“My question is: does it make sense to start a 401(k) plan this year and invest say $10k in order to get the tax benefits?”-->I guess it depends on the situation( in particular your income level in the US); as a H1B visa holder( non-resident of US but as a resident for only tax pruposes) that invests in your employer 401K plan , I think that you MAY wish to know what can be done with the fund when it comes time to return to your home country. As you can see, your contribution to your defined contribution plan, 401K plan I mean, is usually deducted from your paychecks hopefully to grow into a sizable sum to be drawn upon when you reach your retirement age to provide income and security in your retirement. Your contributions to the plan are tax-deferred. This mean that the contributions, as so called pre-tax dollars, are actually tax deductions that reduce the level of your federal and state income taxes by reducing your AGI and Taxable income as you know.In reality, many H-1 visa holders like yourself, recognizing a good deal when they see one, contribute the maximum amount allowed to the 401K, often working up to several years for a company. Over time, their maximum contributions, combined with the employer's match, swell to amount in excess of $100,000.However, when their work visa expires, then they need to decide what they should do with their 401K funds. If you cash out your 401K account as you go back to your hom eland, then you will be subject to 10% of early withdrawal penalty and federal and state income taxes. If the amount is $100,000 then your tax liability ‘d be $55,000; $10,000 early withdrawal penalty(10%*$100,000) and your federal tax liability’ be $35,000( I assume that your federal tax bracket is 35% as your income level is high; 35%*$100,000) and your state tax liability ‘d be $10,000(I assume that your state tax rate is 10%; 10%*$100,000). So as I said, it can get as high as 40%~55% in some of the high tax states like Massachusetts and California. That is a huge tax burden to pay, one that should be carefully considered before you decide to take the money and run.
“ Next year, I would plan to withdraw it and pay the penalty and taxes. Will I still gain by doing this?”--->You r withdrawal comes at a STEEP price as said above DUE to heavy taxes. It depends on your income level and holding period. There are alternatives, however. First, as long as your 401K fund balance is high enough, many 401K custodians will allow you , as an employee, to keep the 401K fund open with the custodian, even after you have left the original job and returned to your home country. While you can no longer contribute to the 401K fund, it can continue to grow while under the custodian's management in the US, and you can eventually access the funds when you turns 59.5 years of age. While income taxes will be levied upon withdrawal, the Early Withdrawal Penalty no longer applies and, with proper tax management, the tax impact can be held to a minimum.For example, you can and should roll your 401K fund into a traditional rollover Individual Retirement Account( by letting your 401K plan trustee directly rollover to IRA) Such an account can be open early, several months prior to the employee's planned return to the home country.However, unfortunately, most 401K custodians require that you terminate your 401K plan when you leave your employment. This is when you decide to take the money,often without being aware of the tax consequences of that decision. By law, the custodian MUST withhold 20% of the distribution as a down payment on the income tax due. Some states also require a smaller withholding for the state tax liability, so you only get about 75% of the money in the 401K. However, that 20% withholding is normally not enough to cover the eventual tax bill as said above.
“What is the optimal amount to invest to get the best tax benefit? Next year, I will be a non resident.”---->It’d be tough question to accurately find out the optimal amount to be invested to the 401K plan to get the best tax benefit. It depends on the many variables .i.e, holding period, income level, or tax rates or etc. Please contact your retirement planner.