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Investing In 401k - For People In Us Through India Based Vendors

Discussion in 'Money Matters' started by Rajkum846, Aug 8, 2016.

  1. Rajkum846

    Rajkum846 Platinum IL'ite

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    First - sorry for using the word 'investing'. When it comes to 401k, right word is 'saving'.

    People who work in US, should start saving in 401k plans. But I have heard people working in US through India based vendors like TCS, Infy, CTS etc. skipping this. Their reasoning seems to be "I will go back to India, so 401k is not a good option".

    I want to use an example and show why that is not true. Please note that I am talking only about people in TCS, infy, CTS who have plans to go back to India. For people planning to settle in US, investing in 401k should be a no brainer and so don't need convincing :).

    Problems most of them list as reason for not investing in 401k:
    1. If I return to India and I take money out of 401k, I have to pay fine of 10%
    2. I have to pay tax when I take money out before I am in 60s.

    I will use an example and show you both points are invalid.

    Assume Ms. A makes $100,000 in an year (this is easy for calc. You can use your actual salary).
    Assumption 2: Company matches up to 3% gross for contribution to 401k. (Some companies match 3% if you contribute 6%. )

    Our Ms. A decides to contribute to take advantage of company match and nothing more.
    So contributes $3000 (3% of 100,000) in year 1. Company matches it by another $3000. Total in 401k plan is $6000, assuming no stock market gains.
    Her total gain for investing 3000 is $3000 from company match plus $300 in tax savings totaling to #3,300.
    Remember she put in only $3000 into 401k plan. But now her 401k has a balance of $6000 plus she has tax savings of $300.

    In year 2, Ms. A decides to go back to India. Assume she left to India in early January.

    Now what happens if she withdraws from 401k plan?

    she takes out full $6000. She has to pay a fine of 10% which is $600. Remaining $5400.
    This $5400 is considered as part of income and is taxed. But since her total income for year 2 is only $5400, it will not come under tax brackets that needs to pay tax.

    So, by investing only $3000, you get $5400 in hand plus another $300 in tax savings.

    Now, you might ask, what if Ms. A left to India in December of Year 2, with lot of salary income. Then I suggest she waits till next Jan and takes the money out, so that this $5400 becomes income of next year when there are no other income.

    Hope this helps you in making the right decision for saving in 401k.
     
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  2. sslkgpaa

    sslkgpaa Gold IL'ite

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    @Rajkum846 can you throw some light on how to deal with my old 401k account. I have moved to a new employer and didnt touch my 401K with previous employer yet.
     
  3. MalStrom

    MalStrom IL Hall of Fame

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    You can leave your 401k in your old employer's plan if you are happy with it. Or you can simply roll it over into your current plan with your new employer. Your HR should be able to tell you the process. I have left my old 401k with my former employer as they offer better fund choices than my present organization.
     
    Rajkum846 likes this.
  4. Rajkum846

    Rajkum846 Platinum IL'ite

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    When you joined the new employer, among the documents they provided, typically there will be a document explaining how to transfer your 401k from prev employer. If you cannot find it, ask your current HR, they can help.

    You can transfer to new employer or convert into IRA, but do not close and take the money out. In fact, if your balance is small, your prev employer might require you to move the balance to new employer plan. If you don't, they can close and give you the amount. But this typically happens only if balance is a small amount like less than $10,000. In case you end up closing and getting money, please note you will have to pay 10% fine. Also the amount taken is taxable. So avoid closing either by you or the prev employer. If you like the previous 401k plan and prev employer does not require you to close/move, then you can choose to leave it there. Then it becomes more of a convenience issue of checking 2 balances instead of 1 .
     
  5. sshilpa200

    sshilpa200 New IL'ite

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    Hope this is not too late. But just keep in mind that the quaterly-fees on a former employer's 401k plan may be very high. Best is to move the money to your own IRA. Also don't forget the pension-fund money if you have one at your former employer. Personally I have taken my former employers 401k and pension-fund and done a "direct roll-over" to a personal IRA plan.
     
    BeingSoulful likes this.
  6. BeingSoulful

    BeingSoulful Silver IL'ite

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    One shouldn't forget there is vesting time involved in ER contributions. With most of the companies being 3years of vesting. Only if you are fully vested, the above would work and you benefit. Or else you will end up paying 10% penalty for early distribution on your own money.
     
    blessings1010 likes this.
  7. armummy

    armummy Platinum IL'ite

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    Good post , we are one of those who did not invest in 401k for long time.

    One small correction to you calculations. Most of desi companies don't offer matching contributions, so you will need to decide considering only your contributions.

    Second , for the companies who match, vesting percentage of matching contributions may not be 100% in initial periods

    In my current company , only 20% percentage of company contribution is vested in your name in the first year, 40% next year and so on. You will get 100% only after 3 or 4 years.

    So the calculations should be based on only your contribution and taking into consideration long term growth oppurtunity.
     
    BeingSoulful likes this.

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