Hi
I currently have an active 401K amount of approx. $9000 with my current company in NJ state. I am on an H-1B visa status and surely intend to go back to India my home country in around Jan/Feb 2007 for good and eventually cash out on my 401K amount. I am assuming that my 401K investments would probably shoot up somewhat to $16000 by then as per contributions/matchings that I/my company is making.
My concern is that looking at the NJ Fed/State tax deductions and 10% penalty that would be levied on this amount at that time, is it wise to rather cash it out right now on a lower amount than wait till then.
Basically are the taxes lower on any specific bracket on the 401K amount withdrawn for resident aliens. Since I do not intend to stay in the US I want to know the best possible options that I have. I am single, stay in a rental property in NJ.

Thanks
toor321

Hi
I currently have an active 401K amount of approx. $9000 with my current company in NJ state. I am on an H-1B visa status and surely intend to go back to India my home country in around Jan/Feb 2007 for good and eventually cash out on my 401K amount. I am assuming that my 401K investments would probably shoot up somewhat to $16000 by then as per contributions/matchings that I/my company is making.
My concern is that looking at the NJ Fed/State tax deductions and 10% penalty that would be levied on this amount at that time, is it wise to rather cash it out right now on a lower amount than wait till then.
Basically are the taxes lower on any specific bracket on the 401K amount withdrawn for resident aliens. Since I do not intend to stay in the US I want to know the best possible options that I have. I am single, stay in a rental property in NJ.

Thanks
toor321[/QUOTE]

If I'm not mistaken any withdrawal before age 59 1/2 is taxed AND penalized (30%)It can be rolledover with no penalty anytime, :cool: see your administrator for details. :)

First you may wish to check, normally matching funds are not yours to take out of a matching fund, unless you meet a certain number of years employment. I have not seen any under 5 but there may be companies that do it without any requirements. When I worked for one company any matching funds was not vested until you worked there 10 years.

So your matching funds may or may not be yours to take out early.

Next you are now saving the taxable money on them, so you are saving?? What ever your tax rate is on the money.
So if when you leave the country you don't plan on paying taxes, basically leave the nation oweing taxes, you will still owe the taxes but they could not make you pay unless you return back to the US.

If you are going to come back to the US, you should pay taxes on the money you are taking out ( thus loose all tax advantage) plus pay a 10 percent penalty on top of the taxes.

But where you make your money is the matching funds, if you are still working there, and if the matching funds will be yours to keep, you are making 100 percent on your money, even having to pay tax and penalty would well be worth it.

In all things, a tax attorney instead of a nut online can always be the best person to ask.

Toor321:

Both Talaniman and Fr Chuck bring up good points, but there are some inaccuracies (IMHO).

First, you need to check with your company to see when you vest in the matching funds. Vesting means the money is all yours.

If you withdraw the money early, you will be liable for both normal income taxes and the 10% penalty. When you do the withdrawal, your 401K custodian, by law, will withhold 20% of the funds for taxes. This 20% will probably not cover the tax liability, so the IRS will be looking for a tax return and payment of the rest of the taxes due. Despite what Fr Chuck says, if the remaining tax liability is large enough, the IRS will track you down with the assistance of the Indian government to collect this tax. That is one of the benefits (to the governments) of tax treaties.

You may be able to roll the money over into a rollover IRA. You should check with a bank or mutual fund to see if you can open such a rollover IRA. They may be restricted to U.S. citizens, but it does not hurt to ask.

If you can roll the money over into an IRA, do so. That way, the money will be able to continue to grow tax-deferred and you can access the money when you turn 59.5 years of age. If you plan it right, the withdrawals then will be tax free.

Toor321:

Both Talaniman and Fr Chuck bring up good points, but there are some inaccuracies (IMHO).

First, you need to check with your company to see when you vest in the matching funds. Vesting means the money is all yours.

If you withdraw the money early, you will be liable for both taxes and the 10% penalty. When you do the withdrawal, your 401K custodian, by law, will withhold 20% of the funds for taxes. This 20% will probably not cover the tax liability, so the IRS will be looking for a tax return and apyment of the rest of the taxes due. Despite what Fr Chuck says, if the remaining tax liability is large enough, the IRS will track you down with the assistance of the Indian government to collect this tax. That is one of the benefits (to the governments) of tax treaties.

You may be able to roll the money over into a rollover IRA. You should check with a bank or mutual fund to see if you can open such a rollover IRA. They may be restricted to U.S. citizens, but it does not hurt to ask.

If you can roll the money over into an IRA, do so. That way, the money will be able to continue to grow tax-deferred and you can access the money when you turn 59.5 years of age. If you plan it right, the withdrawals then will be tax free.