A 401k is a common benefit offered by employers to their employees to plan for retirement. But, what if you are an international student working for a company in the United States? Should you participate in a 401k?
A 401k is good for international students intending to stay in the United States until retirement. Working students can still benefit from a 401k with employer match and low tax rates even with early withdrawal from the account. However, early withdrawal may attract penalties.
This article will explain what a 401k is, how to withdraw money from your 401k, and what fees and taxes you may need to pay when you withdraw funds. Then, there is a section explaining the differences in 401ks for international students and why the benefits outweigh the downsides. Finally, there are some resources you can use to learn more about 401ks.
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Table of Contents
What Is a 401k?
A 401k is a common retirement plan generally offered to people by their employer. If you are an international student working in the United States, you will be able to participate in a 401k if your company offers one, even if you are not a citizen.
There are two types of 401ks when it comes to taxes. Your money will either be taxed when you put it into your 401k account or take it out of your account. Some employers only offer one of the two.
However, before choosing when your money gets taxed, you should consider when your tax rate will be higher. If you expect to have a higher tax rate when you retire, pay your taxes now. On the other hand, your taxes are likely to be lower after retirement, wait to pay taxes.
Most people, international students included, will have a lower tax rate when they retire. You can wait until the year after you retire to begin withdrawing your money. If you do this, your tax rate will be lower, and you will get more money out of your investment.
Finally, many employers will match part or all of your 401k contribution to benefit from working for them. Having an employer match will make your retirement account grow faster, and you can earn more money for your retirement just by contributing to your 401k.
The one requirement for opening a 401k as an international student is that you need a social security number or a taxpayer ID. Without one of these, you will not be able to participate in a retirement account.
Withdrawing Money From Your 401k
If you are an international student and have plans to remain in the United States until you retire, you should have a 401k. Your 401k will work just like it does for anyone else, but there are some tax considerations you should know about.
First, certain 401ks do not let you withdraw money until you reach a certain age. The age restriction applies whether or not you are an international student. For example, the popular Roth IRA has a minimum age requirement of fifty-nine and a half to access your money.
If you need to withdraw your retirement money early, you will need to pay a fee. The fee is usually a percentage of the total amount in the account.
For example, say you have ten thousand dollars in your account, and you have an early withdrawal fee of ten percent or one thousand dollars.
Now, if you did not pay taxes when you put the money in your account, you will need to pay taxes when you withdraw. Say your tax rate is fifteen percent. You will be paying another one thousand five hundred dollars in standard taxes.
After the early withdrawal fee and the taxes are deducted, you will only have seven thousand, five hundred thousand dollars in your account.
Differences in 401ks for International Students
While 401ks for international students are treated the same as 401ks for US citizens, they may face a few differences, specifically regarding the taxes if you are withdrawing your funds and returning to your home country.
International students will need to pay taxes on 401ks even if they are not United States citizens. If you are withdrawing your money from your 401k when you leave the country and paying taxes (as opposed to paying taxes as you put the money in), it is wise to wait a year to take the money out.
If you can wait, you will pay fewer taxes because you will only be paying taxes on your 401k money and not your last year’s worth of income too.
For example, if you make eighty thousand dollars in your last year in the United States and withdraw a 401k worth ten thousand dollars, you will be paying a high tax rate on your 401k money because you are in the ninety thousand dollar tax bracket.
However, if you can wait until the following year when your United States income is zero dollars, you will only be paying taxes on your ten thousand dollar 401k. It will now be taxed at a lower rate than it would be if you withdrew it the year before.
Another situation that international students may face is being taxed by their home country if they return home. Check with your local government to see if they will also tax your 401k money if you withdraw it and return home.
Even with these differences for you as an international student, a 401k plan will be beneficial, especially if you will not need your 401k soon or plan to stay in the United States for the long term.
Learn More About 401ks
If you want to learn more about 401ks, there are many resources you can use, like books and videos. A few of the best resources to get you started are listed below.
First, this video from Jazz Wealth Managers is a great resource for beginners to understand the basics of 401ks:
Second, IRAs, 401(k)s & Other Retirement Plans: Strategies for Taking Your Money Out from Amazon.com will teach you how to take your money out of your retirement plan in the best way. You will learn tax strategies, early penalties, and more about your 401k. The book is updated to include the latest legal requirements, new taxes rules, and other important changes you need to know.
Next, How to Make Your Money Last: The Indispensable Retirement Guide from Amazon.com is a great guide to retirement planning for beginners. The book has the latest information about taxes, investment plans, and risks you face when planning your retirement, and you will learn how to make sure you will not run out of money after retirement.
Finally, Retirement Planning: 401k vs. Roth 401k, IRA vs. Roth IRA from Amazon.com will explain the differences between common retirement plans. You will learn how to choose the best plan for you, how the tax differences between the plans can affect your retirement, and whether or not you should invest your money in an account other than your employer’s retirement plan.
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Conclusion
As an international student, you will benefit from a 401k plan as long as you are not planning on withdrawing from your account in the near future. If you need to withdraw from your account early, try to wait until you are back in your home country and pay a lower United States tax rate. If you leave your money in the 401k until you retire in the United States, you will have a standard 401k just like anyone else.
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