Noorah101

If someone is in the USA on an H1B, and they put money into the company's 401K plan (some money comes out of their payroll check and the company matches it), what happens when their H1B is finished and they go back home? Do they cash out the 401K? Is it worth it for someone to invest in that if they're only here short term?

Thanks!
Rene

SarahG

My OH has been wondering that very thing. He is on a H1B and is not sure if he should do a 401k or not. I am sure if we got GC assurance it would help him make up his mind but just now he's not sure if he should. He paid into a private pension in UK.

md95065

If they cash out their 401K they will pay income taxes on the entire amount in the year that the withdrawal takes place (which could push them into an even higher tax bracket than usual) and an early withdrawal penalty of 10%.

While the benefit of the employer's contribution and tax free growth on the money while it is still in the plan may offset some of the penalty it still usually isn't a good deal to take money out of a 401K early unless you have no alternative. (Also beware of rules about the vesting of the employer's contribution which may depend on how many years of service you have).

Noorah101

That makes sense for sure. So this is a younger person in her mid 20's who isn't going to reach retirement age for a very long time, who is only planning to work however long her H1B is available. Her company won't sponsor a green card, and she applies to the diversity lottery but of course may never win.

After her H1B finishes, she probably will never come live in the USA again. So what happens then? She waits until she's 65 or whatever retirement age is, and then takes the money out?

I'm just guessing it will be some kind of hassle for her in the long run...she'll have this money sitting somewhere for the next 40 years...

Rene

Bob

It's not worth it, unless there's a company match which is free money as long as you meet the vesting requirements...Unless you're on the brink of a higher tax bracket and the contributions put you under, then it might be worth having.

E3only

Ah, younger person. I say withdraw it and piss it all away 

md95065

But even then unless the company match is enough to offset the 10% early withdrawal penalty it still isn't worth it if you anticipate taking the money out after only a few years

Michael

This is complicated. A foreign national not living in the US gets an annual tax free distribution of the amount up to the personal exemption (currently $3650). If the distribution is after age 59 1/2 and the annual amount is under the personal exemption, no US taxes or penalty will be owed. If before age 59 1/2, a 10% penalty will be owed.

http://www.allbusiness.com/governmen.../421593-1.html

If she were to lose her job in the US, she should probably rollover her 401K to a discount brokerage IRA account so that she can manage the assets in the account. As long as she has an ITIN (tax id number), that is legal.

The problem will that the distribution will be taxed as normal income by the UK government.

The current U.S.-U.K. tax treaty taxes pension distributions, including distributions from 401(k) plans, under article 18 as taxable in the country of residence (that is, the U.K.). No distinction is made based on the type of distribution: article 18 covers annuities, periodic payments, and lump-sum distributions. Distributions from Individual Retirement Accounts (IRA) (unless a pure 401(k) rollover) would fall under the "Other Income" article (article 22) which would also make them taxable in the country of residence (again, the U.K.).

http://us.kpmg.com/microsite/tax/ies.../article06.htm

If she is planning on contributing to a 401k plan, she should contact a tax accountant concerning current US and UK law.

jackattack

So I have a question about the "brink of a higher tax bracket and the contributions put you under". My husband was talking about this issue when I first moved to the US and I didn't really understand it then and I guess I still don't. And I've filed our joint taxes for the last 6 years so that's a little scary.

My impression was the the tax brackets were marginal, so while you may jump up to the next tax bracket, it is only the money above that amount which gets taxed at the higher rate. So you would receive less of each incremental dollar that you earn but you're not actually worse off.

Is that incorrect? (and I do understand that your comment above is in reference to reducing your taxable income by contributing to 401k but I still question the point regarding tax brackets and marginal income.)

No idea if that makes sense

jackattack

Michael

You are correct. That is why when you look at the marginal tax brackets it indicates an amount plus a percentage above that amount. That amount indicates the total tax owed on all the marginal tax brackets below your current marginal tax bracket which is a significantly lower percentage than the percentage in the current marginal tax bracket.

http://taxes.about.com/od/preparingy...ax-rates_2.htm

Giantaxe

I am not sure why this is a problem. Distributions from non-Roth IRAs and 401(k)s are also taxed as ordinary income in the US.

To me the main downside to someone intending to return to the UK in investing in a 401(k) is the possibility that they may have the hassle of having to file a US tax return for their US-sourced income. Aside from that, the same advantages accrue to the returning person as they do to someone who stays in the US:

1. Contributions are deductible from income thus saving tax in current dollars.
2. Contributions grow tax-deferred until they are withdrawn.
3. A possible employer match.

As for retirement being a long way away in ones 20's, then so much the better to save for retirement. I wish I'd done so in my 20's and had that much longer for any gains to be compounded.

Giantaxe

Just as if she was still living in the US... these are, after all, retirement savings.

Noorah101

Oops, I forgot to mention she's not from the UK. She's from Turkey.

Rene

Noorah101

Very true, thanks.

Rene