Foreign national currently working in U.S. & investing in 401(k) plan: How will taxes apply?
The 401(k) contribution is Federal tax free, when you make the contribution, and most likely State too.  I believe that is true for California, specifically. There was a court case some years ago about people making 401(k) or IRA contributions in New York, avoiding the New York state income tax.  Then they moved to Florida (no income tax), and took the money out.  New York sued, saying they had to pay the New York income tax that had been deferred, but the court said no.  So you should be able to avoid California state income tax, and then later if you were to move to, for example, Texas (no income tax), have no state income tax liability. At the Federal level, you will have different problems.  You won't have the money; it will be held by the 401(k) trustee.  When you try to access the money (cash the account out), you will have to pay the deferred taxes.  Effectively, when you remove the money it becomes income in the year it is removed. You can take the money out at any time, but if you are less than 59 1/2 at the time that you take it, there is a 10% penalty.  The agreement is that the Feds let you defer paying the tax because it is going to finance your retirement, and they will tax it later.  If you take it out before 59 1/2, they figure you are not retired yet, and are breaking your part of the agreement. Of course you can generally leave the money in the 401(k) plan with your old employer and let it grow until you are 59.5, or roll it over into another 401(k) with a new employer (if they let you), or into an IRA.  But if you have returned to your own country, having an account in the U.S. would introduce both investment risk and currency risk. If you are in another country when you want the money, the question would be where your U.S. residence would be.  If you live in California, then go to, say France, your U.S. residence would still be California, and you would still owe California income tax.  If you move from California to Texas and then to France, your U.S. residence would be Texas.   This is pretty vague, as you might have heard in the Rahm Emanual case -- was he a resident of Chicago or Washington, D.C.?  Same problem with Howard Hughes who was born in Texas, but then spent most his life in California, then to Nevada, then to Nicaragua, and the Bahamas.  When he died Texas, California and Nevada all claimed him as a resident, for estate taxes.  The important thing is to be able to make a reasonable case that you are a resident of where ever you want to be -- driver's license, mailing address, living quarters, and so on.
I can only answer about the U.S. For question 2, I believe the answer is no. If you are a non-resident alien for tax purposes, then only income connected to the U.S. is reported as income on the tax return. Unless there were any non-deductible contributions to your pre-tax IRAs, when you convert to Roth IRA, the entire amount of the conversion is added to your income. So the tax consequence is the same as if you had that much additional U.S. income. If you are a non-resident alien with no other income in the U.S., then the income you have to report on your U.S. tax return will basically consist of the conversion. Non-resident aliens do not have a standard deduction. However, all people have a personal exemption. If we take 2013 as an example, the exemption is $3900 per person. We will assume that you will file as single or married filing separately (non-resident aliens cannot file as married filing jointly). The first $3900 of income is covered by the exemption, and is not counted in taxable income. For single and MFS, the next $8925 of income is taxed at 10%, then next $27325 of income is taxed at 15%, and so on. So if you convert less than the personal exemption amount every year ($3900 in 2013), then in theory you do not pay any taxes. If you convert a little bit more, then some of the conversion will be taxed at 10%, etc. The managers of the 401(k) have to make their money somewhere.  Either they'll make it from the employer, or from the employees via the expense ratio.  If it's the employer setting up the plan, I can bet whose interest he'll be looking after. Regarding your last comment, I'd recommend looking outside your 401(k) for investing.  If you get free money from your employer for contributing to your 401(k), that's a plus, but I wouldn't -- actually, I don't -- contribute anything beyond the match.  I pay my taxes and I'm done with it. The tax consequence is that if you wait until January of 2011 to invest, you won't have the option to sell as a long-term capital gain in 2011.  However, this is not a huge point in practice: If your income this year was very low, but will go up in 2011, you might want to convert some or all of it into a roth ira this year.  This would let you pay the tax on it at your low tax rate for this year, rather than at the likely higher rate when you retire.   An investment consequence is the fact that your money is sitting there, earning a lower expected rate of return than it could be. Not knowing your situation, I can't say how aggressive your holdings will be.  Taking a fairly aggressive portfolio, 9% expected yearly return, and not investing for a month, you lose about .75% on average.  Not huge, but something to consider. Remember that any decision you make here isn't permanent.  If your previous allocation in the 401(k) was 100% in stock funds, you could put it in something like VTI, Vanguard's total US stock market ETF. This person must pay taxes in both the overseas country and in the U.S. This is unusual; generally, only the U.S. demands this. Depending on the specific country, he would likely not be taxed twice as the U.S. generally recognises tax paid in a different country. Note there are some gotchas, though. For example, although Canada has a generally higher tax scheme than the U.S., you may still end up owing tax if you use the Tax-Free Savings Account system in Canada, as that is not recognised in the U.S. As to whether or not this person should form a company, that is far too broad a question. It's going to depend in large part on the tax situations of the countries involved. This person needs to consult an accountant specialising in this situation. That is, on personal versus business tax and on tax involving U.S. citizens. Yes, this person can and indeed must file and pay taxes in the U.S., from outside the U.S. "hello – I am a natural born US citizen; I have worked 35+ years in the United States; I have a 401(k), IRA, Social Security benefits. I have researched the ex-patriot possibilities for several years. I've consulted both accountants and tax attorneys. The long answer is: hire tax consultants/attorneys to try to shelter what assets you can. 401(k), IRA, and Social Security benefits are all taxable worldwide to US citizens. unless you become the citizen of your new country of residence, these taxes are unavoidable. since all of the above assets are considered ""pretax"" to the US government, they are all taxable on distribution whether slowly or in lump sum. the short answer is: ""Hotel California""… ""Relax, said the watchman – we are programmed to receive. You can check out any time, but you can never leave…""" Employer matches (even for Roth 401Ks) are put into traditional 401K accounts and are treated as pre-tax income.  Traditional 401K plans are tax deferred accounts, meaning you won't owe any taxes on it this year, but will have to pay taxes on it when you take the money out (likely after retirement). 401K contributions (including the match) are reported to the IRS and are entered in box 12 on the W2 form. The fact that you are planning to move abroad does not affect the decision to contribute to a 401(k). The reason for this is that after you leave your employer, you can roll all the money over from your 401(k) into a self-directed traditional IRA. That money can stay invested until retirement, and it doesn't matter where you are living before or after retirement age.  So, when deciding whether or not to use a 401(k), you need to look at the details of your employer's plan: Does your employer offer a match? If so, you should definitely take advantage of it.  Are there good investments available inside the 401(k)? Some plans offer very limited options. If you can't find anything good to invest in, you don't want to contribute anything beyond the match; instead, contribute to an IRA, where you can invest in a fund that you like.  The other reason to use a 401(k) is that the contribution limits can be higher. If you want to invest more than you are allowed to in an IRA, the 401(k) might allow that.  In your case, since there is no match, it is up to you whether you want to participate or not. An IRA will allow more flexibility in investing options. If you need to invest more than your IRA limit, the 401(k) might allow that. When you leave your employer, you should probably roll any 401(k) money into an IRA. Any large stockbroker will offer trading in US securities. As a foreign national you will be required to register with the US tax authorities (IRS) by completing and filing a W-8BEN form and pay US withholding taxes on any dividend income you receive.  US dividends are paid net of withholding taxes, so you do not need to file a US tax return.  Capital gains are not subject to US taxes.  Also, each year you are holding US securities, you will receive a form from the IRS which you are required to complete and return. You will also be required to complete and file forms for each of the exchanges you wish to received market price data from. Trading will be restricted to US trading hours, which I believe is 6 hours ahead of Denmark for the New York markets.  You will simply submit an order to the desired market using your broker's online trading software or your broker's telephone dealing service. You can expect to pay significantly higher commissions for trading US securities when compared to domestic securities. You will also face potentially large foreign exchange fees when exchaning your funds from EUR to USD. All in all, you will probably be better off using your local market to trade US index or sector ETFs. As the name says, its for income earned in a Foreign country. If you have been paying US income tax on this while living in the US, nothing is going to change here. You should be informing yourself on how to avoid double taxation in your new country of residence. Passive income earned abroad (dividends, interest) also do not fall under this exemption.  The purpose of the Foreign Earned Income Exclusion is to make it easy for expats who work abroad to avoid double income taxation without going through the complicated process of applying for tax credits. The US is the only industrial country that taxes its residents regardless of where they reside. That is also why it only goes to about $100,000 a year. If you are a high earner, they want to make it more difficult. Also as a side note, since you are going to be abroad for a year. I will point out that if you have more than $10,000 in foreign accounts at any point in the year you need to declare this in an FBAR form. This is not advertised as well as it should be and carries ridiculous penalties for non-compliance. I can't count the number of times I have heard a US expat say that they were unaware of this. "401k plans are required to not discriminate against the non-HCE participants, and one way they achieve this is by limiting the percentage of wages that HCEs can contribute to the plan to the average annual percentage contribution by the non-HCE participants or 3% whichever is higher.  If most non-HCE employees contribute only 3% (usually to capture the employer match but no more),  then the HCEs are stuck with 3%. However, be aware that in companies that award year-end bonuses to all employees, many non-HCEs contribute part of their bonuses to their 401k plans, and so the average annual percentage can rise above 3% at the end of year. Some payroll offices have been known to ask all those who have not already maxed out their 401k contribution  for the year (yes, it is possible to do this even while contributing only 3% if you are not just a HCE but a VHCE) whether they want to contribute the usual 3%, or a higher percentage, or to contribute the maximum possible under the nondiscrimination rules. So, you might be able to contribute more than 3% if the non-HCEs put in more money at the end of the year. With regard to NQSPs, you pretty much have their properties pegged correctly. That money is considered to be deferred compensation and so you pay taxes on it only when you receive it upon leaving employment. The company also gets to deduct it as a business expense when the money is paid out, and as you said, it is not money that is segregated as a 401k plan is. On the other hand, you have earned the money already: it is just that the company is ""holding"" it for you. Is it paying you interest on the money (accumulating in the NQSP, not paid out in cash or taxable income to you)?  Would it be better to just take the money right now, pay taxes on it, and invest it yourself? Some deferred compensation plans work as follows. The deferred compensation is given to you as a loan in the year it is  earned, and you pay only interest on the principal each year. Since  the money is a loan, there is no tax of any kind due on the money when you receive it. Now you can invest the proceeds of this loan and hopefully earn enough to cover the interest  payments due. (The interest you pay is deductible on Schedule A as an Investment Interest Expense).  When employment ceases,  you repay the loan to the company as a lump sum or in five or ten annual installments, whatever was agreed to, while the company pays you your deferred compensation less taxes withheld. The net effect is that you pay the company the  taxes due on the money, and the company sends this on to the various tax authorities as money withheld from wages paid.  The advantage is that you do not need to worry  about what happens to your money if the company fails; you have received it up front.  Yes, you have to pay the loan principal to the company but the company also owes you exactly that much money as unpaid wages. In the best of all worlds, things will proceed smoothly, but if not, it is better to be in this Mexican standoff rather than standing in line in bankruptcy court and hoping to get pennies on the dollar for your work." "There is no penalty for foreigners but rather a 30% mandatory income tax withholding from distributions from 401(k) plans. You will ""get it back"" when you file the income tax return for the year and calculate your actual tax liability (including any penalties for a  premature distribution from the 401(k) plan). You are, of course, a US citizen and not a foreigner, and thus are what the IRS calls a US person (which includes not just US citizens but permanent immigrants to the US as well as some temporary visa holders), but it is entirely possible that your 401(k) plan does not know this explicitly. This IRS web page tells 401(k) plan administrators Who can I presume is a US person?   A retirement plan distribution is presumed to be made to a U.S. person only if the withholding agent: A payment that does not meet these rules is presumed to be made to a foreign person.  Your SSN is presumably on file with the 401(k) plan administrator, but perhaps you are retired into a country that does not have an income tax treaty with the US and that's the mailing address that is on file with your 401(k) plan administrator? If so, the 401(k) administrator is merely following the rules and not presuming that you are a US person. So, how can you get around this non-presumption? The IRS document cited above (and the links therein) say that if the 401(k) plan has on file a W-9 form that you submitted to them, and the W-9 form includes your SSN, then the 401(k) plan has valid documentation to associate the distribution as being made to a US person, that is, the 401(k) plan does not need to make any presumptions; that you are a US person has been proved beyond reasonable doubt. So, to answer your question ""Will I be penalized when I later start a regular monthly withdrawal from my 401(k)?"" Yes, you will likely have mandatory 30% income tax withholding on your regular 401(k) distributions unless you have established that you are   a US person to your 401(k) plan by submitting a W-9 form to them." Would I be taxed at my personal income tax rate upon withdrawal of the   funds for this loan from my professionally managed, balanced 401k (not   Roth funds)? Yes. This is a regular distribution. Why wouldn't you be taxed? What's gifting has to do with anything? If taxable, this would move me to the next higher tax bracket. Depending on your other income - it may, or may not. Whether or not taxable when pulling funds out of the investment   account, when I'm repaid, do I owe Federal tax only on the interest   income portion of repayment funds or on the lump sum & interest   received (all of which which would return to my retirement account in   lump)? Only interest. And you will not return it to your retirement account. Not in a lump and not in installments and not in any other way. "That's a tricky question and you should consult a tax professional that specializes on taxation of non-resident aliens and foreign expats. You should also consider the provisions of the tax treaty, if your country has one with the US. I would suggest you not to seek a ""free advice"" on internet forums, as the costs of making a mistake may be hefty. Generally, sales of stocks is not considered trade or business effectively connected to the US if that's your only activity. However, being this ESPP stock may make it connected to providing personal services, which makes it effectively connected. I'm assuming that since you're filing 1040NR, taxes were withheld by the broker, which means the broker considered this effectively connected income." Unless you started a bank or other kind of a financial institution (brokerage, merchant processor, etc etc), the page you linked to is irrelevant. That said, there's enough in the US tax code for you to reconsider your decision of not living in the US, or at least of being a shareholder of a foreign company. Your compliance costs are going to go through the roof. If you haven't broken any US tax laws yet (which is very unlikely), you may renounce your citizenship and save yourself a lot of money and trouble. But in the more likely case of you already being a criminal with regards the US tax law, you should probably get a proper tax advice from a US-licensed CPA/EA who's also proficient in the Japanese-American tax treaty and expats' compliance issues resolution. "I'm working on similar problem space. There seems to be some working ambiguity in this space - most focus seems to be on more complex cases of income like Dividends and Capital Gains.  The US seems to take a position of ""where the work was performed"" not ""where the work was paid"" for purposes of the FEIE. See this link. The Foreign Tax Credit(FTC) is applied (regardless of FEIE) based on taxes paid in the other Country. In the event you take the FEIE, you need to exclude that from the income possible to claim on the FTC. i.e. (TOTAL WAGES(X) - Excluded Income) There is a weird caveat on TOTAL WAGES(X) that says you can only apply the FTC to foreign-sourced income which means that potentially we are liable for the on-US-soil income at crazy rates.  See this link.. Upon which... there is probably not a good answer short of writing your congressperson."