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!

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My Credit Card is in the T.J.Maxx hijacked list, and I want to "settle down"!

I was checking my credit card activities this morning, and strangely, none of my transactions I made this month showed up. Then I noticed an account alert and a number to call.

The CSR asked me whether I have received a new card with a new number. I told her no. And I asked her why I had to get a new number.
She then told me that my credit card was on the list of those credit cards that got hijacked at T.J.Maxx. So they decided to issue me a new card.

I got worried. From my research on credit scoring, it is a good practice to keep your credit card with long history. The longer your credit history, the better. Last time, I accidentally closed my eldest credit card when an Indian CSR consolidated my cards instead of consolidating my “credit lines”. They could not reverse it. I do not want my credit score to get hurt again. Though the CSR promised that this would not affect my credit score this time, I was not very convinced.

And the second thing I have to worry about is my billing address. In order to keep a nice credit history, I never changed my billing address. Everything is still mailed to our old address, and then forwarded to us by friends. The card must have been sent to the old address if it was sent. I have to wait for a while. I can still use my current card, but the activity goes to the other card, strange, and not convenient.

Now and again, I am nagging Yannick about “settling down”. I can’t even have a permanent address! This affects everything–finance, shopping, and security…I asked him to read Degeratilife’s feeling about her spouse going for a Start up , the uncertainty, the feeling of insecure, blah blah…

In the end, I know that he will still win. He is going to do whatever he wants to do, and I will be supportive — it is inefficient to be unsupportive within a family, it is just that simple. My mom is already on his side, can you believe that? So, what else can I do other than a supporter?

What shall I get for Valentine?

My colleagues asked me this question, my husband asked me this question too.

Everyone knows that I am “chocolateholic”, so chocolate is a no brainer.

But I told my husband,

” You do not have to give me the chocolate on Valentine’s day. Go and get it on 15th, or the weekend after the Valentine. All Valentine chocolate will be on sale then. “

A friend screamed ” That’s not very loving”.

Why not? He is buying me chocolate to show his love, I help him save some money to show my love. Love-love situation!

I am happy that I am not a designer-freak, or diamond-lover, or anything like that. Saves both of us a lot of money, energy, and potential for argument.

Happy Valentine!

Moomin Valley: Paying for Grad School