Taxable Brokerage Account Vs. 401K [India ex-pat working in US]

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Topic Author
sbogle
Posts: 2
Joined: Fri Aug 02, 2019 7:38 pm

Taxable Brokerage Account Vs. 401K [India ex-pat working in US]

Post by sbogle »

Hi,

I'm an Indian, currently working in the US on a Visa. Currently investing in 401k with Vanguard through my company. Considering future uncertainty, If I invest in Roth IRA now and leave the US after 15/20 years, I'll have to pay taxes on the gains in India. So, I was considering to open a taxable brokerage account. My questions:

- Is a taxable brokerage account has any advantage over 401k?
- Currently investing in VINIX and VTIAX in 401k. I would invest in VTWAX or VTIAX and VTSAX if I open a taxable brokerage account. Is there any better way to invest in these funds so I'll pay fewer taxes every year?
- Is there any way to compare 401K and individual accounts?

Thank you for your help.
codedude
Posts: 69
Joined: Thu Jan 26, 2017 9:15 pm

Re: Taxable Brokerage Account Vs. 401K [India ex-pat working in US]

Post by codedude »

sbogle,

Your premise that Roth IRAs will be taxable in India once you return to India is not correct. When someone moves to India, they are a RNOR - resident not ordinarily resident foe 2-3 years depending on number of days resident. During this time, only income from within India is taxed. Any assets overseas are not taxed. Once someone becomes a resident, global income will be taxed. So one could withdraw Roth IRA contributions before becoming a resident.
Topic Author
sbogle
Posts: 2
Joined: Fri Aug 02, 2019 7:38 pm

Re: Taxable Brokerage Account Vs. 401K [India ex-pat working in US]

Post by sbogle »

I didn't know that. Thank you, CodeDude, very much for that info. But help me understand, assuming that if I leave around 45 years of age, I will have RNOR status until 48. If I withdraw money before 59.5 from my Roth IRA, I'll have to pay taxes as well as penalty. If I wait until 59.5 to evade taxes and penalty, I'll have to pay taxes in India? In that case, how does the numbers work in your point of view? Consider an example of maxing out each year from now and I'm 27 now. Let's say it grows around 8-10%. How can I compare a Roth IRA and an individual brokerage account? How about a 401k? What would be an ideal choice for me?
TedSwippet
Posts: 3176
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Taxable Brokerage Account Vs. 401K [India ex-pat working in US]

Post by TedSwippet »

sbogle wrote: Sat Aug 03, 2019 12:17 amIf I withdraw money before 59.5 from my Roth IRA, I'll have to pay taxes as well as penalty. ... How can I compare a Roth IRA and an individual brokerage account? How about a 401k?
If you plan to cash in the entire 401k or IRA before age 59.5, the aim of the game here is to either minimise or offset the 10% (plus any added state) early withdrawal penalties from retirement accounts.

If your employer offers a useful 401k match, that can argue for using it even if you face a penalty on early withdrawals. All you need to do here is compare your contribution and match after tax and early withdrawal penalty with the result of taking the salary (without match) directly.

Otherwise, a Roth IRA beats a tIRA or pre-tax 401k, because with a Roth you only pay the early withdrawal penalty on the gains rather than on the full contributions. An ordinary taxable account can beat both though, as it has no early withdrawal penalties. Here you have to compare the effect of allowing gains to roll up tax-deferred. Over the longer term the IRA or 401k might win; over very short terms, clearly not.

The other option, of course, is to hold the 401k or IRA to age 59.5 and put up with whatever non-US tax hassles this creates. Again, here you have to project future results to assess the non-US and then any later US tax damage. I am not a US citizen or resident, but I have a 401k that I still hold from working in the US more than a decade ago. For me, holding it makes sense. If you keep it though, you need to be on constant watch for political risk. Congress is always keen to pick the pockets of non-voters.

Given this framework, you should be able to project the best fit for your circumstances. My own personal opinion is that if you don't expect to stay in the US for a long period (and 15 to 20 years is perhaps 'long'), then unless there is a good employer match, using US retirement accounts is more hassle than it is worth. And at the other extreme, you might find your retirement savings ravaged by the US's horrible 'exit tax' if you leave the US and surrender a green card; this too argues against 401ks and IRAs for people who do not expect to retire in the US.
codedude
Posts: 69
Joined: Thu Jan 26, 2017 9:15 pm

Re: Taxable Brokerage Account Vs. 401K [India ex-pat working in US]

Post by codedude »

sbogle,

A lot of things can happen in 15-20 years. It is difficult to optimize for a scenario so far out that may or may not materialize.

Just use the Bogle heads wiki and optimize for these 15-20 years and revisit when you are 2-3 years out.
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