401(k) investment

sheeba · Aug 10, 2005

Hello,

I would like to post this query to people who are living in the US for quite sometime and are aware about the 401(K) investment.

My husband works for a company in H1B visa and they match 50% of employee's investment in 401(k). I heard it is investing for retirement and similar to the PF investment in India.

We have plans of going back to India in another 5 or 6 years. So is it worth investing in 401(K)? If we withdraw money from 401(k) before retirment age, what is the penalty?

Please share your thoughts about it.

varalotti · Aug 10, 2005

It Depends On Your Husband's Tax Profile

Sheba,
when you withdraw the money from 401(k) before the normal retirement age of 59 1/2 years then the withdrawal is taxable at the tax rate applicable at that time plus there is a 10% penalty on withdrawal.

But when you save money now in 401(k) you save tax on the amount saved. So in a way whatever tax you saved now is paid back at that time. Plus there is the additional benefit of matching contribution from the employer. I think its worth it.

To minimise the tax outgo at the time of withdrawal(at the time you leave the US) you can opt to rollover the amount to an IRA and then withdraw it when your earnings is nil.
that way the applicable tax rate will be the minimum. I have information that this withdrawal can be done online from India or elsewhere.
But this is an involved decision. If your husband is already consulting a CPA ask him to consult on this also.
sridhar
varalotti
(Note: I am from India. Since I am running a BPO I know the provisions to some extent.)

sheeba · Aug 11, 2005

Thank you Varalotti

Hello Varalotti,

Thank you very much for the detailed explanation. I am surprised about your knowledge about 401(k) being in India. None of our people who came here long back whom we enquired gave us a clear cut information. We got to know everything in bits and pieces not helping to make a decision.

If the 401(k) savings can be withdrawn online from India, that would be great. Just one more additional clarification - is it possible to transfer the 401(k) savings to policies like PPF that we have in India? Do you have any info. on this?

Thanks again for your explanation.

varalotti · Aug 11, 2005

I think theortically you can transfer from 401(k) to PPF. But that does not serve any purpose. Once you are out of the US your aim should be to get your money back. My suggestion is that you get the money back to your NRE or NRO account here and then depending on the advice given by the tax professionals here in India, depending on your husband's income and tax in India, you can invest the money either in PPF or something more attractive.
Sheba, actually I am now training myself to be a US retirement benefit consultant. A man from US is here to train me. When your question came, I told my trainer about that and told him that I am going to answer like this. He approved my answer and then only I sent the answer to you.
This on-line withdrawal from India is something that's newly introduced. You need to make arrangements for paying the consequent US tax. Normally when you withdraw from 401(k) 20% of the withdrawal will be withheld as tax. If your actual US tax is more than that you need to file a tax return.
regards,
sridhar