It is often difficult to make decisions about future, especially when you are thirty or forty years away from your retirement. However, the years do fly especially after the age of thirty five and if you had an extremely busy life raising a family coupled with a demanding career. So, if you are thinking of a good retirement plan then 401(k) and Roth IRA are very good options to consider.
What is a 401(k) and Roth IRA?
401(K):
401(k) is an employer-sponsored retirement plan. Employee’s contribution to the 401(k) plan will get deducted from their paycheck every time before taxation. In many cases, Employer will match up to some percentage of Employee`s contribution.
Employee’s contribution to the 401(k) plan will be invested in funds based on your choice. It is tax-deferred which means, you are not going to pay taxes until you withdraw the money.
Roth IRA:
Roth IRA is an individual retirement plan. Contribution to the Roth IRA will get deducted after taxation. So, no need to pay taxes at the time of withdrawal.
Is 401k a good option for a H1b visa holder?
Absolutely yes, contributions to 401(k) plan is a very good option for H1b visa holders. If your employer is offering 401(k) then it is highly advisable to join the plan for the below reasons.
- Contributions to the 401(k) plan are free from State and Federal taxes. You have to pay taxes only when you withdraw. If you are in a lower tax bracket when you retire, you will be paying less taxes.
- If your employer is also contributing to the employee’s 401(k) plan, this is Free Money! You are getting a ROI of 100% for every dollar your employer matches. Where else can you get 100% ROI?
- 401(k) plan allows you to take loans against the money you have contributed to this plan. Loans will be issued for financing a home, health problems etc.
- 401(k) plan allows withdrawal of money during financial hard times. 10% penalty will be charged for an early withdrawal before the age of 59.5 years.
Here is an example for “Investing in 401(k)” VS “Not Investing in 401(k)”:
- Your Salary: 100k
- Employer Match : 100% match up to 4% of your Annual Salary
- Taxes: 30%
Investing in 401(k) Scenario:
- Your Contribution: 4% of 100k = $4,000
- Employer Match: 4% of 100k = $4,000
- Total Contribution: $4,000 + $4,000 =$8,000
If you want to withdraw after one year, you will be paying 10% penalty and 30% taxes. So you will get 60% 0f $8000 = $4800
If you don`t invest in 401(k):
You will be paying 30% taxes on $4000. You will be left with 70% of $4000 = $2800.
$4800 vs $2800. You decide 🙂
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too good as it sounds. But we all know that H1B is a luck game. What happens after 6 years of H1B , what will be your status ? green card processing started ? EB3 = 10 years of tension ? So this 60 years of age thing is a joke for non-citizens. Anyone wise will send that money to India instead of putting it in US which plans to increase taxes year by year. Do not give anymore of your hardearned H1B salary to US. They are taking it enough in the form of social security and medicare for which we H1B workers have no use of as it is a temporary visa.
A person on H1B can get social security benefits, if he contributes for 40 quarters (10 years) in the social security. I agree that H1B is only for 6 years but a lot of people end up staying more than that. If somehow, you manage to contribute for 10 years, you too will be eligible for the social security benefits when you turn 65 or so. Login to ssa.gov to check your benefits.
Somehow I stay 10 years ? And get benefit after I turn 65 ? And what if this somehow staying didn’t work ? I lose the money. And US funds for social security is depleting. After 30 years or so from my age , I don’t think the amount is worth or even US will have that social security funds even. I am not a gambler. The national debt of US is in trillions. It’s a sinking ship. Take whatever you can in whatever time you got to be in US and goto India before the ship sinks.
You are 100% no on eis gettign any SSN medicare money. It just a pozy scheme of taxking form curren tlot and paying to current retiress. For all practicle purposed SSN Medicare money will never been seen by any one that will retire 20 years from now. Take your money and flee the US.
Just not right article. Example Roth 401k is also available. This is a vast subject.
Author just don’t want you miss the 401k matching that your employee provides. And also he doesn’t want you loose the tax benefits of 401k.
What happens if the person is not in USA at the time or retirement or he leaves the country partially after few years after putting something in 401K ?
THIS IS THE MAIN POINT WHICH IS NOT ADDRESSED IN THE BLOG!
You can withdraw the 401k contribution anytime,even if you are not in USA.
An additional 10% early distribution penalty tax will be assessed if you have not reached at least age 59 ½ when you withdraw money. There are some exceptions (you become disabled, …)
You are talking about a Roth IRA, not a 401k.
Actually that is good. There is no state tax, since you are not living in any state. The federal tax will be very minimum or none based on how much you withdraw per year
Your current country might not recognise the 401k as a retirement fund though and decide to tax it as income.
In that case, you actually lost some money. This article is really too generic…
401(k) amount is invested in markets like shares and bonds and depending on whether market is going up or down, your dollar amount fluctuates with that. In times of difficult economic conditions like recession, many people have ended up losing everything they put in 401(k)
This is so true. But author didn’t want to discuss about investment options.
Also employer match cannot fully with drawn by the employer. Most companies will allow you to withdraw the employer’s contribution depending the the time frame you work for the employer.
This is a valid point. There is a vesting period defined by each company. This info is missing in this blog.
Also market appraisal can be factored in which can either go or down
meant go up or down.
Few companies doesn’t match too. In this case if we need money and withdraw it : we end up loosing extra 10% as penalty ($4000 – 30% tax – 10% Penalty = $2400).
Here you missed a point, not many employers match 100%, most of them provide an option as , if employee contribute 6% they will give max of 3% or 2%, but the facts mentioned in this article are right…