401(K) - Should expats invest in retirement plans?

The United States is home to many migrants, and often the tax saving plans and retirement saving schemes can be quite confusing.

Taxation rules can be daunting, and the advice can be divided - which one is better - 401(K) plan or an IRA (Individual Retirement Account)?

The issue is particularly relevant for non-citizens and those without a green card in America.

What makes the matter complicated is the uncertainty of future. Many migrants come to the US with the intention of returning to their home land - some day. That can be in a few years, or many years, and as it happens, many of them never return.

What should a skilled migrant do? How should they plan for retirement?

401(k) is beneficial in that it allows you to save tax on contributions made to 401(k) even if you are not a citizen of the United States. And that's not it! The employee is also entitled to a matching contribution from their employer as well as tax-deferred growth.

So far so good. But what happens if the employee decides to leave the US for good, and wishes to withdraw their contribution early?

In such instances, they may have to pay taxes and worse still, pay a 10% penalty.

With that background, is it advisable to invest in 401(K), traditional IRA or Roth IRA if you not a citizen?

Here's some good news. If you are a green-card holder, that is if you are a permanent resident, you can use a phased withdrawal approach to lower your tax incidence.

In essence, you simply withdraw only that much which will not attract taxes.

What about the 10% penalty? Here's a solution. Just roll over the 401(k) to an IRA first.

You can then convert it to a Roth IRA.

The bottomline is, if you can refrain from withdrawing from 401(k) or IRAs, you will benefit from the schemes, because these schemes are design to provide for your retirement.

So let your savings rest there till you are 60, and then you can reap the benefits.

Even if you leave the US for good, let your savings remain safe with IRA custodians like Fidelity or Vanguard. They even let you access and manage your account online, eliminating the need to be physically present in the United States.