Whether you are resident or non-resident, at some point in your career you may require to withdraw from your 401k account for various personal financial needs.

One of the questions, you may be trying to understand would be to find out how much penalties/taxes you would be paying as part of your 401k withdrawals.

According to the Internal revenue service, if you participate in the traditional or Roth 401(k) plans you are not permitted to withdraw funds until the age of 59 1/2 or if you are permanently disabled/unable to work. If you are younger than 591/2, not disabled  & choose to cash out funds you will be subject to the 10% early withdrawal penalty.

Example: If your 401k is worth $50,000 and you decide to liquidate the account, you will be required to pay an additional $5,000 in taxes. That means your withdrawal is down to $45,000

Non-residents

The entire 401 (k) is taxed as income in the United States even if you are back in your home country. As an example, if your income tax bracket is 20% in the year you liquidate the 401k. The total tax impact would be up to 30% (the 10% early withdrawal penalty plus 20% income tax rate).

Therefore, if you withdraw $50,000 you will be paying $15,000 in taxes 30% as per the above example. Therefore, many tax advisors will advise you to wait until your age is 591/2 before cashing out your 401k.

 

Despite the early withdrawals penalties, 401k can be a very powerful tax-saving strategy for both non-residents and residents. If you have more questions, contact us here