Abroad in America
As a non-US citizen living and working in the United States, you face many new challenges when it comes to learning and understanding a completely new financial and tax system. Pension plans, taxation of income (both here and abroad), and investments, along with retirement accounts and estate planning considerations, can seem overwhelming. This often leads to inaction and mistakes. The goal of this podcast is to help non-US citizens and cross-border families living and working in America implement effective strategies to take full advantage of the opportunities to create wealth offered to you in the United States, both while you are in America and even once you have left. Sit back and listen as you go behind the scenes with financial planner, author, and speaker Jimmy Miller to learn how to make your time in America as financially rewarding as possible. Be sure to subscribe so you don't miss out on any future episodes. Visit https://www.BaobabWealthAbroad.com for more information and free resources.
Abroad in America
Why “Lower Taxes Today” Can Become a Bigger Problem Later
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
Most people automatically choose the traditional 401(k) when they start working in America.
For expats and foreign nationals, that may be a very expensive mistake.
In this episode of Abroad in America, we break down why many expats working in the U.S. should strongly consider using a Roth 401(k) instead of a traditional tax-deferred retirement account.
While traditional 401(k)s offer an upfront tax deduction, that short-term tax savings can create major tax problems later, especially for people who may eventually leave the United States before retirement age.
We explain the key differences between traditional and Roth 401(k)s, how early withdrawal penalties work, and why many expats unknowingly create future tax liabilities tied to money they may eventually need access to overseas.
You’ll also learn why mobility, future residency uncertainty, and cross-border financial planning can make Roth accounts significantly more attractive for foreign nationals living and working in America.
Through practical examples, we compare how two expats with the exact same salary and savings habits can end up with very different financial outcomes depending on whether they choose traditional or Roth contributions.
If you’re an expat working in the United States, this episode could completely change the way you think about your retirement plan.
In This Episode
• The difference between traditional and Roth 401(k)s
• Why traditional 401(k)s create future tax liabilities
• Why expats face unique retirement planning risks
• How early withdrawal penalties work
• Why the IRS still has a claim on tax-deferred retirement money
• How Roth 401(k)s can provide more flexibility for expats
• Why future residency uncertainty matters in retirement planning
• How taxes and penalties can reduce traditional 401(k) balances
• The importance of long-term tax planning for foreign nationals
• Why mobility and international living change retirement strategy
• How employer matching contributions work
• What expats should know about vesting schedules
• Why many workers choose traditional accounts by default
• Why “saving taxes today” is not always the best long-term strategy
• How Roth accounts may create more future financial freedom
What’s Coming Next
• Roth conversions explained simply
• The Roth conversion five-year rule
• How to potentially fix past traditional 401(k) decisions
• Cross-border retirement planning concepts
• Tax-efficient retirement strategies for expats
The only financial podcast is an American expert living in America. Where you go behind the scenes with financial planner, author, and speaker, Jimmy Miller, to learn how to make your time in America.
SPEAKER_01Hey everyone, welcome back to Abroad in America. I'm your host, Jimmy Miller. Today we're talking about something that sounds boring until it costs you thousands of dollars. We're talking about your 401k at work. More specifically, we're talking about why, if you're a foreign national working in America, you should probably be using the Roth 401k instead of the traditional tax-deferred 401k. And I know when you start a new job in America, HR gives you a mountain of forms, benefit logins, passwords, and acronyms. Somewhere in that pile, you're asked, do you want traditional or Roth 401? And most people end up picking traditional because it lowers their taxes today, or it's what their co-workers do and recommend. And for Americans who plan to stay in America forever, maybe that can make sense in some cases. But for expats, well, that's a different story. Let's start with the basic difference between the two types of 401 accounts. A traditional 401k means you put money in before paying income tax, so you get a tax break today, which sounds nice. But later, when you take the money out, every dollar is taxable as ordinary income, contributions, growth, everything. A Roth 401 works the opposite way. You pay tax today when you put the money in after tax. You don't get the immediate tax break, but the money can grow tax-free and if handled properly, come out tax-free later. So the traditional plan says, don't pay tax now, pay tax later. And the Roth says, pay tax now and be done with it. And for many expats in America, being done with the IRS is exactly the point. Now here's the problem with the traditional 401. That tax deduction feels like a gift, but it isn't really a gift. It's more like a loan. In my book, Divorce the IRS, I describe traditional retirement contributions as borrowing money from the IRS. You avoid tax today, but the IRS now has a future claim on that money, and not just on the original amount you contributed, but also on the growth. So if you put in $10,000 into a traditional 401, you didn't really save $10,000 that's fully yours. You saved money that has an IRS lien attached to it. And one day, when you take it out, the IRS will want its share. Now, for an expat, this gets even more important because many foreign nationals do not plan to stay in America forever. You may be here for three years, five years, or even seven years. Maybe you're on an assignment, maybe you're here for career growth, maybe you're just here for an adventure. But eventually you may want to go home or to another country. And when that happens, you may look at your 401 and think, great, I've saved all this money. Now I'd like to take it with me. And that's when the traditional 401 can turn ugly. If you withdraw money from a traditional 401k before you're age 59 and a half, you generally owe income tax plus a 10% early withdrawal penalty. And the 10% penalty is also calculated on your entire balance, not just on what you put in. So there's a 10% penalty on all the interest and growth you made in your accounts as well. Ouch. So now the tax breaks you enjoyed in your paycheck while working comes back around with friends. Federal tax, probably state tax, as 43 of the U.S. states have a state tax, and early withdrawal penalties. This is how expats can end up losing a huge chunk of their account when they leave America. And the painful part is this the original tax savings often didn't feel that big when they received it in your paycheck. It was just a little extra in each paycheck. Most people don't even save that little extra, they just spend it. So they get a tiny benefit today that they don't even realize because they spend it, but create a much larger tax problem later. That's not planning. That's procrastination with a tax form and a problem. Now compare that with the Roth 401k. With the Roth, you already paid tax before the money went in, so your contributions are after tax money. That means if you leave America and you need flexibility, the Roth is usually much cleaner. You're not dragging the same tax-deferred liability around with you. Yes, there are still rules. Yes, the growth is subject to taxes and penalties if withdrawn too early or handled incorrectly. And yes, you should still work with a cross-border tax professional before taking distributions. But the key point is this. With the Roth, the IRS does not own part of your contributions. You paid the toll already, and that can make a massive difference when your American adventure ends. So let me put this into a simple example. Imagine two expats come to America and they work for the same company. They both earn $100,000 per year, they both contribute 10% of their salary to the company retirement plan. They both stay for three years, they both receive the same employer match, they both invest in the same investment fund within the plan. Only one chooses traditional and the other chooses Roth. At the end, they'll have similar looking balances, but when they leave America before 59 and a half years old, the traditional account may be hit with income tax and penalties on the full withdrawal. The Roth account is usually far more favorable because the contributions have already been taxed. It's only the growth that will be subject to the tax and penalties. Same job, same salary, same savings rate, very different take-home results. This is why the decision matters so much. Now, some people will say, but Jimmy, I want the tax savings now. And I get it, everybody wants lower taxes today. But the goal of your retirement account is not to create a slightly nicer paycheck this month. The goal is to maximize how much of your money you actually get to keep. And for expats, this is even more important because your timeline may be shorter, your tax situation may be more complex, and your future country or residence may be uncertain. You don't know where you'll be living in 10 years, you don't know what your tax rate will be then. You don't know whether you'll stay in America long enough to use the account the way Americans typically do. So why build your plan around later? The traditional 401k is a later account. The Roth 401k is a handle it now and move on account. And for expats, handle it now is often the smarter philosophy. There's another issue here too: currency and mobility. Expats live mobile lives. You may move countries again, you may retire somewhere else. You may want to consolidate assets later, you may not want a future tax bill from a country you no longer live in. A Roth account gives you a cleaner planning option. It gives you more certainty, and financial certainty is valuable when your life already crosses borders. Now let me be clear. If you know you're staying in America permanently and you're in an unusually high tax bracket today, or if there are treaty issues with your home country, you probably need personalized advice. But for the typical foreign national working in America, temporarily or semi-temporarily, the Roth 401k is usually the better default. And please don't misunderstand one thing. You should still pay attention to the employer match. If your company gives you matching money, that's free money and you should take it. Take it if you can. But you may have to stay long enough to become vested in the employer match, so read the rules. But your own contributions are always going to be yours. The important choice is where you save your salary deferrals, traditional or Roth. And for most expats, I want you to strongly consider Roth. Because the traditional 401k gives you a tax break today, but it may also create a tax trap tomorrow. The Roth 41K asks you to pay the tax today, but it can give you flexibility, control, and potentially tax-free income later. And if there's one theme we keep coming back to on this podcast, it's this. America offers incredible financial opportunities, but only if you understand the rules. The 401k is one of those opportunities. Used correctly, it can help you build wealth while you're here. Used incorrectly, it can become one of the more expensive surprises when you leave. So before you click the default button in your company benefit portal, pause and ask yourself, am I staying in America forever? Will I need access to this money before 59 and a half? Am I just taking the traditional option because I like the tax break today? Am I accidentally borrowing from the IRS? Because sometimes the best financial move is not the one that saves you tax this year. Sometimes the best move is the one that gives future you the most freedom. And for expats in America, that often means choosing the Roth 401. Now that's it for today's episode of Abroad in America. If you're working in the US and your company offers a Roth 401, take a closer look. Don't just pick traditional because everyone else does. And as always, talk with a qualified financial advisor and tax professional who understands cross-border planning before making big decisions. In the next episode, we'll explore the Roth conversion and the five-year rule, just in case you have already been putting money away tax-deferred in your traditional 401k plan, and you're not sure if you can fix that problem. So stay tuned for that episode to learn how you can potentially undo any mistakes you may have already done.
SPEAKER_00Until next time, stay curious, stay intentional, and keep exploring.com. And subscribe to the blog to stay up to date on Instagram. Don't forget to subscribe and never miss an app. This podcast is designed for general education purposes only and shouldn't be taken as legal investment or tax advice. You should seek out a qualified tax professional or licensed financial advisor to determine what is best for your personal situation.