401K For Immigrants

B

balls

Registered Users (C)
I work for a company where I signed up for the 401K plan for the tax advantages and my retirement. Does anyone have any experience on whether I can cash in
    my my 401K (stop contributing) without have to pay all of the witholding taxes and fees. I heard a rumor that since I am not a citizen of the country that I may not
    have to pay the regular penalties like a normal citizen.

    Any help on this subject would be greatly appreciated. It could save us working immigrants lots of money.

    Thanks !!!
 
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If you take the money out of the 401K plan before you turn 59 1/2 you are subjected to 10% penalty of the distribution amount plus your normal tax rate at the time of distribution. So let\'s take you come under 28% tax bracket, you have to pay 10% penalty + 28% tax + state tax if any for the distribution. You may loose a huge amount of money.
The law remains the same for everyone. It is not just only for U.S.citizens. No one is exempted from avoid paying the 10% penalty.
 
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I agree with ba485. If you return back to your own country, then next year you can take money from 401k just paying 10% tax penalty.
 
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I think aba485 is correct. Once you withdraw money from 401K before you are 59 ½, you will have to pay 10% penalty, and whatever the federal and state income taxes that are applicable to you. Besides that, you will also need to pay capital gain tax if you have any. That may make you lose as much as 40% total of your portfolio.

You may want to consult an experienced accountant about this. As far as I know, what I was told by my account, unlike social security tax, they have tax treaties with several European countries and Japan, there is no special tax law about 401K to treat a foreigner who works here differently than US citizens.
 
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Well you also should add 20% (withholding taxes) of the 401K amount in addition to 10% tax penalty. No one is exempt from this no matter when you go or where you go. If you know that you may be going back to your country then don\'t put money in 401K if you don\'t plan on coming back ever. However, you can clain FICA (Soc. Security & Medicare) exemption if you petition to the IRS that you will be leaving the county that year. If you don\'t leave and stay with a GC, you have the possibility of severe penalty and prosecution under Tax evasion laws.

Bhanu
 
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Well not every plan permits do that. 10% penalty is waived if someone becomes disabled and he/she has to pay the health insurance cost.There are other special cases too. Only Roth IRA permits to withdraw the money from the plan withput paying penalty for first time house buying and education. That too the plan has to be 5 years old. However you can take loan from 401K for buying house and interest rates vary from plan to plan.
 
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Hi Balls,I heard from my friend that his friend was able to get the 401k money without paying penalty and he returned to his home country.My friend did not know the details how he did that. Also I do not have touch with my friend for the past 3 years. He said this 3 years before. But I am not sure whether that is true. I have a 401k plan with Fidelity Investments through my employer. When I asked the same question to Fidelity 5 years before I was told that under no circumstances the 10% penalty is waived off. The law is same for everyone. However some employer\'s 401k plan will allow you to continue eventhough you are not here and assuming you are in your home country and take the money when yout turn 59 and half. You can get the money from Social Security Administration (the tax you payed) if you are leaving the country permanently and not coming back.I would suggest you to consult a tax expert.
 
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I think one of the keys in considering the 401K is that how much your company is going to match the amount you will put in. What\'s the percentage and max amount. If your company match 100% or even 50%, you should put some to your 401k account, because even you pay penalty later for early withdraw, you will still endup get more. If company doesn\'t match or match little it is another story.
 
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You can not avoid penalty if you withdraw before retirement. What you have to do is withdraw 401K funds the year after you return to india. Eg. If you return to india in 2001, withdraw 401 funds in 2002. This way, your Year 2002 income will be only your 401K withdrawls and you pay only Federal taxes plus penalty. You dont have to pay state income tax. You have to phase out your withdrawls (ie, $30000 each year)so that you always remain in lower tax bracket.
Remember, if you withdraw early, you have to pay taxes on entire amount.
 
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Bhanu,
Can you explain more about claiming FICA if I dont plan to come back ever? Do I get all the money I paid towards SS and Medicare if I dont intend to return to USA ever?

Thanks in advance
 
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Jjsni, I disagree with you. The purpose of contributing max amount usually 15% of your gross income to 401K is not only to get company’s matching fund, but also to take advantage of current tax law. Remember the 15% of your income that goes into 401K is pre-tax money which means that you have not paid any income tax on it. By doing so, you are doing yourself a big favor, because all the federal, state, social security, and Medicare tax will be reduced significantly.

Normally combined tax of federal, state, social security, and Medicare will eat up 40% of our gross income, if your federal tax of gross income fall in the range of 28%. But the money you contribute to 401K is tax deferred, not subject to all above-mentioned taxes. You will only need to pay 40% of the total taxes on your remaining 85% gross income. If you earn 60K, contribute 15% of your gross income instead of 7% of your gross income that can get company’s matching fund, you will save more or less $2000 per year on taxes. It is year after year. So it is really a big saving.

My point is that everybody should contribute Max amount to his or her 401 account regardless of status. Even if you are forced to go back home, you should do this. The ideal situation is that you do not withdraw your money until you are 59 1/2, even you go back to your country. Consider this is your retirement money and safety net and let it grow tax-free. Once you are eligible to withdraw it, then you only need to pay 20% federal tax.
 
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What i am saying here, in the previous message, is at least you should take advantage of company\'s matching fund (company stock or cash). As for how much you should save on your own money is pure your life style. If you want save more for your retirement at the expense of sacrifying your current standard of life, its fine. But many people may not have enough cash when they just start to work. They may need to buy a new car and save for the house down payment. In a word, you should take max advantage from company\'s matching fund if you could.
 
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jjsni,

You are unable to get yoyo\'s point. Company matching your contribution is besides the point. You contributing to your own 401K alone is a huge adavntage let alone matching contribution. The worst that could happen is that you could take early withdrawls and pay 10%.
 
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Jjsni, I think you have missed my point. I am not talking about people’s life style, but talking about real big savings on your tax dollar.

Many people have to pay car loan and/or home mortgage/down payment, but it is not wise to use the money that can go into 401K. Current max interest rates for car loan or home mortgage are less than 10%. If you use 401K money to pay down those expenses, the result is that you lost 30% of your 8% gross income that can go into 401K and get tax-free. It is very simple math to calculate. In order to save 10% interest on car loan or home mortgage, you end up to pay 40% taxes.

So my point is that everyone should contribute max percentage of his/her gross income into 401K regardless of immigration status and financial status. If you have to borrow loan to pay for house or car, it is fine. You still should contribute max percentage to your 401K, because you still can save nearly 30% of tax free dollar after paying the loans. Otherwise, you are doing Uncle Sam a big favor. Think about why Uncle Sam puts a limit on pre-tax contribution and allows you to borrow loan from your 401K account. That’s because they want your tax dollar. They even let you borrow money from 401K to pay for the house. The reason they allow you to do this is that the money you borrowed is pre-tax money that you have not paid any tax on it. But the money you need to return within a limited time will be after tax that means you need to pay nearly 40% all taxes when you return the money. If you cannot return the money in time, 10% penalty will kick in. They would rather get your tax dollar sooner than later.
 
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Yo Yo, I totally understand your points. If you are only talking about overall finacial gain or lost in a long run, you are 100% right to put max money in your 401K. The point I want make here is that a lot of people don\'t simply have enough money. If you make 30K and live in New Jersey, you have no money to put 4.5K in your 401K. I know too many people can\'t affort or just simply don\'t want to put max fund in 401. Besides, if you have $3000 cash, you can borrow $30k more for your house motgage (10% down), which may help increase your net faster than 401K. 401K or not is your own finacial jugement.

Comments and disagreement are always welcome.
 
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Hi,
   I want to mention two points here. First when are leaving this country permanently, you have to file a tax as Non-resident status. For non-resident status, tax is generally very high. So you are not really saving money by that way.

My second point was, your tax defffered contribution is not really completely tax deffered. You still have to pay Social security and Medicare tax. The only tax you don\'t pay are Federal and State tax.

Hope I have clear some people\'s misconception.

With all the dis-advantace mentioned above, there are some advantage too of putting your money in 401K. If you are letting your 401k money work many years (at least 10 yrs), you get the interest for the non-taxed money. Over time it pays more than your 10% panelty.
 
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