Investing while in the US on a fixed term contract

March 25, 2013 8:28 AM

I know I should be talking to an financial planner/adviser about this, and I will do, but... I am British. I'm going to be living and working in the U.S. for somewhere between one and three years. I will probably return to the UK afterwards, but there is a chance I will stay in the U.S. forever. I would rate that chance at about 50/50. I would like to save a fraction of my income while in the U.S., and I would like those savings to grow. I would like to retain at least the possibility of suddenly withdrawing them if and when I leave the U.S. I understand there will be fees and taxes involved in such a withdrawal, but I would of course like to minimize them. And I would like to balance this possibility against the possibility that I will be staying forever, and should make a start on saving for retirement.

My salary will be mid-five figures. Over three years I will probably be able to save around $10,000, so this is not a huge amount of money, but it's enough money to matter to me! As far as I can tell, my options are:

1. Make voluntary contributions to the 401(k) offered by my employer.
2. Invest post-tax income in a Roth IRA
3. Invest post-tax income in a regular investment account, e.g. a cash savings account (do these have a name?) or just a regular purchase of a Vanguard-type index tracker (I can do that, right? I don't have to invest via an IRA or 401(k), right? What should I be Googling for this option?)

Presumably, if I knew I were staying in the U.S., this is easy: the 401(k) is the best option. But am I right in thinking that, if I leave the U.S., with these options:

1. I can withdraw the entire 401(k) immediately, but I will have to pay income tax on the entire amount of the withdrawal + a 10% penalty
2. I can withdraw the Roth IRA after a waiting ("seasoning"?) period of five years after the last contribution. I don't pay income tax on the principal, but I pay income tax on the growth, and I have to pay the 10% penalty.
3. I can withdraw the regular savings/investments whenever I like. There are no penalties. Presumably I will pay income tax on the growth ("capital gains"?) at some point (annually, or at withdrawal?)

Have I got that right? And if so, how do I choose between these options? It seems like over a three year term the Roth IRA and and the 401(k) will work out about the same because the difference between compounding pre- and post-tax principal over such a short time will be small. But the 401(k) is easier/quicker to withdraw when my employment ends? Does the private, non-tax-sheltered savings/investment account even exist? Presumably that's the simplest of all?

(My employer will make contributions to a 401(k) after my second anniversary of employment (i.e. for the last year), but, unless I'm totally misreading the papework, the existence/size of those contributions in independent of the size of mine, so their contributions are not relevant. For the purposes of this decision, it's just free money that I can't do anything about.)

posted by caek to Work & Money (4 answers total)

The 401k is a no-brainer if your employer offers matching.

You must consult an expert in UK/US tax law before you leave to figure out what to do. Step 1 is to roll over from 401k to IRA. Choose somebody like Fidelity that will allow you to continue trading from abroad even though your IRA will be closed to new contributions due to your foreign address.

Step 2 varies based on the specifics of your situation. One option is to leave the money in the US until you retire. Another option is to use any and all facilities made available by UK/US tax treaty to enable you to transfer funds to a UK pension scheme without penalty (or at least with any assessed penalties recovered when you file your taxes). Another option is of course to pay full price.

I know nothing about UK tax so I can't advise; I can tell you that there are facilities to get your 401k to Canada tax free so it's worth the investigation. You will need a specialist. Check the expat community for a resource
posted by crazycanuck at 8:44 AM on March 25, 2013 [1 favorite]

Regarding the Roth IRA, the 5-year rule only applies to earnings. You can make a contribution one day and withdraw the contribution the next day with no penalty and no tax on the contribution. You already paid income tax before the contribution. For earnings, the 5-year clock starts when you make your first contribution, not your last. You can remove all of your earnings five years after your first contribution, with tax and penalty.
posted by JackFlash at 8:47 AM on March 25, 2013 [1 favorite]

Response by poster: The 401k is a no-brainer if your employer offers matching.

Just to clarify: they don't. They will contribute to my 401(k) during my third year, whether or not I contribute, and in an amount independent of how much I contribute.
posted by caek at 8:53 AM on March 25, 2013

Same logic applies for contributions - don't turn down free money! You'll have to solve the 401k problem anyway.

The other thing about Roth IRA - in Canada they are not covered by tax treaty, so no special treatment on withdraw. It is a newer instrument so its downside is lack of international portability. UK may differ, you'll have to investigate.
posted by crazycanuck at 9:24 AM on March 25, 2013 [1 favorite]