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trojanengineer · Jan 17, 2008, 05:07 PM

Hi,

I am in California on H-1 visa right now and I am confused whether I should invest enough in the 401k or not. I am not thinking about long term. If I invest something in 401 for an year and then take it back after an year then do you think that I would be in profit ?

Let me explain you my situation.

My company matches 100% up to 6% of my paycheck that means if I invest up to $150 every month from my paycheck then they will match it 100%. Let's say I invest $150 from my every paycheck to 401k so my total investment will be $300 per paycheck and I will get total 26 paychecks every year.

So, my total investment for this year would be 300*26 = 7800 out of which I have contributed only $4900

So if I take this $7800 back after an year then how much I will get after deducting the CA taxes and the panelty and do you think it's a good deal I mean do you think I will make some profit out of it if I will do it this way?

Thanks

Georgegca · Jan 17, 2008, 05:56 PM

Taxes and penalties will kill you on any returns. You invest this money for the long term. You also have to be in the plan a certain amount of time (usually five years) to be fully vested. This means that after one year, you may only be entitled to 20% of the company contribution, 2 years 40%, etc. Not a good short term investment.

AtlantaTaxExpert · Jan 17, 2008, 08:01 PM

Agreed. It is also hard for foreign nationals to set up IRAs (for rollover purposes) before they leave for their home country (NOT impossible, but hard).

trojanengineer · Jan 18, 2008, 10:17 AM

Hi George,

I didn't understand what do you mean by Taxes and penalties will kill you on any returns ? Could you elaborate more on that ? If it is fully vested after an year then do you think its good short term investment ?

ATE,

What do you mean by foreign nationals to set up IRAs (for rollover purposes) before they leave for their home country (NOT impossible, but hard). Could you explain it in details ?

Thanks,
Trojan

AtlantaTaxExpert · Jan 18, 2008, 01:04 PM

Here is what George means about the taxes:

Let's assume you withdraw $10,000.

You would have to pay taxes on this distribution at your marginal tax rate (that is the rate of tax on the LAST dollar you earned in the year you withdraw the money). This applies to BOTH the federal and the state income tax.

For the federal, it would be AT LEAST 10% and maybe as high as 35%. For most people, it is 25%.

For the state, it is as low as 1% or as high as 13% (average is 7%).

So in taxes, you are going to pay somewhere between 11% and 48%.

Then there is the 10% Early Withdrawal Penalty. For the $10,000 distribution, that's $1,000, and you pay that EVEN IF you owe no other taxes!! This penalty CANNOT be mitigated.

As for setting up the rollover IRA, many of the larger IRA custodians will not allow foreign nationals to open rollover iRAs because they are not going to be in the country for the foreseeable future. Other companies and banks will, but you will have to search for them.

trojanengineer · Jan 22, 2008, 04:05 PM

Thanks for the explanation

I understood it.

But, let me explain what I am thinking

Per paycheck I get $2500 before the tax deduction. My company matches dollar to dollar up to 6% contribution of my paycheck. So, if I contribute 6% of 2500 which is $150 from my every paycheck then my company will put another 150$. So, total contribution would be $ 300 per paycheck and it is vested immediately. So after 1 year my total investment would be 300 * 26(total no. of paychecks per year) = $7800 out of which my contribution is only $3900.

Now if I take those money back from 401k after 1 year then there would be 10% panelty + 32% H-1B taxes in CA will be deducted form that 7800. So, 42% of $7800 = $3276 will be deducted. So, I will get $4524 in my hand Right ? Can you verify this ?

So, Even though I invested $3900, I got 4524 in my hand after the panelty and tax deduction which is a net $624 profit Right

Could you verify my understanding considering this case ? Correct me if I am wrong

Thanks

AtlantaTaxExpert · Jan 23, 2008, 02:40 PM

Your calculations are accurate, so I suppose it does make sense.

Have you considered a ROTH 401K option? Most companies offer that, and you can get your contribution back with NO penalties, which means $3,900 comes back to you, and the 10% penalty only applies for the matched $3,900 plus whatever growth the 401K experienced while in the account.

You do not get the tax writeoff that you do for a regular 401K, but the penalties is a LOT less for early withdrawal.