401K Question - Very Confused. Just came to US and will be here for about 4 Years. Firm matches 25% of first 6% employee down. Some say, upon withdrawal, have to 40% tax/penalty / others say .. Contin

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I’m sure you’ll live beyond 4 years, OP 🙂

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Same here. Don’t know whether I’ll be the U.S. forever, but put 6% in 401k. Even if I’m not in U.S. at the time of retirement, I think I can withdraw 401k, and transfer to home country. Having some USD assets focusing on US market is also a way of asset diversification.

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OP there is a 10% early withdrawal penalty if you withdraw before the age of 59.5. In addition to that, you have to pay federal and state income tax on any withdrawals bases on your tax bracket in the year you withdraw. There is a mandatory 20% federal tax withholding but that is just a withholding. If your tax bracket that year was say 15% then you get 5% refunded when you file your income tax return. I would suggest putting in the money in your 401k, then letting it grow with the market until you reach age 59.5. Think of it as a diversified investment. It will definitely grow with the US market. Just put it in a target fund.

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PwC OP,
If you contribute 6%, you get another 1.5% from firm. The net is 7.5%

Assuming you will be a non resident tax payer when you withdraw, you are subjected to flat 30% tax + 10% early withdrawal penalty (penalty applicable, if you withdraw before 59.5 years).

If you contribute and withdraw before 59.5 years, you will have at least 4.5 % (7.5% - 40% of 7.5%)

If you do not contribute to 401k, you get only 4.2% (6% - around 30% of 6% towards your federal, state, city income taxes) on hand.

I did not even consider the investment growth in the above 2 cases.

But there are other factors like your federal, state / city income tax rates at the time of contribution and withdrawal, your investment growth and options, your forex conversion rate, etc. that will impact your exact outcome.

In general you gain 99% of the time, by contributing to 401k. You can blindly go for at least that 6%.

If I were you, I will max out 401k limit every year.

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Others say 10 % penalty and 10% tax pay .. Very Confused if I should take 401K or no... there is a chance that I may live beyond 4 years but uncertain at this point. Please advise .... Thanks

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How old are you OP?

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Are you going to die after 4 years? .. jokes aside. There is no penalty if you u cash out after retirement age. It depends on how you want to invest. There may be better investment options in India..

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Wow K1. How did you guess OP is from India!

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31. Married and 2 dependents ..

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Either way it’s free money. I’d take it regardless of your age

OP - Meaning if my 6% is 12K for example, then I will get 15K with 401K and 9K without 401K. So it’s makes sense, but 40% cut on withdrawal makes it tricky.

But my lookout is what’s the actual withdrawal rate before 5 years of 401K account opening ... ... is it 10 / 20 / 30 / 40 % ??? Why it’s so difficult to know ...

K1 - that’s not smart. Let’s say after 4 years of age, my 401K balance is 60K (otherwise I would have got 36K). But that 60K lives there for 25 years and no much Y-Y return... If I can get that 60K grow at least 8/10% y-y basis, is it wiser to stack up that money there?? Not sure ...

Well I don’t think there are separate rates like that. It’s easy if you withdraw before retirement age which seems like the case you’re stating - than whatever is the income tax rate that you’re subject to you’ll pay that. So go look at your current income tax bracket and that’s the % of total accrued to date that you’ll loose upon cashing out. Also, not sure why would you break 401(k) savings. Unless you need extra cash after 4 years.

OP, Why are you saying your money won’t grow after 4 years when you leave? The money in the 401k is invested and will return what ever the assets you bought with it are returning in the market..

Don’t withdraw. Maybe you can roll it over into another account

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