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Contributions to 401k funds are subject to a 10% penalty if taken out before the age of 59.5. Presuming my employer has a 401k matching program, does it make sense to contribute to a 401k if I might move out of the US before the age of 59.5 and therefore take my savings with me to another country?

  • Is the question from the point of view of a citizen of the US who plans to retire as an expat in the other country, or a non-US citizen? – user662852 May 6 at 18:24
  • @user662852 non-US citizen – JonathanReez May 6 at 18:30
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    Is there something that prevents you from keeping your funds in your 401k even if you move out of the country? Then, just take it out when you turn 59.5? – Corey P May 6 at 20:34
  • @BetterBudget lots of headache managing a fund in a foreign country, potentially – JonathanReez May 6 at 20:35
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If it's a Roth 401k, you can withdraw what you invested (but not the growth) at any time, without penalty.

Then you just have to wait until you are 59.5 to withdraw any growth that occurred.

I do all my 401k management online, so I see no reason why that couldn't be done from a foreign country. If your company's 401k broker doesn't support that, you could roll the 401k over into an IRA held with a manager that does support online management. It may be worth asking potential fund managers how they would handle that now.

It's also worth thinking about the risks here.

  • If you do not use the 401k and instead use an unrestricted investment vehicle, you are guaranteed worse tax treatment and no employer match if you stay long enough to retire.
  • If you do not invest at all, then you are guaranteed not to get any investment returns nor any employer match.
  • If you invest in the 401k, then at worst you pay a 10% penalty and the taxes that you avoided (if any).

My thought is that the last risk is less of a problem than the two previous risks. This is particularly so if you can just leave the money in the account until you are old enough to withdraw it. So I would invest in the 401k. But you know more about the likelihoods of the various options than I do. For example, if it's a definite plan to leave the United States in five years and you are in your twenties or thirties, it may not be worth the aggravation. If you're not sure if you're going to leave the US and are already in your fifties, that's a completely different situation.

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It does make sense to contribute to your 401k, even if you plan to move out of the country. Besides the "headache managing a fund in a foreign country", you can keep your 401k even if you're residing in a foreign country (source). Your best financial outcome would be to contribute to your 401k with matches and hold it until you're 59.5 and just figure out how to minimize the "headache".

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    This does depend on the country. Some will tax you on the yearly gains of the 401k anyway. Then you will be taxed again by the US during draw down. – Vality May 6 at 21:14
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Yes

Assuming it's a 50% match, your absolute worst case scenario is that you'll have to withdraw the money, pay taxes on the money and pay 10% penalty. However, you already avoided taxes on the income. So you're likely putting 20% or so more into the 401(k) than you would have received if you hadn't contributed.

Assuming you make it to the top marginal tax rate, including the penalty, you still spend less than 50% of the income on taxes, which makes it a net positive in any scenario.

The numbers look even better for a 100% match, obviously.

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