
Nah!

Let's say you have 10k in there and you cash up early.

Your fine is 10% = $1,000
The withheld tax is 30% = $3,000

So they'll cut you a check for $6,000. Out of the $4,000 they took, the $3,000 goes towards your tax bill. Let's say you only earned 25,000 in the year you withdrew and you have 10 kids. Then you'll get the full $3,000 back. If however you earned $250,000 in that year, have no kids, give nowt to charity, etc, then you'll not be getting a check.
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Old Dec 16th 2009, 7:43 pm
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

Just quoting the so called tax and legal experts at the seminar!

Originally Posted by fatbrit View Post
Nah!

Let's say you have 10k in there and you cash up early.

Your fine is 10% = $1,000
The withheld tax is 30% = $3,000

So they'll cut you a check for $6,000. Out of the $4,000 they took, the $3,000 goes towards your tax bill. Let's say you only earned 25,000 in the year you withdrew and you have 10 kids. Then you'll get the full $3,000 back. If however you earned $250,000 in that year, have no kids, give nowt to charity, etc, then you'll not be getting a check.
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Old Dec 16th 2009, 8:33 pm
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Default Re: Is a 401k worthwhile if you're only staying a couple of years?

Originally Posted by scotch03 View Post
Just quoting the so called tax and legal experts at the seminar!
Are you sure they didn't say "withheld" as opposed to "taxed"? Big difference.
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