401K for a H-1B visa holder

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Hi,

I've been working in the US for about 2 years working on a H-1B visa. I'm tempted to open
a 401k account now since my new employer (I joined a new company recently) provides
matching 401k contributions.

My query is, Since I don't have my Green Card yet, does it make sense to have a 401k plan
considering that Green Card application processing is going so slow.

Thanks for any help.

Regards,
- Jack


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AFO said: <blockquote><hr>You invest the same in India, invest Rs 4500, after 5 years, it would be likely Rs 12000.<br><... (more)

tmisc (Feb. 10, 2006 @ 3:02p) |

Ignore what the poster AFO said. I am not sure if he is aware how 401K, taxation, etc. work.<br><br><b>Disclaimer: This ... (more)

tmisc (Feb. 10, 2006 @ 3:27p) |

tmisc said: <blockquote><hr><br><b>Disclaimer: This is my personal opinion and the choice you make is yours.</b><br><br>... (more)

AFO (Feb. 10, 2006 @ 7:37p) |

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I was in your shoes exactly 5 yrs ago. Since I cannot go back in time and fix the mistake, atleast I can give you advice. START your 401K Account immediately. DO NOT DELAY. It is a time sensitive investment. The younger you start it, the better the growth and you will end up with more money when you retire. Don't even worry about H1 Visa, Green Card and other stuff. It'll happen side by side as you live your life. If you are too paranoid, just start with 5% contribution. And then increase it to 10% or more whenever you get your Green Card.

This question has been discussed to no real conclusion many a time: Here and Here and here and
This is a good place to start.

Regardless, I think you need to elaborate your question - what are your concerns? What is your situation? What are your long term plans?

I agree. I did start investing in my 401k since I was 22, and it grew nicely. If you plan to stay in the US, invest in the 401k. As the other poster said, the earlier you start, the better.


Worst case scenario - check to see if your home country has a reciprocating program so just in case your green card doesn't go through, you can still get those funds.

what if I decide to go back to my home country when I am 40 something. will I loose my contributions?

740il said: [Q]what if I decide to go back to my home country when I am 40 something. will I loose my contributions?

very important question, indeed. anyone knows the answer?

Thank you all for the responses.

My dilemma is:

1) Considering the current delays in the Green Card application process, I'm unsure if my
residency application will come through in the 4+ years left on my H-1B.
2) If the point above comes true and I've to return to my home country, I'll have to
pay the penalty to IRS for withdrawing money from the 401K account.

Thus, I thought of opening this question to the forum to get some advise.

Thanks,
- Jack

Your money is your money. You can leave it in the US until you're retirement age and then take payments or you can withdraw it all when you leave and pay the associated taxes and penalties. Also depends on what country you're from. It may be possible to roll over the 401k into a retirement plan in your home country. But I'm not a tax expert, so take this for what its worth (not much).

jackryan01 said: [Q]
1) Considering the current delays in the Green Card application process, I'm unsure if my
residency application will come through in the 4+ years left on my H-1B.
2) If the point above comes true and I've to return to my home country, I'll have to
pay the penalty to IRS for withdrawing money from the 401K account.

You might want to read thru' the immigration rules first. You actually don't have to get the Green Card within that 4+ years. Your Labor Certification will be approved (assuming it is employment based) by that time and you will be renewing your EAD and other documents on a per year basis until GC is approved. So you won't have to leave. Infact, even if your Labor certification hasn't been approved but your application pending for 180+ days, you can still file for 1 yr H1 extensions until you get your EAD.

I know you are having all kinds of thoughts. But believe me, its not worth all the confusion. Just start your contributions ASAP. 4 or 5% contribution at a young age is not a big deal for most youngsters.

You can take ALL the money out of your 401k ANYTIME. You will have to pay 10% penalty + income tax on the money in the year you withdraw it.

AlexTheMan said: [Q]You can take ALL the money out of your 401k ANYTIME. You will have to pay 10% penalty + income tax on the money in the year you withdraw it.

But I guess if you're planning on leaving the US and never coming back, taxes don't matter. Right?

I believe some 20% of the withdrawal amount is withheld.

I advice the OP to start the GC process and contribution right away if he intends to stay. Four years is sufficient as the H1B can be extended annually at a certain point in the GC process. Check http://www.murthy.com/ for excellent GC information and processing times.

Edited to reflect that 20%, not 25% is withheld.

tazzy531 said: [Q]AlexTheMan said: [Q]You can take ALL the money out of your 401k ANYTIME. You will have to pay 10% penalty + income tax on the money in the year you withdraw it.

But I guess if you're planning on leaving the US and never coming back, taxes don't matter. Right?

You never know. Your country and US may have come collabration for tax evasion crimes. It might come back and bite you in the back. Besides, you don't want to sacrifice your chance for future touristic and business trips to US for a couple grand.

I suggest this: You can withdraw your 401K funds during the year AFTER you leave the US. Consequently, you will have no income except your 401K withdrawal during that year, therefore your tax bracket will be relatively low.

I am in the same boat as you are, and I do put stuff in 401K. My comp. matches 50% up to 3% of my pay. And I put exactly 6% of my pay in it. Company adds 3%. Even after 10% penalty for early withdrawal, it is still a very good deal.

I think this whole notion that you should start investing for retirement immediately and as early as possible is flawed. It is flawed in the sense that it sweeps the real point of investing and spending under the rug with a very simplistic notion. At the end of the day what one really cares about is just what kind of income stream one will have in retirement.

Whether you achieve that income stream by investing small amounts throughout your life, or investing larger amounts later in life, is irrelevant.

Of course, at this point someone will say - what about compounding? Don't small investments early on become much bigger because of the effects of years of compounding?

What is compounding? Merely the idea that investments we make give us a certain rate of return, which if we reinvest at the same rate, become larger sums of money over time. Compounding is an argument based on the rate of return of an investment.

We know how to measure the rate of return of financial investments very well. But how do we think about the rate of return of non-financial investments?

I can think of many, many things that young households will want to put money into, that may give them a higher implicit rate of return than financial investments for retirement. Things like childcare. Your children's college fund. Housing. Capital goods like cars and household appliances. Clothes.

Part of this of course are pure consumption activities, but a large amount of expenditures are on things that help people become more productive. To the extent that people may have better non-financial investments when they are young, and if they are capable of making up the retirement investments later in life, then I suggest that no, people should not blindly follow the 'invest early and invest often' rule.

The problem, of course, is that a lack of self control may indeed lead to the inability to invest appropriately later in life, or may lead to the expenditure of income on things that don't generate good rates of return. And so the simple rule of investing early and often may be useful. But if you can look beyond this, then perhaps you should.

(This ignores the many, many tax breaks and benefits that are given to retirement accounts, of course! With those in, perhaps it's not a bad idea. Yet people should consider for themselves how much sense saving early makes, rather than just following conventional wisdom)

Put in money up to the matching contribution, at the very least, because you'll come out ahead either way. If you do leave the US early, you can withdraw the funds with only a 10% penalty.

Same situation here until I got green card. I contributed max possible to 401k (and Roth IRA) even when I was on optional 1 yr training (while company was getting H1B for me) right at the end of my Ph.D when I started working. Green card process took over 4 years. If you'd like to invest for retirement now, it'd be the perfect time to start your 401k.

Basically, resident or not is irrelevant, the money is yours and you're subject to the same rules governing it whether you're alien, resident or citizen. Depending on your situation at time of maturity (59.5+), you'll be taxed on gains. If you're no longer in the US, you'll have lower tax since you may not have any other income in the US. If you're still in the US at retirement, even if you don't have a green card or citizenship by then, you'll still be able to collect the money according to regular rules. Basically, all that the 401k cares about is for you to have a SSN for tax purposes and employer through which you can contribute. After that, regulations have nothing to do with your visa/residency status (outside of temporary tax breaks offered to non-residents of some countries on certain visas - tax exemptions).

Depending on nationality, some non-resident with working visas, you may not be subject to federal tax or have tax exemptions (check to see if your visa type and country has this feature). In that case, make sure to take advantage of Roth IRA as well (after contributing to 401k up to company match). Roth would have no tax on gains since it's supposed to be post-tax dollars going in but it'd be funded with tax-exempt income. And unlike 401k, you'd be able to get your money out (the contributions only) before retirement which can come in handy if you leave the country and need money to relocate. Anyway, that's something to look into.

You can pull the money after you go back to your home country. Since your income here will be $0,you tax rate will be very low.

AlexTheMan said: [Q]You can take ALL the money out of your 401k ANYTIME. You will have to pay 10% penalty + income tax on the money in the year you withdraw it.Not true, strictly speaking: you need to have a separation from service, death, disability, qualifying hardship, or attainment of age 59 1/2. But, you can always take your money when you leave, which is the important point.

Thank you once again for the wealth of advice.

I'm convinced that its best to invest (into 401K) for ones retirement
now (without further delays) and don't let the Green Card delays bother you.
If for some reason I've to leave the country, so be it.. I can take my
money with me (after paying the required penalty & taxes).

Guys, you all are awesome.

Cheers,
- Jack

Only invest in 401K if your employer matches your contribution, or atleast does some sizeable % as contribution.

One thing you can do if this is allowed by your plan is to gradually withdraw your 401K year by year, so your US income from the withdrawal plus other US sources is low enough to keep you in the lowest bracket. If you plan carefully, even with penalty, you may not lose much.

You may also want to check out 401K rollover, IRA and the related early withdrawl penalty.

This is not an easy question to answer. You need to weigh many factors to make this decision. And there are many factors out of your control, for which you can only make an educated guess. For example, what's your forcast of tax rates in US in 10 years? With budget deficit, SS deficit, huge cost of the Medicare reform, one may conclude that the tax rate can only go higher from here.

My 2 cents on this.

Why invest in 401k or Stocks or CD in US at all?
Invest in India, the stock market there is hotter than here, and likely to be so for the foreseeable future.
The financial advisors here have been advising people to invest in 'Emerging Markets', India is a potent symbol of the emerging markets.

If contemplating CD's here, go for FD's in India, CD's here pay 2-4%, FD's in India are anywhere from 6% and up.

Real estate in India is hotter than the hottest market in the US.

So, if you are absolutely certain that you will be returning to India, I would imagine no better place to invest than India itself.

Why is it not the absolute best place to invest if you are not returning to India? You would lose money in the currency exchange rate itself, and if by any chance the rupee goes down when you want to pull your money out of India, you get screwed, and if the dollar goes down (yes, it has been going up and down vs the rupee in the last year) when you intend to invest in India, you are screwed again.

Now for the example:
Imagine, invest $100 in 401k, add in 6% match, 106, after 5 years in the current market in US, it will likely be $200. Withdraw from it with at least a 10% penalty, assuming you are not paying any tax, since you dont have any income and your marginal tax rate at 0.
You get $180 back.
You invest the same in India, invest Rs 4500, after 5 years, it would be likely Rs 12000.
Assuming the dollar-rupee rate is the same, you get $266. Pay the Indian tax on that, at 25%, probably even lower 5 years down the line, about $66, you have $200, $20 ahead of the same investment in US.
Now, $20 doesnt seem much, but thats Rs 900, enough for a pretty good party, huh?

Also, remember, its $20 on a $100 investment. Make it a $20000 (the minimum savings in the 5 year timeframe), and that goes up to ----- > $4000. (Rs 180,000, not just a small party anymore, huh , more like a wedding party

I read somewhere before if you're not a resident when you leave the country and withdraw your 401k the tax rate will be fixed 20% (instead of depending on the income that year). Anyone heard of it?
I also contribute up to my employer matching (3%).

deleted

chepskate said: [Q]tazzy531 said: [Q]AlexTheMan said: [Q]You can take ALL the money out of your 401k ANYTIME. You will have to pay 10% penalty + income tax on the money in the year you withdraw it.

But I guess if you're planning on leaving the US and never coming back, taxes don't matter. Right?

You never know. Your country and US may have come collabration for tax evasion crimes. It might come back and bite you in the back. Besides, you don't want to sacrifice your chance for future touristic and business trips to US for a couple grand.

I suggest this: You can withdraw your 401K funds during the year AFTER you leave the US. Consequently, you will have no income except your 401K withdrawal during that year, therefore your tax bracket will be relatively low.

I am in the same boat as you are, and I do put stuff in 401K. My comp. matches 50% up to 3% of my pay. And I put exactly 6% of my pay in it. Company adds 3%. Even after 10% penalty for early withdrawal, it is still a very good deal.

Wo - that's exactly what my company matches - I'm in the H1 B boat, and I'd been struggling with this as well.

thanks.

timrick8 said: [Q]One thing you can do if this is allowed by your plan is to gradually withdraw your 401K year by year, so your US income from the withdrawal plus other US sources is low enough to keep you in the lowest bracket.Your plan is not allowed to allow that for as long as you are working there, before age 59 1/2. More precisely, if it does, it doesn't qualify as a 401(k) plan, and the IRS is going to have some very big issues, which, in turn, are going to create some Department of Labor issues.

Even if you leave the country you can if you want to, rollover the money into an IRA even with an address outside the US. This is allowed because the money in the 401k was earned in the US.

That is if you think you will stand to gain more by doing this rather than taking it out and paying the penalty immediately. It allows you to invest in the US economy.

Of course max to the match ASAP. If you leave the company for whatever reason, you can roll it over to IRA. If you don't want to pay 10% penalty, do a ROTH IRA conversion (pay the regular tax the year when you do the conversion), wait for 5 years, you can take all the money (principle) out from ROTH IRA without pay tax or penalty. The rest is tax and penalty free after age 59. The money is your no matter your status. Only your age will determine the tax or penalty.

LH2004 said: [Q]Your plan is not allowed to allow that for as long as you are working there, before age 59 1/2. More precisely, if it does, it doesn't qualify as a 401(k) plan, and the IRS is going to have some very big issues, which, in turn, are going to create some Department of Labor issues.

I said that under the scenario where he quits his US job and leaves the country. Sorry I didn't make it clear.

jackryan01 said: [Q]

Regards,
- Jack

What kind of immigrant name is that <img src="i/expressions/face-icon-small-happy.gif" border=0> Now Chakra is more like an immigrant name

On a serious note, you get to keep your SSN and Bank Account forever. Even if you go back to your home country, you get to move your money to Rollover or Roth IRA. Just keep filling your taxes here.

barryccc said: [Q]I read somewhere before if you're not a resident when you leave the country and withdraw your 401k the tax rate will be fixed 20% (instead of depending on the income that year). Anyone heard of it?
I also contribute up to my employer matching (3%).

I think it may be that they automatically whithold 20%. Then when you file your taxes, you may need to pay more, depending on your tax bracket.

I'm in a similar situation. On an H-1B, but not sure if the company is ready to sponsor me for a GC. However, I do have Canadian Landed Immigrant status, and plan on moving there in a year or two and complete three years to get my Citizenship there. Now, if I do put my money into the 401k, and contribute as much as possible, and in one year decide to leave for Canada, what options do I have? Can I keep a retirement account in the US, or is it possible to rollover to a similar account in Canada? What kind of account would that be?

Would appreciate your response.

I didn't contribute to 401K for two years while my company was matching me at 6% of salary due to the same concern as you.

If you decide to leave US, you can take out all of your money without a penny's penalty, you just need to rollover your 401K to any RolloverIRA, Rollover IRA allows you to withdraw money without any withholding, i.e, you want to withdraw $1000, they give you $1000, and you are up to tax return. unlike 401K, at time of distribution, they are going to withhold 20% (IRA rule) of your lump sum. 10% penalty applies only when you file the tax return.




jackryan01 said: [Q]Thank you all for the responses.

My dilemma is:

1) Considering the current delays in the Green Card application process, I'm unsure if my
residency application will come through in the 4+ years left on my H-1B.
2) If the point above comes true and I've to return to my home country, I'll have to
pay the penalty to IRS for withdrawing money from the 401K account.

Thus, I thought of opening this question to the forum to get some advise.

Thanks,
- Jack

People, in the financial world, boom is always followed by bust, India is no exception.



AFO said: [Q]My 2 cents on this.

Why invest in 401k or Stocks or CD in US at all?
Invest in India, the stock market there is hotter than here, and likely to be so for the foreseeable future.
The financial advisors here have been advising people to invest in 'Emerging Markets', India is a potent symbol of the emerging markets.

If contemplating CD's here, go for FD's in India, CD's here pay 2-4%, FD's in India are anywhere from 6% and up.

Real estate in India is hotter than the hottest market in the US.

So, if you are absolutely certain that you will be returning to India, I would imagine no better place to invest than India itself.

Why is it not the absolute best place to invest if you are not returning to India? You would lose money in the currency exchange rate itself, and if by any chance the rupee goes down when you want to pull your money out of India, you get screwed, and if the dollar goes down (yes, it has been going up and down vs the rupee in the last year) when you intend to invest in India, you are screwed again.

Now for the example:
Imagine, invest $100 in 401k, add in 6% match, 106, after 5 years in the current market in US, it will likely be $200. Withdraw from it with at least a 10% penalty, assuming you are not paying any tax, since you dont have any income and your marginal tax rate at 0.
You get $180 back.
You invest the same in India, invest Rs 4500, after 5 years, it would be likely Rs 12000.
Assuming the dollar-rupee rate is the same, you get $266. Pay the Indian tax on that, at 25%, probably even lower 5 years down the line, about $66, you have $200, $20 ahead of the same investment in US.
Now, $20 doesnt seem much, but thats Rs 900, enough for a pretty good party, huh?

Also, remember, its $20 on a $100 investment. Make it a $20000 (the minimum savings in the 5 year timeframe), and that goes up to ----- > $4000. (Rs 180,000, not just a small party anymore, huh , more like a wedding party

AFO said: [Q]You invest the same in India, invest Rs 4500, after 5 years, it would be likely Rs 12000.
You are guessing here. BTW, 5 yrs - 100% returns is considered extraordinary. 8-10%/yr is considered very good in the long run.

I invest in emerging markets inlcuding India and India sucked between 1999-2004. 2005 has been the bull run. Check Brazil, Mexico, South Africa, etc. and they have been very good too. US stock markets in 2005 have also given good returns.

There are fundamental flaws in your example. When one invests in 401K, it is usually pretax and hence, gets deducted against your taxable amount. So $100 in 401K is not equal to Rs 4500 to invest India/elsewhere. Based on your tax bracket, if you plan on investing in India or elsewhere, your net amount available would be lesser (Example tax savings calculator).

So, if one made $100K, contributed 10% ($10K) and in 25% tax bracket, you save $2.5K on taxess (for 33%, $3.3K savings). If you had wanted to invest in India/elsewhere instead of 401K, instead of $10K in your 401K, you had $7.5K on hand to invest (25% bracket).

In your example, for every $100 in 401K, you will not have Rs 4500 to invest in India but
Rs 3375 (25% bracket - $75 for every $100)
Rs 3015 (33% bracket - $67 for every $100)

Dynamics change. <img src="i/expressions/face-icon-small-happy.gif" border=0> Remember that $20 difference. You never had it in the first place as you had $75 or $67 to invest.

Ignore what the poster AFO said. I am not sure if he is aware how 401K, taxation, etc. work.

Disclaimer: This is my personal opinion and the choice you make is yours.

If you will be in US only for a year, it may not be worth the hassle.

More often than not, it is good to invest in 401K. If your employer matches, even better. If you cannot contribute max to 401K, always do so at least upto what your employer matches (free money as it vests).

When you change employers, you can either rollover to your new employer's 401K (if available) or into a Rollover IRA. Limits apply for distribution as in most cases if less than $5K, you will not be able to rollover.

If you leave USA for your home country, you can withdraw the amount. Penalty of 10% has to paid. The distribution will be treated as income and taxed by IRS. In some cases, this can work very favorably. If your country has taxation treaty with US, you would pay the US taxes on the amount and pay difference in tax in your country if taxes are higher. If you need not pay any taxes for US income in your home country (depending on tax treaty), then you could withdraw smaller amounts over a few years and just pay the 10% penalty.

Important point: Just because you put money in 401K, do not expect it to grow. You have consider it as part of your entire assets and plan/invest accordingly. Check investments periodically (6/12 months) inclduing your entire asset plan. Change investments accordingly if needed (dont change every month or two though).

tmisc said: [Q]
Disclaimer: This is my personal opinion and the choice you make is yours.


I absolutely agree with this, I think it goes without saying on this board, and elsewhere on the internet <img src="i/expressions/face-icon-small-wink.gif" border=0>

My basic point was that: It is worthwhile in some situations to consider investing in India, because in terms of raw returns over the next 5 years, I am willing to bet that Indian investments would offer a higher return than US investments. The individual doing the investing would have to apply the various parameters of income tax, pretax and post tax investment, currency fluctuation, yada, yada, yada.

I mention India specifically because I am from India.

Of course, I didnt say it, but I think it was obvious that the calculations were purely hypothetical.



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