Termination of 401(k) plan

[Guest bujjigundu]

If a temporary worker, who is working in US on H1 visa, contributes money to 401(k) plan, can he terminate the plan and get the money contributed by him, and his employer after his H1 visa expires and go back to his home country? Is there any penalty?

[Guest Benefits Maven]

Once employment has been terminated, you can request a distribution of your 401(k) account. However, taxes will be taken on any money that has not yet been taxed (generally all of it in a 401(k)) AND if you are under age 59 1/2 a 10% penalty will be assessed. You cannot avoid the taxes, whenever you take the money - now or at retirement age - taxes will be due on it. Most 401(k) plans will force you to take the money once you have terminated employment if your balance is under $5,000. If this is the case, you can roll the balance into an IRA and leave it invested and tax protected until you are ready to withdraw. If you want to avoid the 10% penalty, you can then withdraw the money after you reach age 59 1/2, although you will still need to pay taxes on it. If your balance is over $5,000 you can leave the money in the plan where it is currently until you are age 59 1/2 and withdraw at that time to avoid the penalty - again taxes would be due in the year of withdrawal. Hope that helps.

[Guest bujjigundu]

Thanks, I have one more question.

A temporary worker contributed $15000 to 401(k) during his stay at US, and left the country after his visa expires. He will not put any money into 401(k) once he leaves the country. Is there any rule like he MUST terminate the 401(k) plan, and pay the penalty if he is leaving and not coming back to US anymore? Or can he leave the money here and get it without paying 10% penalty, when he is 60(he is in his homecountry at this age)?

[Guest Benefits Maven]

As far as I am aware, he is treated the same no matter where he is physically at age 60. He will, as I said, owe taxes at that point and will need to file in the US when he takes distribution. The plan will issue a 1099-R at the time of distribution so the IRS will be notified that distribution has occurred. The penalty should not apply.

[Richard Anderson]

If the account balance is more than $5,000 he can not be forced to take a distribution of his money from the plan. Therefore the answer is yes he may leave his money in the 401(k) plan, and wait until he is over 59 1/2 so he will not incur the 10% penalty.

Another solution is to take a distribution from the 401(k) plan, but roll the distribution over to a US IRA, and leave the money in the IRA until reaching age 59 1/2.