401k Investment!!! Is it Good thing for guys planning to to go back Homecountry

[AmericanWannabe]

If you want to go back, you also need to think of sopcial security taxes.
It is unwise to leave after you have earned 39 credits but 1 credit short
of required to get retirement benefits.

That is why I said Bush's privatizing social security may be good to
such people. If a portion of social security is privatized, you
may eventually get hold of it no matter how many credits
you earn

 

[TheRealCanadian]

I once applied for H1B visa but I already have 401K account. I once worried 401K amount indicated by my W-2 and paystub
will lead to rejectionb of my visa due to immigration intent.

A 401K contribution won't be considered immigrant intent, but even so - you can have as much immigrant intent as you want with an H-1B.

 

[TheRealCanadian]

Yes. It may be even worth it even if you want to withdraw prematurely with penealty. Your employer's match and delayed tax payment may be bigger than penalty.

The marginal rates of tax on a premature withdrawal are between 40% and 50%. Unless you got a good match and some pretty incredible returns, you are far better off letting the money accumulate tax free for several decades, then withdraw it after you turn 60.

You'd be amazed at what prudently invested, diversified index funds can do when they grow tax-free for 30 years or more.

 

[qwertyisback]

If you abandon GC and leave US, then you file Tax as non-resident.
and you only report US income. Your 401K distribution
is conisdered your US income that tax year.

You can deduct maybe only $2000 plus other amount specifiyed by tax treaty.
So you can withdraw your 401K each year by amount smaller than
deduction amount so that you do not have to pay any taxes.
But you have to pay penealty if withdrawal is premature

Better way would be, don't abandon GC, take reentry permit and file taxes as Resident for next few yrs and split 401K/IRA withdrawl during those yrs. In that case, as resident Tax status, GC holder can claim standard deduction ($9500 for family+child deduction) straight (for few yrs) so he can save taxes on around $50000(if 401K is withdrwan in 5yrs e.g) that will be huge savings.

 

[TheRealCanadian]

Better way would be, don't abandon GC, take reentry permit and file taxes as Resident for next few yrs and split 401K/IRA withdrawl during those yrs. In that case, as resident Tax status, GC holder can claim standard deduction ($9500 for family+child deduction) straight (for few yrs) so he can save taxes on around $50000(if 401K is withdrwan in 5yrs e.g) that will be huge savings.

That's assuming you don't have very much other income.

 

[AmericanWannabe]

The marginal rates of tax on a premature withdrawal are between 40% and 50%.

That depends on how much you have to withdraw and how much other
income in US. If you leave US and file as nonresident, then
401K withdrawal may be yoru only US income. If it is not much
(say you work here only 5 years and you even withdraw
401K by installment rather than a lump sum), the rate
may not be that high.

Of course, you should do this only if you need money
in country you go back to. If you are not in hurry,
better not touch 401K and withdraw it only when you
turn 65

 

[AmericanWannabe]

Better way would be, don't abandon GC, take reentry permit and file taxes as Resident for next few yrs and split 401K/IRA withdrawl during those yrs. In that case, as resident Tax status, GC holder can claim standard deduction ($9500 for family+child deduction) straight (for few yrs) so he can save taxes on around $50000(if 401K is withdrwan in 5yrs e.g) that will be huge savings.

If you file as a resident, then you have to report world wide
income. There is a bona fide resident clause that means
one can exclude oversea earned income up to $ 80,000.
But I heard bona fide resident is only for US citizen.
But there is other criiteria to exclude oversea eanred
income. See Pub 58 (?)

 

[AmericanWannabe]

http://www.irs.gov/publications/p54/index.html

If you as PR live in yoru citizenship country for 330 days
or your citizenship country has a tax treaty with USA,
you may exclude your earned income there up to $80,000.



-------Start of QUote-----
Who Qualifies for the Exclusions and the Deduction?
If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction.

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to $80,000 of your foreign earnings. In addition, you can exclude or deduct certain foreign housing amounts. See Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction, later.

You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer. See Exclusion of Meals and Lodging, later.

Requirements
To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must satisfy all three of the following requirements.

Your tax home must be in a foreign country.

You must have foreign earned income.

You must be either:

A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year,

A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or

A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.



International Taxpayer - Bona Fide Residence Test

You meet the bona fide residence test if you are a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. You can use the bona fide residence test to qualify for the exclusions and the deduction only if you are either:

A U.S. citizen, or
A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect.
You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year.

Example:

If you go to a foreign country to work on a particular construction job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for 1 tax year or longer. The length of your stay and the nature of your job are only some of the factors to be considered in determining whether you meet the bona fide residence test.

Bona fide residence

To meet the bona fide residence test, you must have established such a residence in a foreign country.

The bona fide residence test applies to U.S. citizens and to any U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect.

To see if you meet the test of bona fide residence in a foreign country, you must find out if you have established such a residence in a foreign country. Your bona fide residence is not necessarily the same as your domicile. Your domicile is your permanent home, the place to which you always return or intend to return.

Example:

You could have your domicile in Cleveland, Ohio, and a bona fide residence in London if you intend to return eventually to Cleveland. The fact that you go to London does not automatically make London your bona fide residence. If you go there as a tourist, or on a short business trip, and return to the United States, you have not established bona fide residence in London. But if you go to London to work for an indefinite or extended period and you set up permanent quarters there for yourself and your family, you probably have established a bona fide residence in a foreign country, even though you intend to return eventually to the United States. You are clearly not a resident of London in the first instance. However, in the second, you are a resident because your stay in London appears to be permanent. If your residency is not as clearly defined as either of these illustrations, it may be more difficult to decide whether you have established a bona fide residence.

Determination

Questions of bona fide residence are determined according to each individual case, taking into account such factors as your intention or the purpose of your trip and the nature and length of your stay abroad. You must show the Internal Revenue Service (IRS) that you have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. The IRS decides whether you qualify as a bona fide resident of a foreign country largely on the basis of facts you report on Form 2555. IRS cannot make this determination until you file Form 2555.

Statement To Foreign Authorities

You are not considered a bona fide resident of a foreign country if you make a statement to the authorities of that country that you are not a resident of that country and the authorities hold that you are not subject to their income tax laws as a resident. If you have made such a statement and the authorities have not made a final decision on your status, you are not considered to be a bona fide resident of that foreign country.

Special agreements and treaties

An income tax exemption provided in a treaty or other international agreement will n ot in itself prevent you from being a bona fide resident of a foreign country. Whether a treaty prevents you from becoming a bona fide resident of a foreign country is determined under all provisions of the treaty, including specific provisions relating to residence or privileges and immunities.

Uninterrupted Period Including Entire Tax Year

To qualify for bona fide residence, you must reside in a foreign country for an uninterrupted period that includes an entire tax year. An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business.

To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country.

Example 1:

You are the Lisbon representative of a U.S. employer. You arrived with your family in Lisbon on November 1, 2002. Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. You immediately established residence there. On April 1, 2003, you arrived in the United States to meet with your employer, leaving your family in Lisbon. You returned to Lisbon on May 1, and continue living there. On January 1, 2004, you completed an uninterrupted period of residence for a full tax year (2003), and you may qualify as a bona fide resident of a foreign country.

Example 2:

Assume that in Example 1, you transferred back to the United States on December 13, 2003. You would not qualify under the bona fide residence test because your bona fide residence in the foreign country, although it lasted more than a year, did not include a full tax year. You may, however, qualify for the foreign earned income exclusion or the housing exclusion or deduction under the physical presence test.

Bona Fide Residence Status Not Automatic

You do not automatically acquire bona fide resident status merely by living in a foreign country or countries for 1 year.

Example:

If you go to a foreign country to work on a particular construction job for a specified period of time, you ordinarily will not be regarded as a bona fide resident of that country even though you work there for one tax year or longer. The length of your stay and the nature of your job are only some of the factors to be considered in determining whether you meet the bona fide residence test.

Bona Fide Resident For Part Of A Year

Once you have established bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year, you will qualify as a bona fide resident for the period starting with the date you actually began the residence and ending with the date you abandon the foreign residence. You could qualify as a bona fide resident for an entire tax year plus parts of 1 or 2 other tax years.

Example:

You were a bona fide resident of England from March 1, 2002, through September 14, 2004. On September 15, 2004, you returned to the United States. Since you were a bona fide resident of a foreign country for all of 2003, you also qualify as a bona fide resident from March 1, 2002, through the end of 2002 and from January 1, 2004, through September 14, 2004.

 

[qwertyisback]

That's assuming you don't have very much other income.

Ya, GC holder is gone back to his country , so obviously he has no OTHER US income and worldwide income is not taxed below $80000.

That depends on how much you have to withdraw and how much other
income in US. If you leave US and file as nonresident, then
401K withdrawal may be yoru only US income. If it is not much
(say you work here only 5 years and you even withdraw
401K by installment rather than a lump sum), the rate
may not be that high..

If you contributed for 5 yrs also, it will be atleast 75000(can be more with gains and employer match). It would be best to split in such cases, say each year $15K, with resident tax, very negligible tax has to be paid. So except 10% penalty (for 75K, penalty will ne 7.5K), you literally get all your money with very little tax.

Of course, you should do this only if you need money
in country you go back to. If you are not in hurry,
better not touch 401K and withdraw it only when you
turn 65.

I don't think so, somebody returning back permenantly will NOT like that idea. Who knows what will be rule for 401K after 30yrs?? What if 401K company goes bankcorrupt?? What if they deny to pay you at 65?? What option you have from remote country , with old age, no immigration status??? Very little. RIGHT

 

[AmericanWannabe]

I don't think so, somebody returning back permenantly will NOT like that idea. Who knows what will be rule for 401K after 30yrs?? What if 401K company goes bankcorrupt?? What if they deny to pay you at 65?? What option you have from remote country , with old age, no immigration status??? Very little. RIGHT

In this case, it has nothing to do with whether you give up GC and leave US or not. Even if you are to say, you should bail out of 401K too. and even if you pull out of 401K, where to put the money instead of spending it all?
Other kinds of invest are also with risk.

 

[qwertyisback]

In this case, it has nothing to do with whether you give up GC and leave US or not. Even if you are to say, you should bail out of 401K too. and even if you pull out of 401K, where to put the money instead of spending it all?
Other kinds of invest are also with risk.

Did you read my post??? Read it again "What if they deny to pay you at 65?? What option you have from remote country , with old age, no immigration status??? Very little. RIGHT "

 

[TheRealCanadian]

If you contributed for 5 yrs also, it will be atleast 75000(can be more with gains and employer match).

With a 401K, you're limited to the smaller of around 12% of your gross income, or $13000. (These are rough approximations, the numbers are almost certainly different but in the same ballpark). You'd need to be making a low six figure salary to save that much, and contributing the maximum.

Based on the number of underpaid H-1Bs I see complaining in these forums, the chances of that are unlikely, but if you are being paid at this rate, congratulations.

What if 401K company goes bankrupt??

Wether the fund company goes bankrupt or not is immaterial. The funds are held in trust, and there are strong regulations to ensure that investors' funds are protected. Having once worked in an insurance company where we sold securities-backed products, I can tell you that the SEC keeps a very close eye on this.

What if they deny to pay you at 65??

When you are legally denied your own money, that's called Communism. At which point you should be very grateful you are no longer physically in the US and have only lost your 401K. My parents lost most of their earthly posessions escaping it.

 

[AmericanWannabe]

Did you read my post??? Read it again "What if they deny to pay you at 65?? What option you have from remote country , with old age, no immigration status??? Very little. RIGHT "

Such things will at least not happen overnight.

You can roll your 401k over to some IRA accounts at a international bank
that also has office in your own ountry.

I heard if your ex-employer disappear, DOL will take over your 401K.
To prevent the situation that you have to constantly check
if your ex-empoyer company is still there, it is a good idea to always roll
over 401K to your current 401K or to an IRA

 

[TheRealCanadian]

it is a good idea to always roll over 401K to your current 401K or to an IRA

Quoted for emphasis.

One other thing to remember is that many 401K plans place restrictions on what stock funds you can own, whereas an IRA has no such restrictions. Where I am covered by a 401K, I contribute, but I also have an IRA. When I leave the job, the 401K gets rolled into the IRA.

This helps simplify matters, gives me more freedom and reduces my costs as some fees are waived when I have more than $10,000 in a single fund.

 

[AmericanWannabe]

Quoted for emphasis.

One other thing to remember is that many 401K plans place restrictions on what stock funds you can own, whereas an IRA has no such restrictions. Where I am covered by a 401K, I contribute, but I also have an IRA. When I leave the job, the 401K gets rolled into the IRA.

This helps simplify matters, gives me more freedom and reduces my costs as some fees are waived when I have more than $10,000 in a single fund.

Only disadvantage of IRA over 401K, as I heard and I might be wrong,
is that IRA is less protected than 401K when you are sued for money in a civil court.

 

[qwertyisback]

AW, TRC,
Point is whoever leaving US permenantly, will definately like to take his all monetary property to the place where he/she is going to live his/her life. Its hard to imagine that somebody abandoing immigration status and not coming back to US, will keep 401K in US and apply for that money after few decades. They would rather take 401k with them and invest in their country in retirement plan or whatever they wish to do. Does anybody returning back disagree with this???



TRC, this year's 401K limit is 14K. And considering TAX breaks, you don't have to make 6 figures to contribute maximum. Anyway, whatever money you contributed, its good to take that in chunks (while leaving US) over few yrs and filing taxes as resident will save bunch of money liable to uncle SAM. Any TAX gurus (un)confirm this notion????

 

[AmericanWannabe]

Anyway, whatever money you contributed, its good to take that in chunks (while leaving US) over few yrs and filing taxes as resident will save bunch of money liable to uncle SAM. Any TAX gurus (un)confirm this notion????[/B]

401K administrator is obligated to withheld a great portion of your 401K
withdrawal as federal taxes. You have to convince IRS to get that back.
IRS may contact USCIS, which will consider your withdrawal of 401K
as an indication that you abandon your permanent residence and deny
you of resident filing status

 

[qwertyisback]

401K administrator is obligated to withheld a great portion of your 401K
withdrawal as federal taxes. You have to convince IRS to get that back.
IRS may contact USCIS, which will consider your withdrawal of 401K
as an indication that you abandon your permanent residence and deny
you of resident filing status

When USCIS issues 2 yrs reentry permit to keep GC alive.... How can IRS conclude such thing?? But any way, as its just your speculation, I won't worry too much about it.

 

[AmericanWannabe]

When USCIS issues 2 yrs reentry permit to keep GC alive.... How can IRS conclude such thing?? But any way, as its just your speculation, I won't worry too much about it.

re-entry permit is issued to people who want to stay outside USA for
a long time but still want to come back. If they think you
don;t want to come back at all, then you can ignore re-entry permit

 

[TheRealCanadian]

Point is whoever leaving US permenantly, will definately like to take his all monetary property to the place where he/she is going to live his/her life.

If you believe in keeping your money close to you, then by all means do so. You can keep it under your mattress if you want it really close to you. However, if the money is safe and easily accessible to you in terms of trading and monitoring, where it is becomes really rather irrelevant.

Would you prefer to trade with a fund company in the same state as you, or are you OK dealing with a New York firm from California? Heck, in a few years all your calls to your trading company probably will be answered in Bangalore anyways.

Its hard to imagine that somebody abandoing immigration status and not coming back to US, will keep 401K in US and apply for that money after few decades. They would rather take 401k with them and invest in their country in retirement plan or whatever they wish to do.

That depends on what kind of security or rates of return you can get in your home country, and the tax treatment. Unless it's significantly better in your home country, 99% of the time you will be better simply leaving the money alone and letting it grow tax-free.

While I'm not contemplating a return to Canada, my wife and I did leave a small five-figure sum in Canadian retirement accounts. I probably could transfer the money over 3-4 years (my wife's at least) pretty much tax free into an IRA, but I don't see any need to. It's growing tax-free in Canada, under the tax treaty I can defer US taxation until I withdraw, and it enforces some discipline on me. It also gives me some nice currency diversification since a lot is invested in Canadian securities.

TRC, this year's 401K limit is 14K. And considering TAX breaks, you don't have to make 6 figures to contribute maximum.

There's also a percentage of gross income limit, depending on the employer plan. Many employers will not let you contribute more than a certain percentage into a 401K - all of mine had limits of 9 to 13%. If your employer does invoke a percentage maximum, then you need to make a lot in order to contribute the max.