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 $19,500 in 2020.
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 $6,000 ($7,000 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 $19,500 in 2020.
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.
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