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Yes there is a 10% penalty plus you should pay applicable income tax.
Many people on H1 still do it because they don’t want to lose out employer contribution.
Definitely put money in 401K. The money is pre tax contribution. Plus if you go back to India later wait one year when you have 0 income for the year so most likely you will only pay the 10% penalty and no tax or much lower tax than your current bracket. Also employer match is more free and tax free money like D1 said. You cannot lose.
What is the maximum you can put in 401k and how much will the company match?
$18500 per year. This is going to $19000 from next year I believe as IRS is changing limits starting 2019.
Match varies from company to company. Deloitte pays lowest. They do 25% match up to 6% of salary which is basically 1.5% match. For example, if your base salary is 100K and even if you contribute $18500 (max allowable contribution amount for 2018), the company will only match $1500
D1: does that 18.5k limit includes company contribution?
This maybe dumb question - can u not wait till 65 and withdraw it, esp if the contribution is low - 5% ish
C2: No. Excluding Employer contribution you can save up to 18,500$.
PwC1: Yes, and it is up to individuals. You don’t need to wait till 65. I think 59.5 yrs is what IRS says.
P1 yes, the idea of retirement vehicles like 401K or IRA is to not let folks touch the money until 59.5 or older. At some age though (65?) you are forced to start withdrawing RMD(required minimum distribution). The regulations are in place like the 10% penalty and full income tax on contributions to discourage withdrawing earlier than retirement in a way force savings. But some life circumstances need you to access that money like leaving the country and there are some options to minimize your tax impact by deferring withdrawal to a year when your income is zero in the US for example.
@D1 and D2, thank you for the insights. I am aware of the purpose - my only concern is say i go back and just keep the money as is. At age 60 when i want to withdraw from India it shouldn’t cause any issue - mite have to pay taxes in US as well as India possibly?
PwC1: I am in the same boat and my plan is to withdraw it in a year I won’t have any income in US and then put it in a pension plan in India.
D1: thanks a lot! Time to increase my contributions:)
Well... we are possibly talking about a situation after couple of decades, so no idea, earth could be flat :)
With current regulations, I don’t see any issue waiting until retirement. As for taxes, amount you withdraw from 401k is considered as taxable income for that year and you will pay IRS accordingly. Now if you push that money into account in India, you don’t have to pay taxes again, however interest paid by banks in India are taxable. (This is purely my limited knowledge, someone correct me if I’m wrong.)