Is IRA/401K good for me

kishorkumargangoolee · Joined: 20 Feb 2008 Posts: 2

Hi, I need some expert advice on IRA / 401K plan.

Background
I am an alien worker currently working on H1B. I recently joined a
company which offers 401K (after 6 months) and also I am in a
initiation process to file my Green Card. However I am planning to
return to my home country after 5-6 Yrs. I need to take a decision
before April 15 whether I should put some money in IRA or not.

My understanding
My understanding is both IRA and 401K are tax differed and hence I
will have to pay taxes when I withdraw it more over I will even have
to pay a 10% fine if I decide to withdraw it before maturity. Also
there is a 5 Yrs vesting period to withdraw 401K money. My initial
plan was since 401K is free money why to leave it? Accordingly I had a
thought that I will have a Traditional IRA a/c for current year (Since
not eligible for 401K this year) and will put 4000$ in it. Next year
onwards I will put money in 401K and company will match certain % to
it. After initial 5-6 Yrs when I plan to go back I will rollover 401K
money into IRA and will leave the country. The following year (year
after leaving US) since I won't have any US income I can withdraw it
in phases to avoid tax?

Problem
However this leads to numbers of questions -
1. Whether my understanding is correct. Can I phase out the
withdrawals to avoid tax and/or penalty?
2. Will it make any difference if by that time (though looking at the
pace looks very hard) if I get my Green Card and then leave the
country ( I know I have to maintain the status but still will it make
any difference)
3. Do we pay taxes as per tax slab or it is a flat 30% tax for alien
workers?
4. Are there any issues while rollover?

In a totality does it make sense to have IRA/401K account? Or it will
be a loss business ?

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Archived from group: misc>taxes>moderated

removeps-groups · Joined: 09 Dec 2007 Posts: 98

On Feb 20, 11:26 am, kishorkumargangoo...@yahoo.com wrote:

> Background
> I am an alien worker currently working on H1B. I recently joined a
> company which offers 401K (after 6 months) and also I am in a
> initiation process to file my Green Card. However I am planning to
> return to my home country after 5-6 Yrs. I need to take a decision
> before April 15 whether I should put some money in IRA or not.

See the instructions for form 1040-NR.

http://www.irs.gov/pub/irs-pdf/i1040nr.pdf

In there they talk about IRC section 871, which is for example at
http://www.intltaxlaw.com/inbound/fdap/irc.htm.

There they say that all US source income is taxed at 30%. But I don't
see where on form 1040-NR they use this 30%. Even the worksheet on
page 19 of the instructions does not use 30%, and looks to be the same
as the regular citizen tax (which will be much less than 30% if your
own US source income is the IRA to which you've contributed for only 5
years). Can someone please show me where they calculate the 30% tax?

Would money from a Roth IRA be free of tax for non-residents. I think
the answer is yes, but IRC section 871 does not mention it.

Suppose you are in the 25% bracket for federal and 5% for state, then
by contributing to an IRA or 401K you save 30%. And your money grows
tax free too. I guess if you return to India, the money in your IRA
will be free from both India and US taxes until you withdraw it. On
form 1040-NR you get a credit for taxes paid to India (but only on the
US source income taxed by India). So yes, it makes sense to
contribute.

Plus if you switch jobs you can rollover your 401k to an IRA at a
brokerage like ETrade, and then you can buy any stocks, bonds, ETFs,
mutual funds you please, as opposed to being restricted to the mutual
fund choices in your employer's plan, and then you could hopefully
make more money. And if your company does matching 401K, then all the
more reason to do.

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spras2rao2 · Joined: 23 Feb 2008 Posts: 1

On Feb 20, 11:26 am, kishorkumargangoo...@yahoo.com wrote:
> Hi, I need some expert advice on IRA / 401K plan.
>
> Background
> I am an alien worker currently working on H1B. I recently joined a
> company which offers 401K (after 6 months) and also I am in a
> initiation process to file my Green Card. However I am planning to
> return to my home country after 5-6 Yrs. I need to take a decision
> before April 15 whether I should put some money in IRA or not.

You can get a lot of details in the Return2India forum
at http://forum.r2iclubforums.com Some responses inline.

> My understanding
> My understanding is both IRA and 401K are tax differed and hence I
> will have to pay taxes when I withdraw it more over I will even have
> to pay a 10% fine if I decide to withdraw it before maturity. Also
> there is a 5 Yrs vesting period to withdraw 401K money. My initial
The vesting period generally applies only to the Employer-match.
Your own contributions should be always vested.

> plan was since 401K is free money why to leave it? Accordingly I had a
> thought that I will have a Traditional IRA a/c for current year (Since
> not eligible for 401K this year) and will put 4000$ in it. Next year
> onwards I will put money in 401K and company will match certain % to
> it. After initial 5-6 Yrs when I plan to go back I will rollover 401K
> money into IRA and will leave the country. The following year (year
> after leaving US) since I won't have any US income I can withdraw it
> in phases to avoid tax?

This will involve Indian taxes also. The R2I forum
I mentioned above has many discussions on this 401k/IRA
withdrawal management issues.

> Problem
> However this leads to numbers of questions -
> 1. Whether my understanding is correct. Can I phase out the
> withdrawals to avoid tax and/or penalty?
I don't think you can avoid penalty. But tax can be minimized
by withdrawals during low-income years.

> 2. Will it make any difference if by that time (though looking at the
> pace looks very hard) if I get my Green Card and then leave the
> country ( I know I have to maintain the status but still will it make
> any difference)
Whether you have GC or not when you return to India will
matter for how you are taxed by US (US taxes GC holders
like other US residents). But it may not make much
difference due to tax treaties.

> 3. Do we pay taxes as per tax slab or it is a flat 30% tax for alien
> workers?
This would depend upon whether you have GC (tax slab)
or not (flat 30% per treaty). But, I do not have any experience
in this area.

> 4. Are there any issues while rollover?
>
> In a totality does it make sense to have IRA/401K account? Or it will
> be a loss business ?I think it makes sense, even if you intended to withdraw
entire balance in a lumpsum in the next year after
returning to India.

-- Shankar Prasad
spras2rao2@gmail.com

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