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How to best use a 401(k) as a foreign employee

Updated: Nov 25, 2022

In the U.S., there is no federal mandatory retirement insurance for most employees, but it is up to each individual to decide whether and how they want to invest their money.

Most employers offer their employees the option to contribute to the company's 401(k) plan. However, the offer comes with conditions and the plan is not designed to give access to your money before retirement age.

So, what do you do when you don't plan on retiring in the US?

J. Davis International Business Consultant - Employer-sponsored retirement plan - The 401(k)
Employer-sponsored retirement plan - The 401(k)

Unfortunately, there isn't much information for foreigners who do not plan to retire or take up another position in the US but still choose to pay into a 401(k) during their work in the US. In my case, neither my company's human resources department nor the specialists at the 401(k)-plan sponsor could help me, so I'm happy to share the process, the issues, and the outcome.


The Process

The Problems

The Result

The Benefits of a 401(k)

The Disadvantages of a 401(k)



Helpful 401(k) vocabulary

401(k) loans: You can take out a loan for certain emergencies. Some plan administrators allow you to borrow funds from your own 401(k). Loans do not incur any taxes or penalties.

Contributions: What you put into the savings account from your paycheck.

Earnings: The profits made from investments.

Roth 401(k): Employer-sponsored retirement plan with its own rules that allows for after-tax contributions and tax-free payouts after age 59½. You pay income tax before you put the money into your savings account, so you don't have to pay tax when you withdraw.

Roth IRA: Individual retirement accounts (IRAs) with no employer involvement where you pay after-tax dollars, your money grows tax-free, and you can generally make tax-free and penalty-free withdrawals after age 59½. You pay income tax before you put the money into your savings account, so you don't have to pay tax when you withdraw.

J. Davis International Business Consultant Retirement in the U.S.
Retirement in the U.S.

Penalties: Usually the penalty is 10% which you must pay back from your withdrawal.

Plan Sponsor: The company that offers and controls the Plans.

Rollover: If you change or leave your employer, your account can be transferred to another 401(k) or IRA tax-free.

Traditional 401(k): Employer-sponsored retirement plan with its own rules that allows pre-tax contributions and taxable payouts after age 59½. You pay income tax on the entire amount you withdraw at the time of payout.

Traditional IRA: Individual retirement accounts (IRAs) with no employer involvement where you pay dollars before taxes, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½. You pay income tax on the entire amount you withdraw at the time of payout.

Unqualified Withdrawal: A withdrawal made before the age of 59½ or an account younger than five years.

Vested: If the amount is vested, it is entirely yours. Until then, depending on the schedule, you only partially own the employer contributions. Example: Four-year vesting period means you get 25% after the first year, 50% after the second year, 75% after the third year, and 100% after the fourth year.


The Process

After starting my new US job, it quickly became clear that nobody could explain the basics of a 401(k).

I had to start from scratch and although I worked for an international company, nobody really wanted to understand that the American way was not known elsewhere. To learn what a 401(k) is, the investment options, vesting, matching, penalties, ROTH, contributions, earnings...none of it made sense or sounded too promising.

JDI J. Davis International US 401k Taxes

In the early years of my employment, I chose not to invest in the company's 401(k) simply for lack of knowledge and information given to me.

When my employer changed plan sponsors after a few years, all employees had to re-register and transfer their accounts to the new plan. With this change, I took my time and taught myself everything I needed to know using the new online portal and internet. I tried, trained, and ended up putting quite a bit of money into my 401(k) account for the next few years.

A 401k provider gives consumers the ability to view and control their account through an online portal. Monthly contributions, as well as account balances, payments and data are disclosed. Other services must be requested through your human resources department or the plan provider.

J Davis International Business Consultant Researching savings and investments
Researching savings and investments

The Problems

The biggest problems came when I started wondering what would happen to my money if I left my job. Unfortunately, the answers from both my human resources department and the 401(k) plan sponsors ended up being wrong or non-existent.

One of my two options was to transfer my money into an IRA, but unfortunately that means my money would remain inaccessible in an American account for the next 30 years. The other option is to move my money from my current 401(k) to my new American employer's 401(k). Since it was clear to me that I would not work for another US employer, this idea was also out of the question.

When the time came and I left my employer, I needed access to my money. I requested the payout through my HR department and kept my fingers crossed for several weeks with no feedback. Eventually I got my checks in the mail and had to pay the 10% penalty on earnings on my next tax return.


The Outcome

So, what are your advantages and disadvantages of paying into a 401(k), especially if it’s not until retirement? Here are my personal views on the two sides:

The Benefits of a 401(k)

Temporary tax benefits: With a traditional plan, your contributions are paid from your paycheck before income taxes are deducted, so your current tax bill is lower. However, taxes are then due at the time of withdrawal.

J. Davis International Business Consultant Planning your retirement
Planning your retirement

Getting free money: You get "free" money from your employer in the form of matching contributions that are being added to your funds – but under certain conditions.

Later tax benefits: You could save on taxes when withdrawing money because you might be in a lower tax bracket, but also vice versa.


The Disadvantages of a 401(k)

Low Matching Contributions: Your company's matching contributions might be small or non-existent, so it would basically just be another savings account for your money.

Paying fees: Your plan typically comes with annual fees which are automatically deducted from your balance and there is nothing you can do about it.

No choice in plan: You don’t get to decide what plan or plan-sponsor you want to invest in and what fees or rates you agree to - your employer does.

Few investment options: The plan usually only offers around 20-25 mutual funds to choose from, which is low compared to other investment options.

The free money isn't always yours: Your employer decides how long you have to work for them to completely own their contributions, as the amount vests over time.

Unqualified Withdrawal Nightmares: It can be difficult to access your funds early as there are penalties and strict procedures for unqualified withdrawals.

J. Davis International Business Consultant Investment options
Investment options

Higher Tax Risks: If the money is taxed at the time of withdrawal, you may owe more taxes since the tax bracket is difficult to determine at that point in the future.

Paying penalties: Even if you don't have to pay any penalties on your contributions for an unqualified withdrawal, you still have to pay a 10% penalty fee and tax on your earnings.


Tips for your 401(k)

Tip #1: Ask questions about the offer.

Every 401(k) plan is different. It is important to understand the individual details in order to make the right decision. What is my employer's matching rate? What is the vesting schedule? What are the penalties? Depending on these answers, that particular 401(k) may or may not be beneficial for you.

Tip #2: Do your own research.

Unfortunately, since most experts are not trained for foreign situations and employees from abroad, there is not always enough support from the employer or provider. Your own research is extremely important here, so that you don't give away your money because of the ignorance of others.

Tip #3: Represent your own interests.

Remember, a 401(k) is just one way to invest your money. It's up to you how you prefer to save and invest. If you prefer other options, skipping the 401(k) is no problem.


If you are unsure whether you will retire or take up another position in the US, make sure you have all the information you need before investing in a 401(k).

JDI J. Davis International 401(k)

Since this is a legal matter, asking an expert for assistance can give a peace of mind.

If you want to learn more or need more details, I'm happy to help!


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