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H1B employees should invest in 401K even if they plan to go back to their home country.

H1B employees should invest in 401K even if they plan to go back to their home country.

 

Many people on H1B Visa plan to move back to India after few years in US. And they have a feeling as to why should they invest in 401K retirement when they have no long term plans to stay in the country here is the reason why you should vest in 401K and how it benefits you and helps you in saving huge amount of money on a long term,

 

  • Firstly it lets you save on income tax. If your top marginal rate is 30%, and you put $15k into your 401(k), you have saved $5k on income tax.
  • Most companies match certain percentage of your contribution – and that’s free money.
    The issue with 401K is when you withdraw it before you retire.. The 401(k) distribution is subject to income tax plus a 10% early withdrawal fee. The income tax rate is determined by your US income at the time of withdrawal. So if you withdraw when you have $0 US income that year, you can withdraw up to the standard deduction + other tax credits without paying any US tax. You will still have to pay the 10% early withdrawal penalty. But you will have got more money than you would have ended in paying the tax.

    Indian government taxing your 401(k) withdrawal?
    Returning NRIs can  bring into the country their world wide income tax free for 2 years

 

So if you plan your return carefully you will be able to withdrawal  money from your 401(k) without paying any tax.

Example on how you save:
Your salary is 100K; Your company X matches 50% of your contributions up to 5% of your salary; Your income tax rate is 30%.

If you invest in 401K
You contribute 5K(pre-tax) and you company will match 50% so 2.5K
That makes it 7.5 K
So if you withdraw after a year, you will pay 10% penalty + 30% income tax; this leaves you with 60% x 7.5K = 4.5K

If you don’t invest in 401K
You pay 30% tax on the 5K and are left with 3.5K at the year end.
 
3)Another option is to open a Roth IRA account. Here you put your after tax dollars and let the gains grow tax free and at  60 years  when you withdraw you don’t pay any tax on the gains in this account irrespective of your income

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