401K and IRA for foreigners in the United States?

We have been busy with other things in life since more than a year ago and just responded to questions/comments sparingly. I (Yannick) didn’t expect to do another post for a long time but obviously changed my mind because of the excellent question from Abhishek: are there any strings attached to these retirement accounts for foreigners?

If a foreigner plans to stay in US until retirement, then the answer is a straight-forward “no extra string”. For tax purpose, Abhishek has been in the States long enough (6 years) to be treated as a Resident Alien, same as a US citizen. So same rules and penalty apply regarding distribution and early withdraw.

If on the other hand, Abhishek plans to return to his home country after a few years, the answer depends on the tax policy of his home country and the tax treaty (if there’s one) between that country and US. It may very well be less strings (or one more way out) for foreigners. The key questions are usually:
How does the foreigner’s home country treat retirement accounts in US? Is the investiment in a US 401K or Traditional IRA treated as tax deferred as well? Is the Roth IRA treated as tax-free? If not, there’s little reason to use them except contributing to the minimum level in a 401K to get employer match.

If the answers for above questions are yes, then you can have the option to leave the money grow tax-defered or tax-free in US until you reach retirement. US still has the most efficient captial market and lots of long term potenial. So this could be a good diversification investment strategy. Be sure to choose an institution/custodian which keep accounts open when you leave the country. I also recommend to roll-over 401K balances into an IRA accont before you leave. 

What if I need to leave US and also need the money before retirement? First, you want to file a W8BEN with your US custodian to avoid a automated 20% tax withholding at the time of withdraw.  To avoid 10% early withdraw penalty, you need to see if a tax treaty allows a trustee-to-trustee transfer of your money from a US account to a pension fund in your home country.  If not, you want to see if you are okay with annuitizing your traditional IRA money (roll-over 401K to traditional IRA first) or just withdraw your Roth contributions. A SmartMoney article  summarized this approach very well. This applies to all US residents.

If however, you want all of your money within a few years and your home country doesn’t double tax you for incomes in US, then maybe the best bet is to bite the bullet of 10% penalty, while managing the withdraw in each year low enough to avoid US income tax. Income tax is usually much higher than 10%, therefore you may be better off doing withdraw this way, which is not available for most folks staying in US all the time. 🙂

In summary, if you don’t know your long term plan yet, you are likely better off by contributing to 401K and Roth IRA as long as your home country doesn’t double tax you for income earned in US. Please check out our ranked list for savings to manage the trade-off between tax-advantage and liquidity. BEST OF LUCK to Abhishek and all you visitors!

Salary survey for H1B — Are you getting there?

Yannick and I are struggling with Green Card application. We (mainly Yannick) were (was) so lazy and did not bother to work on our immigration stuff and now we had to pay a little cost — Yannick may now have to decline a job offer because of the H1-B. The H1B quota was used up on the very first day!

I am worried, but can’t really push him too much on things he does not like to do. Besides, he has picked up things that I do not like to do — tax, asset allocation… So, it is my turn now.

I can apply for green card through PERM with my company’s sponsorship now. For perm, salary is a key factor–you have to have a salary higher than the average salary in your area to get your visa. So, I found this H1B salary survey.

Surprisingly, Washington has the highest median annual salary of $76K. The average annual salary is usually close to the median value. New York has a very high average of $74k compared to a median value of 55k. I suppose that’s because many were
earning well above 100k. In any case, the good message is that my salary is higher than the median or average in my state. At least, I have met one important condition in getting PERM approved.

The data is a little old, but it tells more than just H1B salary. The most interesting thing to PF bloggers is average household income and house value. California has the highest average house value, but its average household income is actually lower than NJ and CT, or even Maryland!

The average household income in CA is 30% higher than that in Texas, the rent is 40% higher that that in Texas, but the average house value in California is 157% higher than that in Texas! MA is comparable to CA in this respect. So, if someday Yannick and I have to work in CA or MA, I will have a rational plan in head– rent, rent, rent, till we retire in TX and Florida!

BTW, I found it interesting that the average H1B’s salary in New York state is $74K, higher than the average household income ($69K). NYC is really single man’s paradise.