Getting money from my 401K?

Question

I've been on a work visa in the USA for about 8 years now and have about $60,000 in my 401K. My work Visa is up next March and I'll have to return to Canada.

I know there is a 10% withholding tax if I withdraw it but if it is in a low income year (as I will only work 3 months) is that going to be less than the flat 30% tax that will be taken out if I remove it as a non-resident?

I know that leaving it in an IRA making tax free returns is a decent option but I'd rather move it elsewhere and want to get the most I can out of the money I've saved.

Answer 1

The withholding is different for the two situations (10% for resident versus 30% for foreign). But the taxes owed are the real issue.

If you cash out the 401k in 2007 then you will be taxed US income tax plus the 10% early withdrawal penalty. Assuming you are in less than a 30% tax bracket, the withdrawal in 2007 may cost less in tax than after you move out of the US (or may not, since state tax will also be paid).

If you cash out the 401k in 2008 you will pay a flat tax of 30% regardless of your 2008 income, plus a 10% early withdrawal penalty, for a total tax of 40%.

After you leave your job, you could roll the 401k into a self-directed IRA and invest as you choose with few limitations, no current tax, no penalty, and the same tax treatment on withdrawals since Canada recognizes the tax-deferred status of IRAs.

Answer 2

Withholding IS NOT 10%. There is a 10% PENALTY on top of regular income tax on the amount withdrawn. Withholding is 20% and has NOTHING to do with the tax owed on the withdraw. You will LOSE more than a third of your money if you withdraw the money and don't roll it into an IRA. There is no way to make that up in a reasonable time frame. Your IRA can be invested in whatever you planed to invest the money in anyway. An IRA is NOT a type of investment, it is a type of account that can be invested in nearly anything.

Answer 3

You can either leave the 401(k) account as it is, or move it into a traditional IRA without the 10% penalty. You have literally thousands of choices of mutual funds.

There is no way I'd withdraw it. Not only are the penalties and taxes too high, but even worse, you'd be jeopardizing your economic vitality in retirement.

If you're lucky, you will live to be old. You can be either old and broke, or old and well off. Which would you prefer????? (duh)

And what will you do to make it happen?

Answer 4

Have you checked your Plan to see if a loan from your 401(k) account is available? Typically, a plan will allow you to borrow up to 50% of your vested balance.

There are no penalties or income taxes associated as long as you pay back the loan on time.

Otherwise, you'll get hit with the 10% penalty (plus any state penalties if applicable) along with the income taxes.

Answer 5

The best thing for you to do is roll it over. There is a 10% penalty, but the taxable amount will be in addition to your 2007 income. The taxes and penalties on that much are going to be substantial.
Honestly, I would recommend a certified financial planner who is well versed in international tax law to help you. It will be worth the cost.
National Association of Tax Professionals can give you a referral to someone in your area who is registered and can help you. You can find them on-line. There are financial planners all over and hidden in places you'd never suspect.


Good Luck & Bless

Answer 6

You will probably need to get the contact number from your employer. Once you do that, call them. They will probably ask your hire date and termination date. They will mail you a form to fill out. Once you do this, they will mail you a check, or separate checks (in the same envelope) for each stock.

I cashed mine out during the Enron scandal before all my money was gone, although I did lose most of it. Stinking Janus Fund.