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Can Foreigners Withdraw 401(k) Funds Early?

Question: After working in the U.S. on a visa for nearly 5 years, I have to go back to India next year.  I am not a U.S. citizen or a permanent resident.  I estimate that I’ll have about $15,000 in my 401(k) account by the time I have to leave. What is the best option for me to withdraw the money with the least penalties? I have a home loan in India which I need to repay. I do not have the option of keeping the money in the 401(k) until I am 60-years-old.  Should I withdraw next year while I am still a resident alien? Or should I wait until 2013, when I will not have any income other than this 401(k) withdrawal but I will be a non- resident alien?

– David, Ewing, N.J.

Answer: It will be tough for you to access your money and to avoid penalties on an early 401(k) withdrawal. There are three main ways to get early access to your 401(k) funds: if you change employers, take a hardship distribution or take a loan—if your plan allows for it. The Internal Revenue Service does not grant exceptions for foreigners who work in the U.S. with a visa to withdraw from their 401(k) s without penalties when they leave the country. Without hardship withdrawal, you need to change employers, known as “separation from service,” to be eligible for an early distribution, says Mark Ritter, an Atlanta-based managing director for accounting firm Grant Thornton. And, unless you roll it over to an Individual Retirement Account or are age 59 ½, you’ll have to pay the 10% early withdrawal penalty.

If you do roll your savings over into an IRA, you may have more exceptions for early withdrawal that could help you avoid the penalty tax, says Ritter. For example, you can take Substantially Equal Periodic Payments, annuity-like payments that you must take annually for five years or until you are age 59 1/2, whichever is longer.

But these methods won’t get you the big payment for your house, so you now have to determine which tax year to bite the bullet and take the early withdrawal. Because the distribution is subject to ordinary income tax, you might be better off waiting until you are back in India, says Beth Penfold, a tax consultant for Grant Thornton who focuses on foreign nationals working in the U.S. You will probably be in a lower tax bracket, and pay a lower overall tax bill, when your only source of U.S. income is your 401(k) distribution, says Penfold. If you pull the money out while you are still working, your salary and the distribution could push you into a higher tax bracket.

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    • After working in the US for 7 years on a visa, I left the US and went back to work in Europe. Can I still make contribution to my 401K?

      Would I be better off to roll it over to a IRA and which one “Traditional” or “Roth”?

      Thank you

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    • Actually, the author of this article needs to read the requirements for mandatory withholding and treaty rates for non-resident aliens. The penalties and other withholding rules are different for individuals who are not subject to US taxation.

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