There are lots of things that NRIs in USA have to do in order to stay in USA. One of such thing is investing in short term in stuff like 401K. However, we still need to find out whether it is really worth if you are going to stay there for say around 5-7 years.
You surely save some taxes and the employee matching also minimizes to say 40 per cent or so. However, when you leave USA, you need to pay some equal percentage as penalty. That calls for a fair debate of the subject. There are certainly some hassles attached to investing in 401K.
What if you withdraw your money prematurely from 401K account?
On a positive side, you can keep your employer match against your 401K account as it is until there are no vesting rules and this is surely that money you can still keep. Moreover, you can pay your taxes on the money saved during the last few years, as speculated.
On a negative side, there are certain penalties attached to 401K, which comes out to be 10% since this happens to be a retirement account and as per the scheme, the amount should have been there till the time of retirement, which does not happen and thus you have to pay penalty.
Considering these factors objectively, you can yourself gauge what could be the best option for yourself by doing a rough calculation. You can calculate the money you would be getting and the penalties that you would be required to pay and deduct the penalty from the money you would get, thus leaving the actual benefit for you.
On a positive note, the employers match is supposed to take care of the penalty part and thus it is advisable to invest in 401K, if numerical calculations do make sense for you.
A tricky question though is that on the other hand you could invest the same amount in India and attract a good benefit. How that figures out is a matter of introspection and personal calculation. However, considering the highest rates of interests offered in safer investments in India, the employers’ match still weight above.
One another parameter on which you should weigh your decision of investing in 401K is the hassles that you would have to undergo while investing. Considering the taxes and penalties, which may be as high as half of the returns and the added hassles of procedures involved in 401K investment, you can still give your decision a thought.
Last but not the least, considering all the aspects discussed above, the final decision should be based on how comfortable you are while investing in 401K, when half of your returns may go as taxes and penalties, while still leaving you with a handsome return, which could match up the best returns if you keep investing in India. The decision should be based on personal preference and that would differ from one individual to the other.