I moved back to my country, I was working in US with a L1 Visa for a couple years, I have 6K in my 401k, what is your best advice, leave the money until I can cash out with out paying taxes or withdraw money and pay the penalty?


This is something better asking a licensed professional (EA/CPA licensed in the US) who's also familiar with your home country tax law and the tax treaty your home country has with the US.

Assuming no tax treaty and adverse tax consequences at home, you can have this scenario:

  1. Wait till the year you have no US income and you're non-resident in the US. Probably the next year.
  2. Withdraw the amount, pay 10% penalty (but likely no taxes since it is a very low amount and will be your only US income for that year).
  3. Your home country considers this your income (since it has never been taxed and is deferred compensation - most countries will unless there's a specific treaty provision). You pay your home country taxes on that income.
  4. If your home country allows - you claim the 10% credit on your home country taxes.

The last step is critical - unless there's a tax treaty, not every country allows foreign tax credit (tax treaties usually have a provision to avoid double taxation), and you may end up paying both the US tax and local tax on the same money.

If there's a tax treaty - step #4 is most likely guaranteed.

Step #4 may not work in some places that would not consider the penalty as tax. Again - check it with an accountant proficient with the local law.

Step #3 depends on your country. Some countries ignore foreign deferred compensation rules and consider the 401k amounts income to you when it was deposited (the US treats foreign tax deferred accounts this way, I believe that is also the case in India). So you should check locally. In this case you have probably paid taxes (or were exempt) on this amount when you earned it and will not pay taxes again. But then you might also not be able to claim the 10% back as credit.

Leaving it is an option, although with such an amount is hardly worth it. You'll have to check how your country deals with foreign accounts of its citizens (the US, for example, puts an enormous reporting and tax burden on these, some countries forbid them altogether). This also applies to step #1.

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