As a non-resident alien registered to work in my twenties, what happens when I return to my country (Mexico) or start my own company in the US. Do I have to withdraw my 401(k) and pay the 10% penalty, or can I rollover my 401(k) somewhere else? Also, would the tax shelter disappear once I factor in the 10% penalty and income taxes?

Lastly, has anyone factored in the opportunity cost of the 401(k)? It seems like restricting your money and limiting your investment choices until you are 55-60 offsets the tax shelter/matching contribution benefits of the 401(k). Any thoughts?

Thanks

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Originally Posted by srsben

As a non-resident alien registered to work in my twenties, what happens when I return to my country (Mexico) or start my own company in the US. Do I have to withdraw my 401(k) and pay the 10% penalty,

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No - you can maintain the account with your former employer if you want, although if the value of the account is relatively small, say under $5K, the plan may require that your account be discontinued and the amount either rolled to another qualified plan (IRA or another 401(k) with a different employer) or distributed to you . If it's distributed to you then you would owe income tax plus the 10% early withdrawal penalty. If you are no longer a US resident the plan administrator will withhold 30% for income taxes (as opposed to 20% for US residents), given that it's unlikely that you would actually file a US tax return

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Originally Posted by srsben

or can I rollover my 401(k) somewhere else?

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Yes you can roll it to another qualified plan, as described above.

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Originally Posted by srsben

Also, would the tax shelter disappear once I factor in the 10% penalty and income taxes?

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You only pay taxes and penalties if you take the money and don't roll it to another qualified plan within 60 days.

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Originally Posted by srsben

Lastly, has anyone factored in the opportunity cost of the 401(k)? It seems like restricting your money and limiting your investment choices until you are 55-60 offsets the tax shelter/matching contribution benefits of the 401(k). Any thoughts?

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Given the benefits of tax-deferred compounding, plus the matching contribution (assuming your employer offers it), there are few if any other opportunities for investment that can match the power of a 401(k). Of course if the plan has lousy investment choices you could argue that it's not worthwhile, but it would have to be pretty bad - for example if they required that you invest only in company stock I would run away. But few (if any) 401(k)'s are that bad. The one argument you could make is that since all earnings and growth in the 401(k) are ultimately taxed as ordinary income, perhaps you would do better keeping the investment in a taxable account that is geared to capital gains growth rather than income, so that you pay capital gains tax rates instead of ordinary income tax rates. But I am a firm believer that the discipline of regular investment through payroll deduction and the tax-deferred are awfully hard to beat - especially if there is a matching contribution from your employer.