[pandora28]

Hi there

I'm bumping my question to see if get an answer in this second attempt.

My situation is as follows:

* Non-resident alien planning to stay in the US for 2 or 3 years
* I receive a 100% employer match on my first 6% contribution plus an automatic employer contribution of a 3.5%
* I'm thinking on the 401K more as a savings a account rather than a retirement plan. After 2 or 3 years I will cash out my money, return to my country and probably spend it on a house.

Regardless of the early withdrawal penalties (~10%?) is it still worthwhile to open a 401K account or I should better think on investing my money somewhere else?

Also, could someone help me understand the differences between the regular pre-tax 401K and the 401K Roth?

Many thanks in advance

[ebaines]

"Is it worthwhile" is a rather subjective question. First, it is always worthwhile to save for your retirement. I think it's wrong to think of your 401(k) as a short-term savings vehicle. But if that's what you want to do...

Given the employer match it may be more advantageous for you to take advantage of the 401(k), even if you're going to cash out in a few years when you leave your employer. However - be aware that when you do this you will owe regular income tax plus the 10% early withdrawal penalty, so the amount you receive will be reduced accordingly. But the employer match will more than make up for that. One thing to check: is there a minimum vesting period before the company's match becomes available to you? My company for example requires 5 years of service before their match is fully vested. So be find out what the rules are for your plan.

As for a Roth 401(k) versus traditional 401(k): like a Roth IRA your contributions to a Roth 401(k) are post-tax (not pre-tax like a regular 401(k), which means you can't afforrd to save quite as much, but it allows you to withdraw the money you contributed plus earnings on that money tax-free. The portion of your withdrawal attributable to your employer's match and earnings on that match are taxable (like with a regukar 401(k)). The catch is that the account must be in existence at least 5 years and you must be age 59-1/2 before you can make the tax-free withdrawal - otherwise taxes on the earnings kick in. There is no rule of thumbe as to which is better - it all depends on whether you think you'll be in a lower or a higher income tax bracket when you take the money out at age 59-1/2 or later. If you think yor tax rate is likely to be higher in the future, a Roth may make the most sense. But if you know that you'll be taking the money before age 59-1/2 there's not much point in considering a Roth - stick with the traditional 401(k).

[pandora28]

Thanks for the heads-up on the vesting period. Any other caveats?
So considering that my plans are initially to cash out in 2-3 years looks like I should opt for the traditional 401K right?

[pandora28]

Folks, let me be sure I've got this straight:

If "X" is my gross income, "Y" my regular income tax percentage and assuming the aforementioned employer contributions and that I contribute a 6%, what I'm going to get the day I cash out is, at least (without considering the interests of my investments) :

X*(1-Y)*(0.06+0.06+0.035)* (1-0.1) ~ X*0.7*0.155*0.9 ~ X*0.097

Is this right?

[ebaines]

X*(1-Y)*(0.06+0.06+0.035)* (1-0.1) ~ X*0.7*0.155*0.9 ~ X*0.097

Is this right?

My apologies - I clicked "agrees" in response to your post, but actually it's not quite right. Remember that the 10% penalty applies to the full amount of the withdrawal, not just the portion that remains after taxes. So the formula would be more like this:

X(0.155)(1-y-0.1)

If y = 30%, then you get

x*0.093

So at the end of the day by investing 6% of your wages you get a return on 9.3% of your wages (not including the growth or loss that occurs in the account). Again, this assumes that the 9.5% match from your employer is fully vested. It also assumes that 30% tax rate is the right amount - don't forget that your taxes must include federal as well as state/local (depending on where you live).