Should H1B Visa Holders Invest in 401k? | The Wandering Nerds (2024)

For citizens of the United States and non-citizens who are there temporarily like those with an H1B visa, there is always the question of what to invest in. Seeing that having or taking part in the right investment program or scheme is an important factor in determining how you live after your retirement. One of the popular questions raised to this effect is: should H1B visa holders invest in401k?

While there are other investment opportunities available to H1B visa holders, the 401k investment is also a strong option when it comes to investment provided they are in a tax bracket of 10% and above.

As an H1B visa holder, if your employer offers the 401k investment, then it is really advisable to join because the contributions to the investment are tax-free, you only pay tax when you intend to withdraw and you can take loans against the amount invested in the plan, to mention but a few.In the course of this article, we shall be taking you across various aspects of the 401k investment. Let’s delve in!

401k Investment Rules and Requirements for H1B Visa Holders

As an H1B visa holder, if your company or employer offers the 401k investment plan, it’s one of the easiest and also most effective ways to save your money for retirement. Despite the main advantage of the 401k which is that you’re allowed to save a portion of your pay into the account automatically, there are some investment rules and limits to take note of:

• TheIRSreviews and sometimes modifies the maximum contribution limit on 401k accounts every year. This usually takes place around October or November. As of November 6, 2019, the amount of contribution was increased to $19,500 from $19,000.
• People who are of age 50 and above are qualified for a subsequent catchup contribution of $6,500 in 2020 which is an increment of that of the previous year that was $6,000.
• Employees should be 100% fixed in their individual contribution account. There might be a schedule for their match.
• Employees can contribute to H1B employees. But with a limit of $56,000 on both the employer and employee as of the year 2019. If qualified for a catch-up contribution, the limit rises to $62,000.
• For 2020, the limit rose up to $57,000 and $63,500 for joint contribution and in cases of an additional catch-up contribution respectively.

401k Withdrawal Rules for H1B Visa Holders

Before you can be qualified to make a withdrawal from your 401k account, you must be retired and just have been contributing to the account for at least the last 5 years and also be at least 59.5 years old. It is however also to be noted that withdrawals can be taken if the account owner dies or becomes disabled. In the case of death, the funds go to the account beneficiary.

According to a report byInvestopedia, President Trump on March 27, 2020, signed a $2 trillionCoronavirus emergency stimulus bill. This bill would allow withdrawals up to one hundred thousand dollars from IRA & 401k without a 10% penalty for people who are younger than 59.5 years old.

When a withdrawal is made from a 401k account that does not meet the above rule, it is tagged as an early and unqualified withdrawal. Your contributions can be withdrawn from your 401k account without paying any penalty. However, if the withdrawal is considered early and unqualified, you’ll pay the taxes on earning to be withdrawn and a possible 10% fee for early withdrawal.

What Happens to 401k if You Leave USA?

According topath2usa, If you’re an H1B visa holder at the time of contributing to the 401k and at the time when the withdrawal is considered, the best thing to do when leaving the USA with your 401k intact is to contact your accountant if you have one or a financial advisor who would inform you of the possible effect your departure from the USA would mean to your 401k plan. However, you have a few options at your disposal which are:

1. Roll over the amount In your 401k to an IRA:This is an option to be considered, but however, your SSN – Social Security Number is always acceptable even if you live in the US or abroad. But, also note that your finances and investment will be affected by factors like how often you live in the US, how often you visit, your status in the US, and more.

2. At the time of your departure, if the money you have contributed to your account is more than $5,000, you can leave the money in your previous employer’s plan.

3. Take a lump sum: You can take the money saved otherwise referred to as a lump-sum payment, into your account. But bear in mind you’ll have to pay the tax penalties associated with the early withdrawal.

However, it is better to consult a professional expert in the financial field before making decisions such as these.

Can You Withdraw 401k When Leaving USA?

Most times, a lot of people usually ask if they can withdraw their money from 410k when leaving the US or transfer/roll over to their new country or home country of residence. Well, the answer is that you’re allowed to withdraw from the money from your 410k account when you are to leave the country according to most financial experts. However, the amount you will withdraw will be counted as taxable income unless you’re 59.5 years or older. Note that you’ll also face a 10% penalty on the money. Also, note that you have to let your plan provider know that you are no longer a US tax resident.

When it comes to whether you can transfer the balance in your 401k account to your home country as you intend to leave the U.S, the answer is NO. You can travel and leave the U.S, but the account can not leave with you. Also note that as stated earlier, any withdrawal at this point will trigger the US and possibly foreign taxes and also the age penalty fee. Taking your 410k plan also removes the advantage of a tax-deferred growth that usually continues even when you move to another country.

According to experts, at this point, the best option is to leave it your 401k money right where it is, that is, your former employer’s plan where the original contributions were made. It is a very good idea, and also the easiest when taking an administrative look at things, not forgetting the advantage of continuing to benefit from the tax-deferred growth.

However, there’s The issue of facing the decisions in leaving money in an active 401k account. Most times, we think it is the lowest cost option which is not always true. The employer pays for the administrative cost and investment solutions from the money in the account. That means you’re paying them by a small amount of your money which in turn erodes your returns.

Alternatives to Investing in 401k for H1B Visa Holders

The 410k investment account is one of the best ways out there to invest ahead of the future. However, for an H1B visa holder, not all employers and companies offer the 401k plan while the ones offered by some are really poor and you would rather save on your own. Alternative options include:

Traditional IRA

This option is regarded as one of the most common ways a person living in the US with an H1B visa can save for retirement. This plan allows the users to save money in an account and watch it grow, tax-free.With the exception of paying taxes only when you wish to withdraw the money at retirement.

Main benefit:You have a Tax-deferred growth, flexible investment choices, and a tax break on contributions.

Roth IRA

This is another type of investment that is largely participated in by people with H1B visas. The main difference between this option and that above is that it allows your money to grow tax-free and you’ll be able to withdraw it at retirement, tax-free. But in return, you will have to contribute money frequently after tax.

Main benefit:Total flexibility in your choice of investment, you have tax-free growth, tax-free withdrawal at retirement, and flexible use of contributions for expenses like college fees.

SEP IRA

TheSEP-IRA is an acronym for Simplified Employee Pension Individual Retirement Account. It’s an account with functions similar to the traditional IRA. It allows your money to grow text free till when you withdraw it.

Main benefit:You enjoy a bigger saving limit than the traditional IRA, a completely flexible choice, and tax-deferred growth on your savings.

Health savings account

Otherwise known as HSA. This type of account is not only for health purposes alone, although it is for the purpose of helping American citizens afford quality health plans. This plan provides rewards to those who can hold on to some of their money in the account until they get to the retirement age. You can be eligible if you have a minimum of $1,400 to a maximum of $6,900.

Another savings option includes the solo 401k which requires you to have a business before or a temporary side job before you can partake.