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I'm a foreigner working in the US. I know if I don't work or reside in the US anymore, I can roll over to my country's accounts or cash out. But cashing out is subjected to a penalty, so of course I want to avoid it, which makes me think of other alternative saving accounts. Besides, it depends on the home country - my home country may not have HSA. I still want to save for HSA and 401K, but unsure whether I'll live in the US forever, hence the concern. Some questions pointed out non-resident can just leave it there even if they are not in the United States. And I take it as, if you don't plan to/ aren't unsure about your stay in the US, you shouldn't put a large chunk into HSA / 401K?

What is the best way that US foreign employees commonly do with their HSA / 401K?

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    What prevents you from just leaving it until you can withdraw without penalty?
    – littleadv
    Commented Jan 6, 2023 at 23:07
  • Fair question. Just in case I need that money. IMO the healthcare cost/cost of living in countries aside from the USA is not that expensive so I wouldn't require significant savings. The mentality is because of the high price in the USA, I will want to have HSA / 401K, but in other countries, or my home country, it's not that needed. The money could be better spent on houses, better childcare, or emergencies, i.e. it becomes a disposable fund without worrying about a large unexpected bill if accidents happen one day.
    – Lacie
    Commented Jan 8, 2023 at 18:24
  • You can spend HSA money after retirement age on non-medical expenses.
    – JohnFx
    Commented Jan 9, 2023 at 1:31
  • Related: money.stackexchange.com/questions/9450/…
    – littleadv
    Commented Jan 12, 2023 at 22:03

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This is a non-trivial question, and there's no single answer. I'll point out some of the complexities and trade-offs, and you'll need to follow up with a tax adviser proficient with your home country taxes and their interaction with US taxation.

Options

Ignoring your home country laws, these are your options.

Do Nothing

When you reach the age at which you're eligible to withdraw the money without penalty - start withdrawing. You'll owe US taxes on the income at the current rates at that time. You'll most likely be considered non-resident, which means you won't be able to take advantage of sheltering options like standard deduction.

Use HSA For Medical Expenses

You can use your HSA to pay for medical expenses. You'll need to track the expenses, and match the amounts to the withdrawals (you don't have to pay the expenses directly from the HSA, you can "reimburse yourself" from it). These distributions would be penalty free and tax free in the US.

Withdraw Everything and Cash-Out

You'll pay income taxes on the deferred amount (the HSA and traditional 401k balances, and the earnings on the after-tax balances), in addition you'll pay a 10% tax penalty on the taxable amount withdrawn. From that point on the remaining money is yours to do as you please.

Home Country Taxes

Here's where things get hairy.

Tax Treaties

Tax treaties may allow you do things that the base law doesn't allow or penalize you for. For example, you may pay lower tax rate, lower penalties, or be able to roll over into your home country scheme. You'll need to check with a local tax adviser.

Local Treatment of Foreign Income and Accounts

You'll need to check how your home country handles income from foreign sources and foreign accounts. You may need to pay taxes on the earnings every year even though in the US these taxes are deferred.

You may need to pay taxes on the contributions in your home country, or may not need to. Some countries require disclosures of foreign assets, others forbid them entirely.

Different Tax Rates and Credits

In the option of using HSA for medical expenses, this would be tax free in the US - but may be taxable as ordinary income in your home country.

You may or may not be able to treat gains in the deferred accounts as capital gains instead of earned income for the purposes of taxes in your home country (some countries tax earned income, but not capital gains, or tax them differently).

You may or may not get credits in your home country for taxes paid in the US on these monies.

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