Greetings, I'm J-1 visa holder, 27 years old, non-resident alien for tax purpose. I got ~$ 20,000 on my 401k savings. I'll go back to korea on April 2008 permanently but from my knowledge, I'm exempt for tax until 2007 tax return and that's why I terminate 401k while I can be exempt still. From 2006~2007, I'm exempt for tax under j-1 visa and wondering whether I could be exempt for 10% early withdraw penalty of 401k on my 2007 tax return.

If I get bak my 401k automatically after my lay-off from company not early-withdrawl on April 2008, how much it'll be tax in WA? I'll be not exempt anymore on 2008. Could you assume whether the tax would be higher than 10% or not? If it's higher than 10%, I'll go with early termination on 2007, while I can stay still as exempt.

Hope to listen from you tax experts and thank you so much in advance! :p

If you are totally exempt from taxes for the two-year period normally allocated to J-1 visa holders, then you are exempt from ANY taxes on the 401K distribution.

If your departure in 2008 is OUTSIDE of the two-year period, then all taxes (to include the 10% Early Withdrawal Penalty) WILL APPLY.

Thank you for fast and clear reply again, AtlantaTaxExpert.
Here I got additional question.

If I early terminate my budget from 401k this month (late Nov 2007 still when I'm exempt for tax purpose)and since my company allow fast withdraw termination, I guess I could receive withdrawal check from Vanguard in 2007, then could I get my 10% penalty tax to be refunded when I apply for 2007 tax return? I'm not sure whether I can apply for tax return for my 10% penalty tax for 2007. Hope to listen from you again soon. Thank you!!

You need to coordinate with Vanguard and MAKE SURE they understand that you are NOT SUBJECT to either taxes or penalties for an early withdrawal.

If this is properly coordinated, they will issue the 401K funds with NO tax withholding, then issue a Form 1099-R that shows the distribution is not subject to income tax.

I got urgent situation about my early withdrawal. I just found out I can't withdrawal my 20k budget from 401k until I separate from my employer. I'll be go back home next March 2008 and on 2008 I'm not exempt for tax purpose. Could you help me what options I got to escape from paying taxes for my budget?

How about hardship withdrawal? By hardship withdrawal, can I get whole of my budget? I need to find a place to live and don't have extra financial source to do it. Before relocating to Korea, preparing housing could be an excuse for hardship?

If I'll get my 20k budget next year then how much it'll be the total I would get? Could you assume for me?

THank you so much!

Hardship withdrawals are determined by the 401K custodian.

However, that exempts you only from the withholding. The tax would STILL be due (as well as the 10% Early Withdrawal Penalty), and the Korean government would enforce any IRS collection action under the reciprocity agreement between the Korean and U.S. governments.

The bottom line is that if you withdraw the money, you WILL owe the taxes.

Look into the possibility of maintaining the 401K with Vanguard after your employment is terminated. You can also start a periodic withdrawal process that is set based on your expected lifespan. The amount may not be much, but it WILL exempt you from the Early Withdrawal Penalty and, after 2008, will probably not be taxed at all as it will be less than your personal exemption.

I just talked to Vanguard correspondence associate and was told just preparing rental house would not accepted as reason for hardship withdrawals. I have no way to withdrawal my contribution until I'll terminate from my employer.

What does it mean with Korean government action? Could you explain with more details?

If I just keep my money with Vanguard and then how can I get a periodic withdrawal process? Could you provide more infos about it? I'm wondering how can it be exempt from taxes.

THanks for fast answer again! I'll look forward to listen from you!

Talk with the Vanguard representative about a periodic withdrawal. Here is an example of how it would work:

Assuming that you are 30 years old and you are projected to live until you are 70 years, the withdrawal period would be 40 years. So every year, Vanguard would distribute a portions of your 401K on a pro-rated basis based on this 40-year withdrawal period (the distribution would be somewhere between $500 to $1,000). It would not be much, and you WOULD have to file a non-resident alien tax return with the U.S. government every year a distribution was made. However, because your personal exemption is OVER $3,000, the $500-to-$1,000 distribution WOULD be tax-free. Add the fact that the account would be invested and would continue to grow with the stock market, and you could count on that check every year TAX-FREE.

However, if you take the withdrawal all at once, the combination of state and federal income taxes, plus the 10% Early Withdrawal Penalty, could cost you at least $5,000 in taxes and possibly as much as $10,000.

By law, Vanguard is required to withhold 20% of the distribution and send it to the IRS as a down payment of the taxes owed. That's $4,000.

However, it is ONLY a down payment. As noted above, the IRS would expect you to file a dual-status tax return for 2008 and pay the remaining tax owed. If you fail to file that return, they would eventually (probably after about two years) contact the U.S. State Department to try to track you down back to your home country of South Korea. Many visiting foreign nationals believe that the IRS cannot touch them because they have returned to their home country and are no longer under the IRS' jurisdiction.

That is not the case. In response to this scenario, the U.S. government has negotiated 'reciprocity agreements' with various governments as part of the tax treaty (there IS a tax treaty with South Korea currently in effect).

Under this reciprocity agreement, the IRS would contact their counterpart in the South Korean government and would present their case that you owe U.S. taxes for the withdrawal of the 401K money. If the South Korean tax authorities agree that the IRS case IS valid, they then track you down in South Korea and collect the taxes (plus interest plus penalties) on behalf of the IRS.

The IRS would do the same if a South Korean national emigrated to the U.S. while still owing South Korean taxes.

Thanks for the tips to avoid tax dues. It's such a great way to escape from tax. However it bugs me much with the fact I need to file for tax every year for ~40 years, even worse I'd live in Korea and send tax file to USA every year. I'll talk to Vanguard person with it and get some infos for the best.

Is there any way that I can roll my money into IRA and take out when I purchase a house in Korea? I searched some other questions from foreign nationals and your replies for them. Some of them could be able to roll their money to IRA and take out with tax-free for their housing. Is it right? If yes, I'm wondering whether I can do that in Korea and how to do that.

Thanks for every time the fastest and accurate replies. Hope to listen from you. Thanks again.

One more question for my 401k money.. to clarify myself..

After my relocation to South Korea on March 2008 and separated from my current employer, my company's benefit administer will report to Vanguard that I'm not active employee any more. If I get my 401k money back let's say May 2008, the money would be treated like as my income and I need to pay taxes for that and early termination penalty, which would be at least ~35% up to ~50% combined. Am I think right? Just want to be sure with my situation. Thank you so much again.

Could you assume how much I'll need to pay for the tax if I withdrawal whole the money after separation from my employer? And If I'm terminated from employer, still I owe the 10% penalty tax? Although the money was collected during my tax exempt period 2006 and 2007, I need to pay all of the taxes? Thank you!

That is correct. Vanguard my not be willing to continue to carry your 401K account given the relatively small amount of money involved.

You should ask if they will be willing to roll the money over into a rollover IRA managed by them. Once this is done, you can manage the IRA from Korea using the telephone, the Internet and email. Such is the benefits of modern telecommunications.

If they refuse to allow the rollover and insist on distributing the proceeds of the 401K, then, yes, all taxes and the 10% Early Withdrawal Penalty would apply.