Hi,

I need advice on US tax laws. I worked in US for a period of two years. During this time I contributed to 401(K). Now, I am considering terminating my 401(K). I understand, as a Non-Resident Alien, I will have to pay 30 % withholding rate plus an additional 10 % penalty for early withdrawal. Is this correct?

Also, I was informed by my withholding agent (Vanguard) about several termination options. In particular, I am interested in In-Kind distribution.
In-kind distribution - If you are invested in your plan's company stock fund, your company stock holdings can be distributed as shares of stock. In-kind withdrawals may be rolled over into a self-directed IRA or taken as a taxable distribution. When taken as a taxable distribution, you only pay income tax on your cost basis, the price at which the shares were purchased. The earnings are taxed as capital gains when you sell the shares at a later date. Thus, there can be significant tax advantages to an in-kind distribution. Kindly advice if this would be a good termination option.

First the withholding rate is generally 20% not 30%.

However, if you roll over the distribution into an IRA, you continue to postpone the taxation. If you do a direct rollover there will be no withholding and no penalty.