# 401K contributions



## tsgasianexpat

US citizen living in HKG, and I have a question about my contributions to my 401K. I am contributing pre-tax to my 401k, but since most if not all my income is tax free as an expat, would it make sense to stop contributions to my 401K and just save the money tax free? currently I only have 2 funds in my 401k account, the rest is all in a cash account in my 401k's program. I am very conservative and wary of the market these days, as I have lost a bunch of money in the past and it took a long time to recoup.


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## Guest

I made the mistake of waving the magic wand, and "poof" - changing tax free earned money into taxable money for later. Did it thinking I was being prudent, and saved the annual max amount into my 401(k) for many years.

After retiring early, I now get to not only pay regular income taxes on whatever I pull out, but also a 10% early withdrawal penalty on the full amount too because I am not yet 59 1/2 y.o. Tax on a tax.

I think a better route is to contribute up to the company 401(k) match limit (my company had a 50% match up to 6%) - that is free money to offset the taxes later. Anything you want to save above that amount, either put it into a Roth IRA if you can, or sock it away somewhere else.


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## Bevdeforges

Be careful here - for IRAs, you can NOT contribute unless you have salary income that is subject to US taxation. If you are excluding your foreign salary using form 2555, then you are not eligible to make any contribution to your IRA.

I think the rules are similar, if not the same for a 401K, but you may want to check with your employer's HR department just to be sure.
Cheers,
Bev


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## JasonWatson

There is more to the story-

Yes you can contribute to IRAs and 401ks. However, excluded income amounts must be used to compute income thresholds and phase-out limits. For example, your ability to contribute to a Roth IRA completely phases out at $125,000 for single filers and $183,000 for couples filing jointly. So, if you earn $183,000 and you are married, and you exclude all of your income because of the foreign earned income exclusion you would still be ineligible for a Roth IRA contribution.

Traditional IRAs follow the same rules, although the 2012 phase out amounts are lower ($68,000 for single filers and $112,000 for couples filing jointly). SEPs, SIMPLEs and other plans for self-employed people also follow similar rules.

Your ability to deduct your contribution or take advantage of savers' credit might be limited.

Please read IRS Pub 54, pages 31 and 32.

Thanks,

Jason


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## robnw

If you were asking a (qualified) cross-border wealth manager to work out a recommendation, they'd go through this routine:- 
1. They would ask you first where you might retire. Some countries tax pensions more lightly (the more recent USA- DT Treaties say that only the country in which you are resident tax the income from the 401k [but not any lump sum]. Then, the formula is:- fund accrued during accumulation phase (assuming optimal growth for your stated risk in today's markets, call it 6%) less charges in the 401k less USA tax in the 401k less inflation, and subtract fund on depletion - that is income stream at current annuity rates less global tax on this stream: and then compare this result with not using a 401k.
2. Then they would consider if your ability to obtain optimum growth is handicapped by using this particular 401k. If it can invest only in funds, one would increase charges by 2% p.a.; and if the range of funds is limited, perhaps take 3% to 5% p.a. off the optimal growth rate.
3. Then they'd consider (both country Estate Tax on the amount in the 401k and if you simply accumulate.

Assuming your adviser has your financial data on file, the above should take about an hour. Takes longer to describe than do.


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## Bevdeforges

Are you sure about that answer?

I only ask because, given that the OP is a US citizen, all amounts withdrawn from a 401K are going to be subject to US income tax at the time of withdrawal just like they were regular income. It matters not where the person is resident at the time, Uncle Sam gets his cut first at regular income rates. (For US tax purposes, withdrawals from a 401K are not considered "pension" income - not that that would make any difference anyhow.)

Any other form of investment with these funds would subject the OP to paying US income taxes on the income generated by the investment - subject, of course, to any available foreign tax credits. But if it's the sort of investment where the earnings aren't taxed by the country in which you are resident, then you wind up paying US taxes on all earnings year by year - not to mention the reporting requirements under FBAR and FATCA which may make placement of the funds more difficult.
Cheers,
Bev


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