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Millennials Have More Appetite for Stocks Than Reports Suggest

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Are millennials afraid of the stock market? This cohort came of age at the height of the Great Recession, and some recent media reports suggest that this has made young adults more reluctant to put their money into the markets.

A new analysis from MagnifyMoney, however, shows that millennials aren’t exactly allergic to “risky” investments such as stocks. We examined 20 years of workplace savings account data from the Federal Reserve’s Survey of Consumer Finances and compared millennials’ investing habits with prior generations of young savers.

Key findings

  • In 2016, millennials had 60.3% of retirement accounts like IRAs and workplace savings accounts like 401(k) plans allocated to stocks or stock funds. This means millennials have 8 percentage points more of their retirement account funds invested in stocks than those 53 and older — the widest gap since 2001.
  • In general, exposure to stocks (equities) has trended downward over the past 20 years. In 1998, all generations had an average of at least 60% of their workplace retirement savings in stocks and stock funds. In 2016, millennials were the only age group who allocated more than 60% of retirement assets to stocks and stock funds.
  • How investors view their tendencies and what they actually do can be two different things. Some millennials claiming they are risk-averse (and thus claim they don’t invest in stocks) may unknowingly own stocks through target date funds (TDFs) and other multi-asset class investments in their retirement plan.

Millennials’ stock-heavy portfolios in line with conventional advice to young investors

Overall, millennials have more of their retirement funds invested in stocks and stock funds than older savers. Here’s a look at the allocation of retirement account assets across millennials (ages 35 and younger), Generation Xers (ages 35 to 51) and baby boomers (ages 51 and over).

In 2016, millennials had, on average, 60.3% of their retirement savings in stocks and stock funds, compared with just 53% for Generation Xers and 52.3% for baby boomers.

This trend of millennials allocating a larger portion of savings to higher-risk or more volatile assets such as stocks is actually in line with conventional retirement planning advice. Younger workers are advised to be more aggressive investors — with decades left to save and weather market ups and downs, they can afford to front-load risk (and reward) today.

Older generations, on the other hand, are advised to allocate retirement funds to less volatile assets as they get closer to retirement age. Baby boomers, in particular, might be planning to live off of retirement savings soon — or might already be relying on those savings. So it’s important to shield retirement savings from high-risk and volatile investments.

Across age groups, today’s investors are choosing stocks less

Overall, this analysis shows that today’s investors are less likely to have a large portion of retirement savings allocated to stocks and stock funds. Here’s a chart that compares the percentage of retirement savings allocated to stocks among age groups, over time:

Stock allocations across all three age cohorts show a largely downward trend, with current stock investments among the lowest levels reported.

Two major changes since 1998 may explain these shifts better than differences in generational risk aversion: the decline of workers with pensions and the rise of target date funds.

TDFs are playing a role in “right-sizing” asset allocations based on age, including those of millennials, who have had access to them since the beginning of their saving careers.

Meanwhile, most private-sector workers today only have defined contribution plans (401(k)s), and not defined benefit (DB) plans.

Major market ups and downs also correlate to some of the trends in this graph above, too. Stock allocations rose in the late 1990s, for example, as the dot-com bubble boomed — and fell in 2000 following its burst. Another small dip in stock investing is seen from 2007 to 2010, in line with the Great Recession and following recovery.

How to start investing in stocks

Whatever your age, buying stocks can be a smart way to grow your net worth and build a secure financial future. However, weathering stock market volatility isn’t always easy — and you’ll want to make sure your stocks strategy is in line with the rest of your financial goals.

If you’re interested in adding stocks to your investing or retirement savings strategies, here’s where you can begin.

Learn the stock market lingo. The world of stocks can seem complicated at first, so picking up on common stock terms can help you make sense of options. You should figure out what stock funds and exchange-traded funds are, for example, and know the difference between preferred and common stocks.

Set your stock investing goals. It’s important to make sure you align your stock investments with your bigger goals. Maximizing your 401(k) funds for a retirement that’s 30 years away will call for a much different investing strategy than if you’re investing in short-term savings. If you know what you want to accomplish by investing, you can choose stocks and funds that are most likely to make that happen.

Research stocks and funds. Once you’re aware of the types of stocks, funds and other assets you can buy, you can look for specific shares that you think are a smart buy. You can research how stock prices are set, and how you can evaluate whether a stock is overpriced or undervalued. Keep an eye out for deals you think are good, and figure out which ones would match well to your investing goals.

Review your account allocations. Many investors have a 401(k) or IRA but might not know how their funds are invested within those savings accounts. Revisit your retirement accounts to see if you want to adjust your allocations for new contributions. You might even want to rebalance your portfolio, selling some assets and buying others, to align with your targeted returns (and risk).

Set up a brokerage account. Most investors can’t buy and sell stocks directly — they’ll need a brokerage account to do so. A traditional broker can be an affordable way to get started — just look for one with low fees to ensure that your returns aren’t eaten up by investing costs.

Download an investing app. Downloading an investing app can be a smart and simple way to get started. Some of the best investing apps can help you analyze stocks, trade and manage investments and even find more funds to invest. Robinhood, for example, charges no commission fees on trades. Or try Acorns, where you can link your checking account to round purchases up and invest the change.

Stay cautious when getting started with stocks. No matter how well-researched or experienced an investor you are, no one can predict the future. As a new investor, however, it’s easy to make rookie mistakes that can cost you big. Keep in mind that every investment you make carries a risk of loss, so start investing a little bit to get comfortable while figuring out the right investing strategy for you.

These tips can get you started if you want to invest in stocks, but make sure you aren’t overlooking other ways to invest.

In some cases, stocks won’t be the best way to invest your funds and keep them growing. If you’re stocking away money for a shorter-term goal, you might want to consider a certificate of deposit. And a savings account is an old favorite if you want to safely store emergency funds or keep your funds easily accessible.

Adding stocks to your investing and money management strategy can be a move that pays off big. The U.S. stock market has consistently performed well, and lots of people have grown their wealth and net worth by investing their funds here. Start small and simple, investing what you can afford to each month, and you could see the effects add up over time.

Methodology

MagnifyMoney examined 20 years (1998 to 2016, inclusive) of workplace savings account data from the Federal Reserve’s Survey of Consumer Finances (SCF) to determine if millennials (young adults ages 35 and under in 2016) are more risk-averse than prior younger savers.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Elyssa Kirkham
Elyssa Kirkham |

Elyssa Kirkham is a writer at MagnifyMoney. You can email Elyssa here

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Retirement

The Average Retirement Savings of Millennials Isn’t Enough

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

The Average Retirement Savings of Millennials Isn’t Enough

A new MagnifyMoney analysis of recent Federal Reserve data reveals that millennials aren’t saving enough for retirement. This might not be shocking on its own, but the data also reveals that the gap between what millennials have saved compared with what they should be saving is surprisingly wide.

To set our benchmark, MagnifyMoney used the guideline promoted by retirement industry experts, such as Fidelity, that workers should have roughly two times their annual income in retirement savings by age 35.

We then compared the earnings, savings and ages of millennials as reported in the Federal Reserve’s Survey of Consumer Finances to see whether they are hitting that mark.

Here’s what our dive into the data revealed about millennials’ retirement savings.

Key findings

  • The median 2016 retirement savings level for households headed by 30-somethings was about $23,000, while the median income level was $55,400. This means that typical millennials in their 30s have saved just 41% of their income.
  • Based on that level of income, median households should have saved $112,000, according to a common rule of thumb suggested by retirement plan administrators and financial planners. That’s almost five times more than the actual median savings of $23,000.
  • This shortfall isn’t specific to the current cohort of savers in their 30s (millennials). Prior surveys show a persistent shortfall in retirement savings among 30-somethings in previous generations, too.
  • While high earners are saving slightly more than median or average earners, they still fall short of retirement savings guidelines. Recent data show 30-something households with income at the 90th percentile — $146,000 — have saved roughly 1.1 times their income ($160,000) in retirement accounts when the rule of thumb suggests that figure should be $292,000.

Millennials are 80% behind on retirement savings


Unfortunately, millennials’ retirement saving efforts are far behind the recommended benchmark. The median income for workers in their 30s is $55,700 per year. This puts the retirement saving target at around $111,400 by age 35.

The actual savings are far behind that, however, with the median retirement savings at just $23,000. In fact, a typical millennial has saved only 40% of their annual income at age 35. This is just about one-fifth of the amount they should have saved. (Average retirement savings levels are similarly short).

Median earners in their 30s aren’t saving nearly enough. But perhaps more surprisingly, a better paycheck doesn’t seem to help much, as even high-earning households are coming up short.

High earners save more, but are still behind

High earners do a better job saving for their golden years than their median-earning peers. This makes sense, as higher-income households will have more funds at their disposal that they can use to save.

But even high-income millennials still fall short of the target of saving twice their incomes. Part of that is because earning more results in higher salaries, which also raises the target amount they should save.

In 2016, households earning at the 90th percentile — those earning about $146,000 or more per year — had saved $160,000 so far for retirement. That might seem impressive since it’s nearly seven times the $23,000 median retirement savings balance among their cohort.

But based on their level of income, the retirement savings standard suggests they should have close to $300,000 saved. Yet these high earners are around five years behind on their savings, having saved just 1.1 times their annual salary.

Of course, these numbers won’t reflect every saver’s individual progress. A household that falls in line with the median retirement savings of $23,000 with an annual income of $20,000 might actually be doing OK. Or they might earn $200,000, and be even further behind than most.

Other households might have their retirement savings right on target for their 30s or even be saving more aggressively with the aim of retiring early. Overall, however, it’s safe to say that millennials whose retirement savings are on or ahead of schedule are the exceptions to the undersaving trend.

Millennials’ retirement savings are on par with previous generations’

Millennials are way behind the ideal benchmarks for their retirement savings, and that’s worrying. But do these millennials have it worse than past generations?

We took a look at the historical Federal Reserve data going back to 1998 to find out how millennials’ retirement savings levels compared with previous generations’ savings habits.


As this chart shows, millennials are actually saving better than previous cohorts of 30-somethings. This could reflect the conservative money management attitudes found among many millennials. After coming of age in the Great Recession, this cohort saw the importance of personal fiscal responsibility.

The average retirement savings for millennials in 2016 is $64,000, which is 14% higher than the $56,000 30-somethings’ average retirement savings in 1998 (all figures are in 2016 dollars).

Interestingly enough, millennials are saving more without earning more than previous cohorts — U.S. wages haven’t grown much in that time.

On top of stagnant pay, millennials have also faced historically higher levels of student debt. The average student debt among recent graduates was $39,400, and a typical monthly student loan payment for a millennial is $351. With this student debt, millennials have had fewer discretionary funds they could use to make retirement savings contributions.

The fact that millennials’ savings habits are outpacing previous generations despite these financial obstacles is a promising trend, but it still might not be enough.

The guideline to have twice your salary saved by 35 is, admittedly, an aggressive goal — one that 30-somethings have been falling short of for the past 20 years. But it’s what millennials should be shooting for to ensure a comfortable and financially secure retirement.

How millennials can catch up on retirement savings

If you’re a millennial, you might be wondering how your retirement savings stack up — and if you’re behind, what you can do to make up for lost time.

The first thing to do is figure out where your retirement savings “should” be, according to this guideline. If you’re 30, this will simply be equal to your annual salary; for 35-year-olds, it will be twice that amount.

For every year in between or above, you can simply add on an additional 20% of your annual income. A 38-year-old, for example, should be shooting to have 2.6 times their annual income in retirement savings accounts.

Once you have your number, start planning for retirement and taking steps to catch up. Here are some ways you can start saving more.

  • Take advantage of employer-provided retirement plans. If your employer offers a retirement savings plan, such as a 401(k), it can be an easy and simple way to contribute through your paycheck.
  • Contribute enough to get the full employer match. Many employers will include retirement savings matching in their benefits package. This usually means that they will deposit extra funds into your retirement account to match your own contributions, typically capped at a certain amount. Find the details about your employer plan and contribute at least enough to take advantage of this full match.
  • Open an individual IRA. You don’t need an employer to open a retirement savings account, however. Almost anyone can open an IRA or Roth IRA and start contributing to it on their own.
  • Get debt costs and payments under control. If you have student loans, credit card balances, or other debt, these monthly payments and interest costs will limit your ability to save for retirement. Look for ways you can decrease the costs of your debt, such as consolidating credit cards or refinancing student loans to lower interest rates. Prepaying debt can also be a smart way to avoid interest charges and get rid of debt, freeing funds up to use for retirement savings.
  • Shoot to save 15% or more. As you might have figured out, saving a year’s worth of earnings every five years requires some intense saving habits. Of course, these funds will be invested and generate growth and returns that will do some of the work for you, so you can save a little less than 20% of your gross income. Saving 15% of your annual earnings is the typical suggestion.
  • Increase your savings rate a little at a time. If saving 15% feels out of reach, start smaller. Increase your retirement contribution rate by just 0.5%-1%. Then give yourself a few months to adjust, then raise it again and repeat until you’ve reached your target retirement savings rate. This method can help you ease into higher savings and find the right amount to balance retirement contributions with today’s costs.
  • Save “extra” funds when you can. If you’re behind on retirement savings, you can use extra income to play catch up. Instead of using bonuses and raises as more take-home pay, for instance, you can contribute this increase in pay to retirement savings.

It’s not too late to start saving for retirement, and every dollar you contribute now will count more than what you’d save later. That’s because saving for retirement in your 30s gives these funds over three decades to grow and for that growth to compound — time and money you simply can’t make up for later.

Take a look at your retirement savings and find one thing you can do to save more. Your future self will thank you.

Methodology

MagnifyMoney examined data from the Survey of Consumer Finances, a triennial report issued by the Federal Reserve, to determine relative retirement savings levels for various age and income ranges from 1998 through 2016 (the date of the latest study). We only include households with savings in at least one retirement account. All figures are in 2016 dollars.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Elyssa Kirkham
Elyssa Kirkham |

Elyssa Kirkham is a writer at MagnifyMoney. You can email Elyssa here

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Retirement

I Am a Foreign National — What Should I Do With My 401(k)?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Thanasis Konstantinidis didn’t know what a 401(k) was when he got his first job in the United States almost four years ago. He just thought the term sounded a bit strange.

The 34-year-old software engineer from Greece eventually learned the basics of the classic American retirement investment account. But it didn’t exactly seem like the wisest move. He was granted a temporary work visa for three years. If at the end of three years he wasn’t granted permanent residency in his host country, there was a chance he would have to leave the country all together.

“My future was very uncertain at the time, and I wasn’t sure if I’d stay in the U.S.,” Konstantinidis told MagnifyMoney.

In 2016, there were 27 million foreign-born workers in the U.S., according to the Bureau of Labor Statistics. These workers made up nearly 17 percent of the American labor force that year, up from 13.3 percent in 2000.

Many non-native workers in the U.S. are young professionals hired by firms seeking workers with highly valued skills. In 2016, more than 870,000 foreign nationals were granted the most common temporary work visas. The U.S. has also seen a dramatic increase in the number of international students at colleges and universities in the past decade. After graduation, these students are often eligible for visas that allow them to pursue jobs in the U.S.

It is tricky enough for the average millennial to think about the future. The temporary immigration status of foreign nationals and the fact they may travel between countries in the future add additional layers of complication when it comes to retirement planning. How can they make long-term financial plans when they aren’t sure if they’ll be able to continue working in the U.S.?

In this article, we answered typical questions foreign nationals may have about 401(k)s as they pursue careers in the U.S.

Should foreign nationals contribute to a 401(k)?

The answer here may seem intuitive to those who, like Konstantinidis, think they will only stay in the U.S. for a few years. Tying up their funds in a 401(k) in a country they may be leaving soon might seem unwise. And by choosing not to participate in a 401(k) plan, they may have more cash available for their immediate needs.

In truth, there are pros and cons depending on a few factors, so you have to ask yourself a few questions first:

Do you view this 401(k) as part of a long-term investment plan or only as a short-term savings account?

When you are young and start saving early, you have a huge advantage on your side — time.

“Most of those folks who are here on a temporary visa tend to be young,” said Chris Chen, a Waltham, Mass.-based wealth strategist at Insight Financial Strategists. “They happen to be able to take the advantage of the power of compounding. That is truly a gift that you can’t get when you are older.”

It’s also an opportunity to invest in the U.S. market, which is among the strongest economies in the world and has a relatively mature and stable market with lower fund fees than many other countries.

Are you a high earner, which would increase the tax benefit of opening a 401(k)?

Another immediate and major benefit that you would lose is the tax advantage. Especially for those high-income earners, you are saving money by not paying taxes now, and when you withdraw the money at retirement, you will pay fewer taxes because ideally, you will be in a lower income bracket.

Is there an incentive to contribute to your 401(k), like a company match?

If your employer offers a match, you would be walking away from additional income if you fail to contribute. Many U.S. employers offer to match up to a certain percentage of employee 401(k) contributions.

For example, an employer may offer to match up to 3 percent of the employee’s contribution.

Let’s say you make $60,000 a year and contribute 6 percent (or $3,600) into a 401(k) for the year. Your company would match up to three percent (or $1,800) of that contribution. This means you would only contribute $3,600 to your 401(k) but end up with $5,400 thanks to the match.

“They would be leaving money on the table by giving up on the match,” said Chris Chen.

How certain are you about returning to your home country in the near future?

It may not feel like your odds of needing a U.S.-based retirement fund are certain, especially if your circumstances are anything like those of Konstantinidis.

However, Chris Chen argues that an international worker’s future isn’t all that uncertain. In fact, if anything is certain at all, it’s the fact that they will likely retire at some point.

“Whether it is India or China or Europe, when you go back to your country, you are going to have to use the tools available there for retirement,” he said. “And in the meantime, you will still have an extra little [retirement fund] out there in the U.S.”

If you were to leave the U.S., you have several options on managing your U.S.-based savings, some of which will require some administrative hassle. We’ll cover these options later.

Furthermore, your plans may change. You might have planned to stay in the U.S. for just two years, but you may end up staying longer. In that case, it could be wise to start saving for retirement early.

Can your 401(k) help with non-retirement goals?

Hui-chin Chen, a financial planner with Arlington, Va.-based Pavlov Financial Planning, who works with foreign nationals in their 20s to 40s, told MagnifyMoney some have other plans for their 401(k) than just retirement.

Many of her clients stayed in the U.S. for jobs after completing their college or graduate studies here. Although some eventually left the country, they still wanted their children to have the same study abroad experience. So they considered their 401(k) an education fund.

“They think, ‘Okay, I can leave some money in the U.S. I don’t care about taking it with me,” Chen explained. “‘And if I leave the money in the U.S., I might as well get some tax benefits. I can wait until I am older and I can take that money out to pay for their college.’”

Just keep in mind that if you try to tap your 401(k) for funds before you turn 59 1/2, you will likely face early withdrawal penalties and could be hit with income taxes.

The disadvantages of contributing to a 401(k)

While financial planners encourage foreign nationals to invest in their 401(k) in general, they would advise against the idea in some cases.

For those who are certain that they are just staying in the U.S. for a very short time, are in a relatively low tax bracket, and don’t see 401(k) as a long-term savings plan, experts suggest they open a taxable account — like a brokerage or savings account — or send money back home if they have better investment choices over there.

But do take note that you are a considered a U.S. resident from the tax perspective as long as you live in this country. This means if you invest outside the U.S., your income from those investments are still subject to U.S. taxes.

The tax benefits could justify the administrative hassle for those who have worked in the U.S. for a long time and have a big 401(k) balance. That’s because they are able to save a potentially significant sum of money without paying taxes upfront. And when they withdraw those funds later, they will likely be at a lower tax bracket and, hence, enjoy big tax savings.

For international workers whose stay in the U.S. is shorter, however, that tax benefit doesn’t necessarily pack the same punch, especially if their account has a smaller balance.

“It’s OK if [your 401(k) is worth] $200,000. If it’s $18,000, the benefit is offset,” said Andrew Fisher, president of Worldview Wealth Advisors, a financial advisory firm that specializes in working with cross-border individuals with U.S. connections.

How much should I invest and where do I invest?

If you’ve decided to open a 401(k) with a U.S. company, the next challenge is figuring out how much to save and where to save it.

The answer to the first question — how much to save — is simple if your company offers a match.

Sirui Hua, 26, a producer with a New York-based digital media company, told MagnifyMoney that he saves 4 percent of his income in his 401(k). His employer offered to match up to 4 percent of his income and he didn’t want to give that up.

“If I don’t save the money now, I’d have nothing when I go back,” Hua said. “At least I would have a little something one day I go home.”

Hua, originally from China, was recently approved for his work visa by his employer, which allows him to continue working in the U.S. for up to six years. Knowing that he has a full six years of stable work ahead of him, he is planning to increase his 401(k) contribution. He’s still not sure if he’ll use it as a retirement account if he returns home to China, but he would rather take the opportunity while he has it.

At least contribute enough to capture the full match. From there, consider increasing your contribution based on your other financial goals.

Depending on your personal goals and future plans, contribute more if you are able to. Just remember the legal contribution limit for 401(k)s is $18,500 in 2018.

It may also make sense to save cash in a standard savings account so that you can access money in an emergency. Remember, early 401(k) withdrawals come with potential tax penalties.

What do I do with my 401(k) if I leave the country?

This is the question that has deterred many foreign workers from investing in their 401(k) accounts.

There are basically two solutions: You can either leave it in the U.S. or take the money out and deal with the tax and early withdrawal penalties — and the potential hassle of getting a U.S.-based bank to transfer funds to an international account.

Leaving your 401(k) in the U.S.

You can leave your 401(k) with your employer’s plan administrator or you can roll it over into an IRA.

In general, pros recommend that you do not cash out your 401(k) before age 59 1/2 (to avoid penalty) if you don’t have to. Keeping your 401(k) is the easiest solution.

“It’s less likely that [the plan providers] will say, ‘We have to close your account,’” Hui-chin Chen said. ”Because as long as you are still a plan participant, they cannot kick you out unless there is plan provision specifying it.”

That being said, you will want to check in every now and then to be sure your investments are properly allocated based on your needs. Hui-chin Chen notes that companies may offer good low-cost index funds with balanced asset allocations for employees. However, it’s important to be sure your investments are well-balanced and you’re not taking on more risk than is suitable for your age and goals.

You can keep your 401(k) with most plan providers even after you leave the company, she added. However, there are exceptions. Check with your HR department and read the details in your plan documents to find out specific plan rules.

Rolling it over into a traditional IRA

Another option for workers who leave the country is to roll the funds into a traditional IRA (Individual Retirement Account) that you can control yourself. Just like a 401(k), you may be able to defer paying taxes on money contributed to an IRA.

A major difference between an IRA and a 401(k) is that you are limited to a total annual contribution of $5,500 ($6,500 for those over age 50) with the IRA. But an IRA may potentially offer a wider variety of investment choices than a typical employer-sponsored 401(k).

The challenge with opening an IRA for foreign nationals is that not many plan providers work with people with foreign mailing addresses because they are seen as a potential risk, experts said. You should check with brokerage firms to see whether they will hold accounts for people with international addresses.

The advantages of keeping your 401(k) in the U.S.

Potential tax benefits

When you withdraw your 401(k) funds from a U.S.-based account, it’s likely that your home country will not treat it as taxable income.

Tax laws in different countries vary. There is a grey area whether other countries respect the tax benefits of the U.S.-based 401(k) or IRA.

Fisher of Worldview Wealth Advisors explains that in his experience, most countries have not expressly accepted or denied the tax-deferred status of funds held in a 401(k) or IRA, but most foreign tax preparers are treating it as such. In other words, you may continue to enjoy a tax-free growth investment vehicle even if you move overseas. But you want to check your country’s tax laws to make sure this is the case.

The magic of compounding

Before you take this road, remember you could face a 10% early withdrawal penalty plus a hefty income tax bill.

If you’re a younger worker, you’re also missing out on potentially decades’ worth of growth that you might enjoy if you leave your funds where they are.

Let’s say you save $18,000 in a 401(k) over your time working in the U.S. It might seem like peanuts to you. But consider this: If you never contribute another penny to the account, you could grow that savings to over $317,000 over the next 40 years (assuming an average annual return of 7.2%).

“It’s no longer peanuts,” said Chris Chen. “When you take [the money] out, think of that $18,000, what are you going to do with it? People often do that without much savings, so they will end up spending it.”

Cashing out your 401(k)

If you don’t want to leave the money in the U.S. to invest for the long run, there are more tax complications and administrative hassle to contend with.

You’re allowed to withdraw the money from your 401(k) when you leave the country, experts say. The amount you withdraw will count as taxable income unless you’re 59 1/2 or older. You’ll also face a 10 percent penalty.

You have to notify your plan provider when you leave that you are no longer a U.S. tax resident. The provider most likely will withhold taxes on the money withdrawn, and you will have to file a U.S. tax return for that income the following year, Hui-chin Chen said.

If you want to save money on taxes, Hui-chin Chen suggests you wait until the year after you leave or even later to take the funds out. When your U.S. income becomes just the amount of money you withdraw from your 401(k), you may be put in a lower tax rate than when you had full employment income in the U.S., Hui-chin Chen said.

But note that you need a bank account to receive the distribution, and not every provider may be willing to mail a check to an overseas address. It is likely that you probably have to keep a checking account open in the U.S., which is also easier said than done — banks don’t like clients with foreign addresses, either, Hui-chin Chen said.

“In the grand scheme of things, [for] most people, if they don’t stay in the U.S. for the long term, taking the money with them is probably not that difficult the year they leave or the year after they leave when they still have some leverage with the bank,” she said.

If you have a sizeable 401(k), taking a small distribution each year to pay zero-to-minimum amount of taxes is doable, experts say. But then you are facing far more complicated ongoing maintenance, which includes filing taxes every year, and keeping a U.S. bank account and address live. You may also be subject to some state taxes depending on your resident country, Fisher said.

Although Konstantinidis didn’t contribute to his previous 401(k) plan, his employer invested 3 percent of his income in a 401(k) for him for free. Konstantinidis, who lived through nearly a decade of financial crisis in Greece, is ultimately skeptical about the stock market.

Now, the self-acclaimed “paranoid” computer scientist is considering contributing 3 percent of his income to the 401(k) with his current employer as he awaits his green card — he is settling down.

“I’ve actually seen my 401(k) go up,” he said. “That’s really impressive. Now I am convinced.”

401(k) Frequently Asked Questions

401(k) is the name of an account U.S. workers can use to save for retirement through their employer. The name 401(k) comes from the section of the U.S. tax code that it was derived from in the 1980s.

The traditional 401(k) allows workers to set aside part of their pre-tax income to save for retirement. It’s up to the individual to decide how much to save. Even if you are not an American citizen, you are eligible to participate in a 401(k) plan, experts say.

There is also a Roth 401(k) option, which is becoming increasingly common. With a Roth 401(k) you would contribute funds and pay taxes on them right away, with the ability to withdraw funds in retirement tax-free.

When an employee signs up for a 401(k) plan, they’re typically given a choice of different investments, such as mutual funds, stocks, or bonds. The benefit of a 401(k) is that you not only avoid paying income taxes on your savings now but you’ll have a source of additional income later when you are ready to retire.

The legal maximum amount you can save in your 401(k) is $18,500 in 2018.

Employers may offer to match employees’ contributions up to a certain percentage.

For example, an employer may offer to match up to 3 percent of the employee’s contribution. Say you make $60,000 a year and contribute six percent (or $3,600) into a 401(k) for the year.Your company would match up to three percent (or $1,800) of that contribution. This means you would only contribute $3,600 to your 401(k) but end up with $5,400 thanks to the match.

Some employers may vest your match immediately. That means as soon as they contribute to your 401(k) the funds belong to you. However, others may have a vesting schedule, which is a set timeline that dictates how long it takes for you to own the money your employer contributes.

Generally speaking, you can start taking money out of your 401(k) account when you reach age 59 1/2. There are ways to tap into your 401(k) sooner, but you’ll face an additional 10 percent early withdrawal penalty and you could owe income taxes on the amount withdrawn.

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Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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