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I am in my late 20s and a non-resident, working in the USA. My employer has a 401k plan to which I am contributing 6%. I might be leaving US with in 3-5 years from now. What I came to know regarding the withdrawal of the 401k money is:

If you are less than 59-1/2 years, you need to pay a penalty of 10% of the total amount.

As this is a pre-tax income, we should be paying the current tax bracket (at the time of withdrawal).

For a person like me, who will be leaving the USA way before the age limit, what are the ways to get penalty-free withdrawal?

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    You might be able to roll over the money into a retirement account of the country you are moving/returning to. This will avoid the early withdrawal penalty but likely not the US income tax that will be charged on the distribution. – Dilip Sarwate Jun 14 '18 at 15:29
  • Does your employer offer a contribution match? – quid Jun 14 '18 at 15:46
  • You should consider not contributing. – Pete B. Jun 14 '18 at 17:43
  • @DilipSarwate Sure. But what if my home country doesn't have such retirement accounts? Also will I get charged with the dollar conversion charges? – Austin Evans Jun 14 '18 at 18:08
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    Why would you want to withdraw the money, rather than keeping it as a retirement account? (By e.g. rolling it over into an IRA.) – jamesqf Jun 14 '18 at 19:01
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I highly doubt that you'll get out of the penalty, but that probably depends on your country of citizenship. With that said, though....

If you get a company match, you're far better off contributing to the 401(k), then withdrawing, paying the tax and the penalty, and taking the rest of the money. Inside the 401(k) you might want to be slightly conservative if this is the way you're going. A strong market correction at the wrong time could rid you of all the profit.

I would suggest other options, however. You could (after leaving the company) roll over into a Roth IRA, or you could keep the 401(k).

I would personally just keep the 401(k) unless I know that I really need the saved money. There's no penalty in keeping that money in a 401(k) in the US. The accessibility of that money is obviously greatly reduced, but even that shouldn't be a problem that you won't see coming. When you're eligible for retirement withdrawals you can open a bank account in the US and access that bank account from anywhere (online banking + paypal (or other) is really nice).

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This might not be the most popular opinion but if there's no match, I'd reconsider participating if I were you. If you are likely to leave the country before you retire, you might be better served by something other than a 401(k).

It really comes down to paying income tax on this money now, or later.

  1. Traditional: You deduct your contribution from your income delaying taxation.

  2. Roth: You pay the income taxes on your contribution, shielding your distributions from income taxes.

What would be the "best" could only come from really looking at your income, the tax tables, and how many years you'll be in the country. Essentially, do you want to pay income taxes on your contributions incrementally each year, or do you want to pay all at once when you liquidate the account?

Lets say you're contributing $5,000 to your 401(k) now, and will for the next 5 years and your top tax bracket is 12% (and you earn 7% in the market annually):

You deduct $5,000 from your income, saving $600 in taxes each year. When you leave in five years you'll have an account balance of about $30,766 thanks to your gains. You'll have to liquidate your account and owe income taxes on $30,766 which might even push part of that amount in to the next tax bracket at 15%. You saved $3,000 in taxes over the 5 years, but you'll owe about $3690 + another 10% penalty for $3,076 for a total of $6,766 in tax and penalty.

If you made these contributions on a Roth basis, you contribute $5,000 and pay $600 in income tax each year. In five years you'll have the same account balance of $30,766 thanks to good fortune in the market. When you liquidate, you get to take your $25,000 of contributions back with no tax consequence. The $5,766 of gains will be subject to income taxes and penalty for a total of about $1,270. With the Roth you will have paid $4,270, $3,000 over the five years in additional income tax and $1,270 when you liquidate your account.

In this hypothetical, your total cost for the Traditional is about $6,766, versus a total cost for the Roth of $4,270. All other things being equal, your Traditional Account leaves you with about $24,000 but the Roth would leave you with about $26,496.

Now, there's an argument to be made that maybe you wouldn't contribute the full $5,000 each year if you had to pay tax on that amount, maybe you'd only contribute $4,464. But, even running those numbers your account balance after 5 years would be $27,468, you contributed $22,320 for a gain of $5,168; taxes and penalty on your gain is $1,132 plus $2,678 in taxes on your contributions over the five years for a net total of $23,657.

So, you can see these totals aren't very far apart from eachother particularly when you control for tax rate. It's really going to hinge on where your annual income falls on the tax table each year and where it would fall the year you'd be leaving. Maybe your traditional contributions spare you from creeping up in to a higher marginal rate each year and maybe if paying all the tax in the future would cause you to creep in to a higher bracket when you leave. All things being equal, this is a coin flip, you're not going to get away from the taxes though.

Obviously the math skews dramatically toward an employer plan when there's a match, a dollar for dollar match on your 401K contribution would result in a balance of over $60k versus $30k after the same 5 years. Also, even if there's no match but you're contributing above the IRA limits you might want to go for a blend. Unless you were going to switch to a Roth paradigm the benefit of payroll deductions probably outweighs switching from the 401(k) to a Traditional IRA. Be vigilant about the fees you're paying in the 401(k) fund options, but there's not a lot of wiggle room here, and not a lot of net difference.

And for whatever my personal opinion is worth, without looking at your specifics, I'd probably stop contributing to the 401(k) and start my own Roth IRA somewhere with high quality no-commission low-fee funds; Vanguard or Schwab.

  • might want to bold the "if there's no match". Completely agree with this answer. – xyious Jun 14 '18 at 19:39
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    Tip: "Roth" is a name, not an acronym. – Chris W. Rea Jun 14 '18 at 20:56
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    lol I thought it looked weird while I was typing it... – quid Jun 14 '18 at 20:57
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401(k) plans have a provision where they can be “rolled over” to another plan without penalties.

Depending on the tax treaty between the county you are returning to you may be able to roll-over your plan to a similar kind of retirement plan in your country. I think the IRS maintains a list.

Alternatively you could leave your plan in the United States and draw on it when you reach 59 1/2.

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