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I'm a resident for tax purposes (H1B Visa) at the moment. I have accumulated $35K in my traditional 401(k) account including employer contributions.

I'm planning to permanently move out of the U.S., with no plans to come back for the foreseeable future. I'm aware that withdrawing my money from my 401(k) means I'd incur taxes + 10% penalty for early withdrawal. I wonder if the following strategy works:

  • Leave the 401(k) account open when I move out in the middle of the year.
  • In 2018, when I'm not a resident of the USA, I withdraw just enough to get my taxable income to the lowest tax bracket. Pay the taxes and 10% penalty.
  • Repeat the same in 2019, 2020.... until there is not any money left.

Is this plausible? Am I missing anything basic?

Deeper question: In 2018, would a European country that I'd be a resident of potentially charge me income taxes for my 401(k) withdrawal (I'd have proof that I already paid U.S. taxes, right?)

  • 1
    If you are willing to wait 5 or more years, you might want to consider setting up a Roth conversion ladder. This would allow you to avoid the 10% tax penalty as well. – Andy Oct 27 '17 at 16:22
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This all comes down to time: You can spend the maximum on taxes and penalties and have your money now. Or you can wait about a decade and not pay a cent in taxes or penalties. Consider (assuming no other us income and 2017 tax brackets which we know will change):

Option 1 (1 year): Take all the money next year and pay the taxes and penalty:

  • Taxable Income (sans Standard Deduction of $6350): $28650
  • Penalty: $3500
  • Taxes: $932.5 + .15 * ($28650 - $9325) : $3831.25
  • Total Taxes + Penalty: $7331.25

Option 2 (2 years): Spread it out to barely exceed the 10% bracket:

  • Taxable Income both years (sans Standard Deduction of $6350): $11150
  • Penalty: $3500
  • Taxes Year 1, 2: 932.50 + .15 * ($11150 - $9325): $1206.25
  • Total Taxes + Penalty: $5912.50

Option 3 (6 years): Spread it out to cover your Standard Deduction each year:

  • Taxable Income: $0
  • Penalty: $3500
  • Taxes: $0
  • Total Taxes + Penalty: $3500

Option 4 (6-11 years): Same as Option 3 but via a Roth Conversion Ladder:

  • Taxable Income: $0
  • Penalty: $0
  • Taxes $0
  • Total Taxes + Penalty: $0
0

You can do that, you aren't missing anything. It is supposed to be punishment, but as you are moving to a European country your non-penalized income would likely be taxed higher as is.

I don't have info on whether you will be taxed a second time by the European country.

  • > but as you are moving to a European country your non-penalized income would likely be taxed higher as is. Do you mean I can't apply "standard deduction" on my taxable income(401k withdrawal) for 2018? – Aravindh Sathish Jan 30 '17 at 19:02
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    @AravindhSathish sounds like its own separate question. Nothing I said could be inferred to be related to your standard deduction – CQM Jan 30 '17 at 19:56
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    @Aravindh Sathish: No, I think what the answer is saying is that whatever European country you're living in would tax the money you get from the 401k at a higher rate than the US would. – jamesqf Apr 30 '17 at 18:01

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