2

I am on H-1b visa in the U.S. I will stay between 2 and 5 years here. My employer is (almost) matching my 401k contribution.

I am wondering if it makes sense for me to participate in the 401k. I have no intention of using it at retirement age, due to my situation. I have done the rough calculation and I think it does, but I might be missing something.

So I contribute $191.67 twice a month. The employer contributes $143.80 twice a month. I become vested after 2 years of employment.

2 years, no 401k:
24 * 191.67 * 2 = 9200 - 2024 = $7,176 after tax (I've put roughly 22% for tax)

2 years, with 401k:
24 * 191.67 * 2 = $9200 own contributions
24 * 143.80 * 2 = $6902 employer
9200 + 6902 = 16102 - 5313 = $10,789 after tax and penalty (22% tax, 10% penalty)

So at minimum, I am ahead with $3,613 as soon as I become vested, even with the 10% penalty. I am aware that if I leave the employer even a month before the 2 years vesting period, I'd lose money. e.g.:

2 years, 401k, quit a month before vesting:
23 * 191.67 * 2 = 8816.82 own
8816 - 2909 = $5,907 after tax and penalty. i.e. lose $1,269

But if I work for 5 years, I'd be ahead with $9,032 thanks to the employer's contribution.

I am not even counting the market fluctuation for my investments. Let's just assume I don't lose money on the market.

Any holes in my 'airtight' financial plan? Can I 'abuse' the 401k as a short-term investment strategy?

  • 2
    Why would you have no intention of using it at retirement age? AFAIK (though I'm no expert), you could simply let the money sit in that account (or a rollover IRA) and grow for several decades. – jamesqf Apr 19 '18 at 23:23
5

Your calculations look right and I think your strategy is sound. The 10% penalty is enough to persuade most people from withdrawing from their 401(k) early but not enough to be really punitive in case of special situations like yours. Plus you have a very generous employer match which shifts the balance toward contributing. The only things I'd recommend checking with your calculations are (1) is the 401(k) contribution entirely within the 22% bracket? and (2) is it possible your 401(k) balance would be large enough that some of the withdrawal would get bumped into the 24% or 32% bracket? That would obviously make it less advantageous.

Another possibility to consider. You might be able to contribute to a Roth 401(k). You don't get the tax benefit up-front, but after you rollover to a Roth IRA you can withdraw your contributions immediately (earnings would have to wait) with no tax or penalty. Your employer matching would be the same amount and still go into a pre-tax account, so you'd still pay income tax and 10% early withdrawal penalty on that portion. But it'd allow you to avoid the penalty on about half of your money. Since your tax rate now is probably the same or lower than when you withdraw, making your contributions Roth would make sense here.

  • Re: tax bracket at the time of withdrawal - OP will likely reside outside of the US by then, so he will be a non-resident alien, so only his US income will be taxed, albeit under NRA taxation rules. – void_ptr Apr 19 '18 at 19:11
  • I'd withdraw before I leave. So with Roth my own contributions are not penalized for early withdrawal? – Ицко Apr 19 '18 at 20:17
  • I just looked it up though and it's true only under particular conditions (including the account being 5+ years old) – Ицко Apr 19 '18 at 20:23
  • 1
    @Ицко Sorry, I clarified that only your Roth 401(k) contributions can be withdrawn immediately without tax or penalty after a rollover. Your earnings would indeed have to wait or you'd owe tax + penalty. – Craig W Apr 19 '18 at 20:25
  • 1
    @CraigW Except that OP will be NRA with no US income soon after his departure, which guarantees lower tax bracket if withdrawals are spread over multiple years after OP's H1B ends. – void_ptr Apr 19 '18 at 20:44

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .