Green Card holder (permanent resident): Should I contribute to my employer-matched 401(k), even if I might leave the U.S. later?

Question

I am a Green Card holder (permanent residence card) and my company offers a matching 401(k). I plan to stay in the U.S. for a long time. However, I can't control the future. If there were a family emergency, I might have to leave the States.

The question is: Should I contribute to my 401(k) with the company? Right now, I haven't been doing so because I worry about withdrawing it early (before 59.5 years old) and paying both the 10% penalty plus income taxes.

Can I take an advantage of the 401(k)? I am not sure that I knows all the pro(s) and con(s) in this matter (to contribute or not to contribute). Can anyone tell me about your experience on this?

Answer 1

Separate from some of the other considerations such as the legality, it is likely going to be worth your will if you employer has company matching even if you have to pay the early withdraw penalty because the matching funds from your employer can be viewed as gains on the money deposited. For example, using round numbers to make the math easy:

No 401(k) Deposit

  Gross Pay: $ 1000.00 
Taxes (25%): $  250.00 
    Net Pay: $  750.00

Take Home: $750.00

With 401(k) Deposit

           Gross Pay: $ 1000.00
401(k) Withdraw (5%): $   50.00
         Taxes (25%): $  237.50
             Net Pay: $  712.50

401(k) Account
Employee Contribution: $  50.00
Employer Contribution: $  50.00
              Balance: $ 100.00

  Withdraw Taxes (25%): $ 25.00
Withdraw Penalty (10%): $ 10.00
          Withdraw Net: $ 65.00

Take Home: $777.50

So as you can see there is a benefit to deferring some of the earnings to the 401(k) account due to the employer matching but the actual dollar amount that you would be able to take home will be different based upon your own circumstances. Depending upon what the take home would be at the end of the day the percentage return may or may not be worth the time involved with doing the paperwork.

However, all of this only applies if you have to pull the money out early as once you hit 59.5 years old you can start withdrawing the money without the tax penalty in which case the returns on your initial deposit will be much more.

Answer 2

If you invest in a 401(k), the shares in that plan are yours for as long as you live, or until you pull them out. So, if the employer is offering any sort of matching and those matched funds remain yours after you leave, then definitely contribute; that's an immediate return on your money. If the employer is NOT matching funds, then usually it is better to contribute to an IRA instead; you get the same income tax benefits from the deduction, without the headaches of going through your company (or the company from 3 jobs ago or whoever bought them) to get to your money.

If I were in your position, the most I personally would do after I quit the company (which I'm assuming you'd be doing if you were going back to your country of origin) would be to have the 401k shares rolled over into a traditional IRA; that way I'd have more control over it from outside the country. Just keep the bank holding your IRA apprised of your movements around the world and how they can get ahold of you (it may be wise to grant a limited power of attorney to someone who will be staying in the U.S. if you don't want the bank mailing your statements all around the world), and the money can stay in an American account while you do whatever you have to outside it.

As long as you don't take the money out in cash before you're 59 1/2 years old, you don't need to pay taxes or penalties on it. If you were to need it to cover unexpected expenses (perhaps relating to the aforementioned family emergency), then that decision can be made at that time. If you think that's even remotely likely, you may consider a Roth IRA. With a Roth, you pay the income taxes on your contributions, but the money is then yours; you can withdraw anything up to the total amount of your contributions without any additional taxes or penalties, and once you hit 59 and a half the interest also becomes available, also tax- and penalty- free. So if you had to leave the country and take a lot of cash with you, you could get out everything you actually put into a Roth with only minor if any transaction fees, and the interest will still be there compounding.

Answer 3

If you're thinking of going back to your home country, you need to check whether you're allowed to keep foreign accounts once back there. In some countries having a foreign account may be illegal. In this case - don't contribute to 401K as you'll have to withdraw, and pay the penalty.

If, however, your country of origin doesn't care about you having an account in the US - keep it, and contribute, because then you'll achieve these nice things:

1. Additional source of income when you're 60+
2. Employer's match - free money.
3. Tax benefit on your deposits and earnings on the account (at least the US tax, check with your country of origin tax code to make sure you won't be considered as tax evader).
4. Additional emergency fund.
5. Ability to invest in the US market easily while living abroad, many people are actually looking for such an opportunity and can't have it.