401K for non- US citizens

[Nikii]

A little background about ourselves- DH and I are 32 years old and have been working in the USA for the last 8+ years on work visas. We have GCs applied by our respective companies. We also have 2 kids, 3 and 1.
Now here are my questions-
1-   401K- We were never really sure how long we would live in the US, so did not think about participating in the 401k plans here considering the penalty and taxation when we withdraw the money. We just started looking into it once we turned 30 when we realized that we are not doing much for our retirement. Currently we both have about 20k+ balances on each of our 401k accounts.  We earn decent money and can contribute the max to 401k each year, however I am not really sure what are the implications if we have to leave the USA in the next few years. (There may be some family emergencies that may require us to move back to our home country).
In this case, what would you advise us? Continue investing in 401k or look for other options. Please note that we are not eligible for retirement accounts/ investments in our home country since we are non-residents there. Thanks much!

2-   IRA- have been maxing our ROTH IRA accounts for the last 3 years, but will not be eligible for ROTH IRA starting this year because of the minimum income requirement. In this case, do I put the money in trad IRA?

Thanks in advance!!

[PapaBear]

What is your home country? You need to look at the bilateral tax agreements between the US and your home country (especially regarding retirement income), if you want to evaluate what your long-term options are.

[Nikii]

It is India.. I will need to research more on the bilateral tax agreements.

From what I understand, you can move your overseas income tax-free within 2 years of moving back to India. It is taxed thereafter..

[PapaBear]

You might want to look at this thread - the TO is in a similar situation: https://forum.mrmoneymustache.com/case-studies/family-guy-finding-out/

I wrote this in the thread above, maybe some of it is also helpful to you:

This is a rather difficult question. I don't know anything about Indian taxation and/or India-US tax treaties, but a quick google-search came up with a few helpful links:
http://timesofindia.indiatimes.com/nri/other-news/NRI-back-in-India-Heres-what-to-do-with-your-401k/articleshow/11633158.cms
http://www.abhinavgulechha.com/401k-ira-return-india/
http://sanjivcpa.com/moving-back-to-india-what-should-you-do-with-401k-plan/   (I especially like the emphasis of changing plans in the beginning of the video - with kids growing up here, staying in the US could always be a possibility that should not be neglected)

So it seems like there a quite a few ways to access your 401k in India. Thus, my assumption is that the tax savings with your income and marginal tax rate are still worth it.
You also might want to investigate the RNOR status for NRIs returning to India as well as some experiences that people share on Quora and similar platforms.
It seems like there are a few setups that allow you to keep the 401k while paying minimal tax in India. One of the components seems to be selling and repurchasing all 401k assets in the last year of RNOR status without triggering a wash sale in the US - to make sure that the baseline for the later capital gains taxation in India is reset.
Some people who returned to India treat their 401k as their personal international diversification and plan to pay e.g. their kids US college tuition out of their US 401k funds.

If you are worried about only being able to access your 401k after 59.5, then you should have a look at the Roth conversion ladder mentioned here and elsewhere
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
http://www.madfientist.com/how-to-access-retirement-funds-early/
However, you might want to check whether this works in your Return-2-India setting.

[Nikii]

Thank you PapaBear!! all that info is very helpful

[Nikii]

Can anyone please help me with this question as well??

2-   IRA-  have been maxing our ROTH IRA accounts for the last 3 years, but will not be eligible for ROTH IRA starting this year because of the minimum income requirement. In this case, do I put the money in trad IRA?

[jamesbond007]

A little background about ourselves- DH and I are 32 years old and have been working in the USA for the last 8+ years on work visas. We have GCs applied by our respective companies. We also have 2 kids, 3 and 1.
Now here are my questions-
1-   401K- We were never really sure how long we would live in the US, so did not think about participating in the 401k plans here considering the penalty and taxation when we withdraw the money. We just started looking into it once we turned 30 when we realized that we are not doing much for our retirement. Currently we both have about 20k+ balances on each of our 401k accounts.  We earn decent money and can contribute the max to 401k each year, however I am not really sure what are the implications if we have to leave the USA in the next few years. (There may be some family emergencies that may require us to move back to our home country).
In this case, what would you advise us? Continue investing in 401k or look for other options. Please note that we are not eligible for retirement accounts/ investments in our home country since we are non-residents there. Thanks much!

2-   IRA- have been maxing our ROTH IRA accounts for the last 3 years, but will not be eligible for ROTH IRA starting this year because of the minimum income requirement. In this case, do I put the money in trad IRA?

Thanks in advance!!

Let me ask you a question? What is the likelihood of you returning to India anytime soon, with kids born here? Sure there are unforeseen family emergencies. All of us have those. But, being an Indian myself, once you have kids and they start going to school, it will be brutal for them. That's just my personal opinion BTW.

My original question still stands. Are you leaving tomorrow? In the next month? Next year? If you can definitively answer the questions and have everything lined up for your move, then don't put it in 401K. Take your money with you or send money to India and put it in a fixed deposit at a nationalized bank. You get about 7% interest as of yesterday (I renewed by FD yesterday). Inflation currently is it 2.5% or so. Not a bad deal IMO.

But if you cannot answer my question with confidence or certainty, then max out on your 401K. Get the employer match. Even if you withdraw, pay penalty and taxes, you will still come out ahead. I hope your 1st question is taken care of.

Now coming to Roth IRA. If you don't have any tIRAs till now, you can do a Backdoor Roth IRA for the full $5500. But check if your income level lets you take a tax deduction on tIRA contribution. If so, tIRA it is. If not, backdoor roth it is. Backdoor Roth is very easy.

[Asalbeag]

You're actually in a unique position to take advantage of a 401K since you won't have any US income when you retire and you won't be resident in any state.

Alternatively once you're no longer resident you may be able to take advantage of a backdoor roth and withdraw the entire amount over the course of a few years with no penalty and no taxes since you will have no other US income.

Note that both of these options will likely have tax implications for you in India.

[Nikii]

Let me ask you a question? What is the likelihood of you returning to India anytime soon, with kids born here? Sure there are unforeseen family emergencies. All of us have those. But, being an Indian myself, once you have kids and they start going to school, it will be brutal for them. That's just my personal opinion BTW.

My original question still stands. Are you leaving tomorrow? In the next month? Next year? If you can definitively answer the questions and have everything lined up for your move, then don't put it in 401K. Take your money with you or send money to India and put it in a fixed deposit at a nationalized bank. You get about 7% interest as of yesterday (I renewed by FD yesterday). Inflation currently is it 2.5% or so. Not a bad deal IMO.

But if you cannot answer my question with confidence or certainty, then max out on your 401K. Get the employer match. Even if you withdraw, pay penalty and taxes, you will still come out ahead. I hope your 1st question is taken care of.

Thank you so much for your response...
This is the core issue, that we don't know if and when we are moving back yet. It would have been simpler if we had an answer to that. We both like it here and it is just the family emergencies that will draw us back to India. Do you suggest just contributing until we receive the full company match (which is 100% company match for 4% employee contributions) or contributing 18000 yearly?

Now coming to Roth IRA. If you don't have any tIRAs till now, you can do a Backdoor Roth IRA for the full $5500. But check if your income level lets you take a tax deduction on tIRA contribution. If so, tIRA it is. If not, backdoor roth it is. Backdoor Roth is very easy.

I will have to look up Backdoor ROTH. I don't think I can take tax deductions on tIRA, but I will check on that as well. Thanks much!!

[Nikii]

You're actually in a unique position to take advantage of a 401K since you won't have any US income when you retire and you won't be resident in any state.

Alternatively once you're no longer resident you may be able to take advantage of a backdoor roth and withdraw the entire amount over the course of a few years with no penalty and no taxes since you will have no other US income.

Note that both of these options will likely have tax implications for you in India.

Thank you Asalbeag, I will look into backdoor ROTH..

[jamesbond007]

Let me ask you a question? What is the likelihood of you returning to India anytime soon, with kids born here? Sure there are unforeseen family emergencies. All of us have those. But, being an Indian myself, once you have kids and they start going to school, it will be brutal for them. That's just my personal opinion BTW.

My original question still stands. Are you leaving tomorrow? In the next month? Next year? If you can definitively answer the questions and have everything lined up for your move, then don't put it in 401K. Take your money with you or send money to India and put it in a fixed deposit at a nationalized bank. You get about 7% interest as of yesterday (I renewed by FD yesterday). Inflation currently is it 2.5% or so. Not a bad deal IMO.

But if you cannot answer my question with confidence or certainty, then max out on your 401K. Get the employer match. Even if you withdraw, pay penalty and taxes, you will still come out ahead. I hope your 1st question is taken care of.

Thank you so much for your response...
This is the core issue, that we don't know if and when we are moving back yet. It would have been simpler if we had an answer to that. We both like it here and it is just the family emergencies that will draw us back to India. Do you suggest just contributing until we receive the full company match (which is 100% company match for 4% employee contributions) or contributing 18000 yearly?

Now coming to Roth IRA. If you don't have any tIRAs till now, you can do a Backdoor Roth IRA for the full $5500. But check if your income level lets you take a tax deduction on tIRA contribution. If so, tIRA it is. If not, backdoor roth it is. Backdoor Roth is very easy.

I will have to look up Backdoor ROTH. I don't think I can take tax deductions on tIRA, but I will check on that as well. Thanks much!!

If you are going to contribute to 401K, might as well go for the full amount. Look up your employers matching plan. Some employers will stop matching when you stop contributing. So it might be good to spread over the course of the year to get the maximum from them. Adjust each time you receive a bonus etc. If you can contribute the full $18,500 and still live the same lifestyle, then I say just max out on 401K. It is practically free money when you factor in contribution by employer and growth. Act on what you know NOW unless you can somehow predict the future.