H-1B Retirement Strategy: 401(k), Roth IRA, and the Exit Tax Trap

If you’re working in the United States on an H-1B visa, you’ve likely encountered a puzzling financial reality: every piece of retirement advice you read assumes you’ll spend your entire working life and retirement in the same country. But your situation is fundamentally different. You might stay in America for decades, eventually obtaining a Green Card and citizenship. Or you might return to your home country next year, taking your retirement savings with you across international borders.

This uncertainty isn’t just a minor complication—it transforms the entire calculus of retirement planning. The question of whether to prioritize your employer’s 401(k) plan or an Individual Retirement Account (IRA) becomes intertwined with international tax treaties, immigration timelines, and estate planning considerations that most Americans never need to think about.

This guide cuts through the complexity to provide a practical framework for H-1B professionals. Whether you’re a software engineer in Silicon Valley, a finance professional on Wall Street, or a researcher at a university, you’ll find actionable strategies tailored to your cross-border reality.

The central insight: While the 401(k) employer match offers an unbeatable mathematical advantage during your working years in America, the rigidity of 401(k) plans after you leave the country often makes a strategic pivot toward IRAs essential for maintaining liquidity, claiming treaty benefits, and keeping your accounts accessible from abroad.

Part One: Understanding Your Retirement Account Options

Before diving into strategy, let’s establish a clear understanding of the two primary retirement vehicles available to you: the employer-sponsored 401(k) and the Individual Retirement Account (IRA). While both offer tax advantages, they differ significantly in contribution limits, flexibility, and cross-border implications.

The 401(k): Your Primary Accumulation Engine

The 401(k) is the workhorse of American retirement savings. It’s offered through your employer and allows you to defer a significant portion of your salary directly into investments before taxes are calculated. The distinguishing feature that makes the 401(k) uniquely powerful is the employer match—essentially free money added to your account based on your own contributions.

For 2025, the IRS allows you to contribute up to $23,500 of your own salary into a 401(k). If you’re 50 or older, you can add an additional $7,500 in catch-up contributions. Looking ahead to 2026, these limits increase to $24,500 and $8,000 respectively.

Perhaps most notably, the SECURE 2.0 Act introduced a “Super Catch-Up” provision allowing workers aged 60-63 to contribute an additional $11,250 starting in 2025—a recognition that many people need to accelerate their savings in the final stretch before retirement.

When you factor in employer contributions and profit-sharing, the total amount that can flow into your 401(k) reaches $70,000 in 2025 and $72,000 in 2026. This creates opportunities for sophisticated strategies like the “Mega Backdoor Roth,” where after-tax contributions up to this limit are converted to Roth status, shielding substantial wealth from future taxation.

The IRA: Flexibility in a Smaller Package

Individual Retirement Accounts operate on a more modest scale but offer something the 401(k) cannot: complete control over your investments and choice of custodian. For 2025 and 2026, the contribution limit for both Traditional and Roth IRAs is $7,000, with an additional $1,000 available for those 50 and older.

Here’s where it gets complicated for H-1B holders: if you participate in your employer’s 401(k), your ability to deduct Traditional IRA contributions begins phasing out at relatively modest income levels. For single filers in 2025, the deduction phases out between $81,000 and $91,000 of Modified Adjusted Gross Income. For married couples filing jointly, the phase-out range is $129,000 to $149,000.

Given that H-1B positions typically command salaries well above these thresholds, most H-1B holders cannot claim a tax deduction for Traditional IRA contributions. This effectively narrows the practical choice to either the Roth IRA (if your income qualifies) or the “Backdoor Roth”—a strategy where you make a non-deductible Traditional IRA contribution and immediately convert it to Roth.

Side-by-Side Comparison: 401(k) vs. IRA

The following table summarizes the key structural differences between these two account types for the 2025-2026 tax years:

The Math That Matters: Why the Match Is Non-Negotiable

From a purely quantitative perspective, the 401(k) employer match creates an advantage that no other investment vehicle can match. Consider this scenario:

Your employer offers a 100% match on contributions up to 6% of your salary. If you earn $150,000 and contribute $9,000 (6%), your employer adds another $9,000. That’s an immediate 100% return on your money—before any market gains.

Even in the worst-case exit scenario where you face a 30% withholding tax plus a 10% early withdrawal penalty (more on this later), that initial doubling of your capital means you still come out ahead. This is why contributing at least enough to capture the full employer match should be the mathematical baseline of any H-1B holder’s financial plan.

Part Two: Understanding Your Tax Residency Status

The prioritization of retirement accounts is inextricably linked to your tax residency status. Here’s a critical distinction that trips up many H-1B holders: the U.S. tax code does not strictly align with immigration status. You’re a “non-immigrant” for visa purposes, but you’re typically a “Resident Alien” for tax purposes. This distinction dictates how your contributions and worldwide income are taxed.

The Substantial Presence Test

H-1B holders generally qualify as Resident Aliens for tax purposes by meeting the Substantial Presence Test (SPT). This test aggregates your days of physical presence in the United States according to a weighted formula:

• All days present in the current year, plus
• One-third of the days present in the first preceding year, plus
• One-sixth of the days present in the second preceding year

If this sum equals or exceeds 183 days, you’re taxed on your worldwide income, just like a U.S. citizen.

What this means for retirement planning: As a Resident Alien, you enjoy the standard deduction ($15,000 for singles in 2025, adjusted annually) and access to “Married Filing Jointly” tax brackets. This lower effective tax rate during your accumulation years enhances the value of pre-tax 401(k) contributions compared to Non-Resident Aliens, who cannot claim the standard deduction and face less favorable tax schedules.

The Dual-Status Complication

Complexity arises in the year you arrive in the U.S. and the year you leave. If you arrive in October or depart in March, you may not meet the Substantial Presence Test for that calendar year, making you a “Dual-Status Alien”—classified as a resident for part of the year and a non-resident for the remainder.

The departure trap: In the year of permanent departure, if you leave the U.S. before meeting the SPT threshold, you may revert to Non-Resident Alien status for the entire year unless you utilize special elections. This can impact the deductibility of IRA contributions made earlier in that year.

Filing nuance: Dual-status returns require filing a Form 1040 (for the resident portion) with a Form 1040-NR (for the non-resident portion) attached, or vice versa. Correctly timing your 401(k) contributions to occur during the “resident” portion ensures they offset income taxed at graduated resident rates rather than income subject to flat withholding.

Part Three: The Repatriation Event — What Happens When You Leave

The critical divergence in 401(k) vs. IRA prioritization occurs when analyzing the exit strategy. When you return to your home country and cease to be a U.S. tax resident, the taxation of your retirement assets shifts dramatically—from the domestic graduated income tax regime to what’s known as the Section 1441 Withholding Regime.

The 30% Default Withholding Rule

Upon becoming a Non-Resident Alien (NRA), distributions from U.S. retirement plans are classified as U.S.-sourced Fixed, Determinable, Annual, or Periodical (FDAP) income.

The rule: Absent a tax treaty, the IRS mandates a flat 30% withholding tax on the gross distribution amount. This is often a “final” tax, meaning no deductions are allowed to offset it.

The early withdrawal penalty: Your residency status does not exempt you from the 10% early withdrawal penalty if you access funds before age 59½.

The cumulative hit: An H-1B holder who cashes out a $100,000 401(k) upon returning to their home country at age 35 would effectively receive only $60,000:

• $30,000 withheld for federal tax
• $10,000 withheld as early withdrawal penalty

This 40% reduction represents the worst-case baseline against which all other strategies must be measured.

Why the IRA Offers Superior Exit Flexibility

While tax law applies similarly to both 401(k)s and IRAs, the IRA offers dramatically better logistical flexibility for non-residents.

401(k) limitations: Corporate 401(k) plan administrators (like Fidelity NetBenefits or Vanguard Institutional) are designed for domestic employees. They often lack the sophisticated systems to handle:

• Foreign addresses
• International wire transfers
• Treaty-based withholding claims via Form W-8BEN for individual participants

Some plans may even force a “distributable event” liquidation if your account balance is low or if plan rules don’t support non-resident participants.

IRA advantages: Retail brokerages like Interactive Brokers and Charles Schwab are accustomed to servicing international clients. They allow account holders to submit Form W-8BEN to claim lower treaty withholding rates (if applicable) and are far less likely to force-close accounts solely due to a foreign address.

Strategic implication: Rolling your 401(k) assets into an IRA at an expat-friendly custodian before or immediately upon departure is a critical step to preserve capital and ensure you can claim any treaty benefits available to you.

Part Four: International Tax Treaties — The India and China Deep Dive

The “IRA vs. 401(k)” calculus is heavily influenced by the specific bilateral tax treaty between the United States and your country of citizenship. The provisions regarding “pensions,” “lump sums,” and “other income” vary significantly, fundamentally altering the prioritization logic.

United States – India Tax Treaty

For the substantial population of Indian H-1B professionals, the treaty presents specific challenges regarding lump-sum withdrawals.

Periodic Payments vs. Lump Sums

Periodic payments: Article 20 of the U.S.-India treaty dictates that private pensions and annuities are taxable only in the country of residence. If an Indian resident receives monthly 401(k) or IRA payments in retirement, the U.S. should withhold 0%, and the income is taxed solely in India.

The lump sum vulnerability: The IRS Technical Explanation clarifies that the term “pension” implies periodic payments. A single lump-sum withdrawal does not qualify as a pension under Article 20. Consequently, it falls under Article 23 (Other Income).

The Saving Clause: Under the treaty’s Saving Clause, the U.S. preserves its right to tax its citizens, residents, and often former long-term residents as if the treaty were not in effect.

The result: A lump-sum 401(k) withdrawal by an Indian resident typically faces:

• Full 30% U.S. withholding
• Plus 10% penalty if withdrawn before age 59½
• The Indian resident must then claim a Foreign Tax Credit in India via Form 67 to mitigate double taxation, but the U.S. tax bite is immediate and severe

The RNOR Window: A Strategic Opportunity

A unique opportunity exists for Indian returnees who qualify as Resident but Not Ordinarily Resident (RNOR). For a transitional period (typically 2-3 years) after returning to India, RNORs are not taxed by India on foreign-sourced income unless it is derived from a business controlled in India.

The arbitrage strategy: An H-1B holder could return to India, establish RNOR status, and then liquidate their U.S. retirement accounts. They would pay the U.S. tax (30% + 10% if early) but zero Indian tax. This window offers a unique tax planning opportunity that requires careful timing.

Section 89A Deferral

Historically, India taxed the accrual (growth) of foreign retirement accounts annually—a nightmare for compliance. The introduction of Section 89A allows Indian residents to defer Indian taxation on U.S. 401(k)/IRA income until actual withdrawal, harmonizing the tax events between the two nations. Filing Form 10-EE is mandatory to claim this relief.

United States – China Tax Treaty

The treaty landscape for Chinese H-1B holders offers different—and generally more favorable—protections.

Article 17 Protections

The U.S.-China treaty provides that pensions and other similar remuneration are taxable only in the state of residence.

Broader interpretation: Unlike the India treaty, the language in the China treaty is often interpreted more broadly to protect retirement distributions from U.S. source taxation, provided the recipient is a resident of China.

Potential 0% U.S. tax: A Chinese resident providing a valid Form W-8BEN claiming Article 17 benefits could theoretically receive U.S. retirement distributions free of the 30% withholding.

Important distinction: Government pensions (for example, if you worked at a state university) are treated differently under Article 18. These are usually taxable only in the paying state (the U.S.), regardless of where you reside.

Dividend Withholding in Taxable Accounts

For taxable brokerage accounts (non-retirement), the U.S.-China treaty reduces the withholding tax on dividends from 30% to 10%. This makes taxable accounts relatively more efficient for Chinese residents compared to Indian residents, who face 25% under their treaty.

Treaty Comparison Summary

Part Five: State-Level Taxation — The Geographic Traps

While federal treaties govern international taxation, state tax laws operate independently and can create unexpected liabilities for H-1B holders departing from high-tax jurisdictions. If you live in California, New York, or New Jersey, pay close attention to this section.

California: The Aggressive Sourcer

California taxes residents on worldwide income but is restricted by federal law regarding non-residents.

The protection: Public Law 114-126 prohibits states from taxing the retirement income of former residents if the individual is now a non-resident. This protection applies to “qualified plans” including 401(k)s and IRAs. For standard H-1B holders with 401(k)s, moving to India or China generally severs California’s taxing right on those assets.

The warning: California does not recognize the step-up in basis for HSAs or foreign accounts, and it may aggressively audit “residency termination” dates. You must clearly establish your new domicile outside California to ensure your 401(k) withdrawal isn’t re-characterized as California-source income. Document your departure thoroughly.

New York: The Lump Sum Tax

New York imposes specific sourcing rules that can entrap unwary professionals.

Form IT-230: New York levies a “Separate Tax on Lump-Sum Distributions.” While federal law protects qualified plan distributions for non-residents, New York’s tax code contains mechanisms to tax lump-sum distributions derived from NY employment if they don’t fall strictly under the federal exemption criteria.

The “Convenience of the Employer” rule: New York aggressively taxes income earned by non-residents if they work for a NY-based employer, unless the work is performed outside NY out of necessity. While this primarily impacts wages, it complicates the residency termination analysis for H-1B holders who worked remotely before departure.

New Jersey: The Pension Exclusion

New Jersey offers a “Pension Exclusion” for residents aged 62 or older, allowing them to exclude up to $100,000 of pension income if their total income is under $150,000.

Non-resident treatment: For non-residents, New Jersey generally does not tax pension income sourced to NJ employment, aligning with federal protections. However, contributions to 401(k)s were historically taxable for state purposes (though this has aligned more with federal rules), meaning the basis in your NJ 401(k) might be higher than your federal basis—potentially allowing for a tax-free return of capital portion upon withdrawal.

Part Six: The Estate Tax Cliff — A Hidden Danger

A frequently overlooked but potentially catastrophic risk for H-1B holders is the U.S. Federal Estate Tax. Unlike income tax, which uses the Substantial Presence Test, estate tax relies on domicile—and H-1B holders are often classified unfavorably.

The Non-Domiciled Trap

H-1B holders are often considered “Non-Domiciled” for estate tax purposes because the visa is strictly “non-immigrant” and temporary. You lack the permanent intent to remain that defines domicile.

The exemption gap:

• U.S. citizens and domiciled residents: $13.61 million lifetime exemption (2024)
• Non-Resident Aliens and non-domiciled residents: $60,000 exemption

This isn’t a typo. The difference is staggering.

What This Means in Practice

Assets held within U.S. 401(k)s and IRAs (U.S. stocks, mutual funds) are considered U.S.-situs property subject to estate tax.

The scenario: An H-1B holder accumulates $500,000 in a 401(k). They return to India or China and pass away. The U.S. IRS asserts taxing rights over the 401(k).

The calculation:

• First $60,000: Exempt
• Remaining $440,000: Subject to estate tax rates up to 40%
• Estate tax owed: Approximately $176,000

The heirs receive the funds only after this substantial tax is paid.

No Treaty Relief for India or China

While some treaties (like the U.S.-Canada treaty) allow for a “pro-rata unified credit” that increases the exemption based on the ratio of U.S. assets to worldwide assets, neither India nor China has an estate tax treaty with the United States.

Strategic implications:

• Consider capping U.S.-situs retirement account exposure
• Explore term life insurance (generally not U.S. situs for non-residents) to cover potential estate tax liability
• Consider moving funds to non-U.S. situs assets upon departure

Part Seven: Custodial Logistics — Keeping Your Accounts Alive

Beyond taxes, the practical ability to manage your account from abroad dictates the choice of vehicle. When you update your address to a non-U.S. location, financial institutions must comply with strict Know Your Customer (KYC) and FATCA regulations—and their responses vary dramatically.

Brokerage Policies for Non-Residents

The Rollover Imperative

For H-1B holders, the IRA is superior logistically because it is portable. An employee tied to a corporate 401(k) plan is at the mercy of that plan’s specific administrator. By rolling 401(k) assets into an IRA at an expat-friendly custodian (like Schwab or Interactive Brokers) before leaving the U.S., you ensure:

• Continued control over your assets
• Direct management of tax compliance and treaty claims
• No risk of forced liquidation due to address changes
• Ability to make strategic withdrawal decisions based on your home country’s tax calendar

Part Eight: The Strategic Decision Framework

Based on the convergence of contribution mathematics, tax treaty law, custodial logistics, and estate planning, here is a prioritized decision matrix for H-1B holders.

Priority Level 1: The 401(k) Match (Essential)

Recommendation: Contribute to the 401(k) up to the employer match percentage.

Rationale: The match is the only financial mechanism powerful enough to mathematically neutralize the exit tax risks. A 100% match is an immediate 100% return. Even if you face a 30% withholding tax and 10% penalty upon exit (40% total loss), the initial doubling of capital ensures you remain net positive.

Target: Typically 3-6% of salary, depending on your employer’s matching formula.

Priority Level 2: Health Savings Account (If Eligible)

Recommendation: Maximize your HSA if enrolled in a High Deductible Health Plan.

Rationale: HSAs offer a triple tax advantage:

• Contributions are tax-deductible
• Growth is tax-free
• Withdrawals for qualified medical expenses are tax-free

Unlike 401(k)s, HSAs don’t have an early withdrawal penalty when used for medical expenses—which can be incurred anywhere in the world, including India or China.

State warning: California and New Jersey do not recognize the federal HSA deduction, taxing both contributions and earnings at the state level.

Priority Level 3: Roth IRA (Liquidity Layer)

Recommendation: Maximize Roth IRA contributions ($7,000).

Rationale: The Roth IRA allows for tax-free, penalty-free withdrawal of contributions (principal) at any time. This provides a critical liquidity bridge for H-1B holders who may face sudden job loss or need relocation funds. While earnings are subject to the 5-year rule and age 59½ restrictions, access to principal makes this superior to the unmatched 401(k) for those with uncertain residency intent.

If your income exceeds direct Roth IRA limits, execute the Backdoor Roth strategy.

Priority Level 4: Unmatched 401(k) vs. Taxable Brokerage

This is where your future intent matters most.

Scenario A — Likely to Stay (Green Card Track): Prioritize the unmatched 401(k) (up to $23,500). The tax-deferred growth over decades outweighs liquidity restrictions.

Scenario B — Likely to Depart (Within 5 Years): Prioritize a taxable brokerage account.

• Long-term capital gains rates (0%, 15%, 20%) are generally lower than the 30% flat withholding on 401(k) withdrawals for non-residents
• For Chinese residents, the treaty rate on dividends is only 10%
• Money is accessible anytime without the 10% penalty
• Upon becoming a non-resident, you’re generally not subject to U.S. capital gains tax on stocks (only dividends), allowing tax-efficient portfolio liquidation

Decision Matrix by Profile

*Indian returnees may prioritize unmatched 401(k) if planning to use the RNOR window or Section 89A deferral strategies.

Part Nine: Pre-Departure Checklist

If you’re planning to leave the United States, execute these steps to protect your retirement assets:

6+ Months Before Departure

1. Research your custodian’s non-resident policy. Call your 401(k) administrator and brokerage directly. Ask specifically: “What happens to my account if I change my address to [your country]?”
2. Open an IRA at an expat-friendly custodian (Schwab or Interactive Brokers) while you still have a U.S. address.
3. Initiate 401(k) to IRA rollover if your plan allows in-service rollovers, or prepare to execute immediately upon employment termination.
4. Review your country’s tax treaty provisions for pensions vs. lump sums. Consult a cross-border tax professional.
5. Calculate your estate tax exposure. If your U.S. retirement assets exceed $60,000 (the non-resident exemption), consider life insurance or reallocation strategies.

1-3 Months Before Departure

6. Complete any Roth conversions you’ve been considering. Your U.S. tax bracket may be lower in your partial departure year.
7. Document your residency termination for state tax purposes, especially if leaving California or New York.
8. Gather tax records including basis calculations for any after-tax contributions.

After Departure

9. Update your address with your chosen expat-friendly custodian.
10. File Form W-8BEN with your brokerage to claim any applicable treaty benefits.
11. Establish your new tax residency in your home country and understand local reporting requirements for foreign retirement accounts.
12. Consider the timing of withdrawals based on both U.S. and home country tax calendars (e.g., the RNOR window for Indian returnees).

Conclusion: Building a Defensive Architecture

For the H-1B professional, the “IRA vs. 401(k)” debate is not a binary choice but a tiered liquidity strategy. The 401(k) is the superior accumulation vehicle only when subsidized by an employer match or protected by long-term U.S. residency. For the professional whose future address remains uncertain, the IRA (specifically the Roth) and taxable brokerage accounts offer the necessary agility to navigate the frictional costs of cross-border relocation.

The optimal strategy requires building a “defensive architecture”:

1. Secure the employer match — This is free money that mathematically overcomes exit penalties
2. Build a liquid Roth core — Access to principal provides emergency flexibility
3. Consolidate assets into expat-friendly custodians before departure
4. Cap U.S.-situs exposure below the estate tax threshold unless comprehensive life insurance strategies are in place
5. Understand your specific treaty and plan withdrawal timing accordingly

By aligning your investment vehicles with your immigration realities, you transform regulatory complexity into a sophisticated wealth preservation framework. The uncertainty of your H-1B status doesn’t have to mean uncertainty in your financial future—it simply requires a more thoughtful approach than the standard American playbook provides.

Disclaimer: This guide provides general information for educational purposes and should not be construed as tax, legal, or financial advice. Tax laws and treaty interpretations change frequently. Consult qualified professionals in both the United States and your home country before making financial decisions.