By Dan Miller, WCI Contributor

A 401(k) refers to retirement plans that many employers offer, named for the part of the tax code that outlines these plans, subsection 401(k) of the Internal Revenue Code. 401(k) plans are some of the most common types of retirement plans for many people. One of the biggest reasons for this is the tax breaks many people enjoy when contributing to their 401(k). While 401(k) plans get their name from the US tax code, that doesn't mean that US citizens are the only ones who can invest in 401(k) plans. In most cases, people legally living and working in the United States can also invest in 401(k) plans.

 

Understanding 401(k) Retirement Accounts: Basics and Eligibility

One of the most important things to understand about 401(k) plans is who is eligible to contribute to them. Unlike Individual Retirement Accounts (IRAs), 401(k) plans are generally an employer-sponsored retirement plan. That means that in most cases, you will open, contribute to, and manage a 401(k) account within the plan based on the rules set up by your employer (though there are also individual 401(k) accounts available for some self-employed workers).

Most US employers offer their 401(k) plans to full-time employees aged 21 and older, but this may not always be the case. This could depend on the employer's policies or the nature of the employee's work. If you are a non-US citizen considering participating in your employer's 401(k) plan, make sure you check with and work with your company's HR department to see if you are eligible.

More information here:

In Defense of the 401(k)

 

International Workers and 401(k) Participation: Ex-patriates and Non-Citizens

Here's a quick look at some specific types of workers and whether they might be eligible to contribute to a 401(k) plan:

401(k) for non us citizen

  • Green card holders — Holders of a US green card (aka lawful permanent residents) are generally eligible to contribute to their employer's 401(k) plan. Since they are long-term US residents, green card holders are generally taxed on their worldwide income, allowing them to take advantage of all of the benefits of a 401(k).
  • Temporary workers —  Temporary workers on H1B or L1 visas are also usually eligible to participate in their employer's 401(k) plan, as long as their employer allows it. One thing for these workers to understand is what sorts of tax consequences might occur if they leave the US before retirement age.
  • Non-resident aliens —  Non-resident aliens who are earning income in the United States are also typically eligible to contribute to their employer's 401(k) plan.

 

Legal and Tax Implications of 401(k) Investing

For US citizens, they may be mostly concerned with the overall 401(k) contribution limits. As long as they remain under the annual contribution limits and leave their money in until retirement, they can continue to enjoy the tax advantages. 

But non-citizens have other legal and tax implications that they'll want to be aware of when deciding whether to invest in their employer's 401(k) plan. Primarily, this involves how any 401(k) distributions are taxed. Even distributions in retirement may be taxable, depending on the tax treaty between the United States and the non-citizen's home country. If you find yourself in this situation, make sure that you talk with an experienced financial planner or tax advisor to make sure that you are complying with all of your tax obligations.

More information here:

What to Do with a Crummy 401(k)

Should You Make Roth or Traditional 401(k) Contributions?

 

Alternative Retirement Saving Options

Besides investing in a 401(k), non-citizens who are living and working in the United States have a few different options. There are several different types of retirement accounts, each coming with their own advantages and disadvantages. Non-citizens are generally also able to open Traditional and/or Roth IRAs.

Another option to consider would be to invest in a taxable brokerage account. You might also consider investing in real estate, precious metals, or other alternative investments. If all you have is a 401(k), then you may have limited diversification of your accounts. Putting all of your retirement eggs in one basket can have negative consequences, so it's usually a good idea to diversify the types of investments you have and the types of accounts that you have.

 

The Bottom Line

While 401(k) plans are so named because of the section of the US tax code that authorizes them, that doesn't mean that they are reserved for US citizens. Instead, most non-citizens who live and work in the United States can take advantage of their employers' 401(k) plans. However, there may be additional tax consequences for non-citizens, especially when it comes to distributions from their accounts. So, any non-U.S. citizen will want to make sure that they understand any legal or tax implications before choosing to invest in a 401(k) account.

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