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Each situation is different, this article was written for informational purposes only and the opinions mentioned here do not constitute financial advice. This article will give you an overview and is not necessarily exhaustive.
One of the first things I look at in my clients’ financial landscape is their 401k.
In almost all cases, 401k should be the cornerstone of your wealth. Before opening other accounts, make sure you are maximizing your 401K – $ 19,500 (2021) or $ 750 every two weeks. If you are self-employed, you can open a Solo 401k.
Unless you contribute to the CFE (Caisse des Français de l’Etranger), you do not contribute to your retirement in France. Therefore, there will be a gap when you retire. This gap will be filled in part by US social security, but also and mainly on what you save today.
Here is some information about your 401k:
- The money you put on your 401k will grow tax-free whether you are in France or the US.
- Before age 59 and a half, you can withdraw the money, but you will pay a 10% penalty and income tax on the whole amount if it is in pre-tax or only on capital gains if it is in a Roth.
- After age 59 and a half, you can choose to withdraw all or part of the amount. It will then be taxed in the US, but not in France. However, France will take the amount into account when calculating your tax bracket.
- From the age of 72, you will have to withdraw part of the sum: the RMD “Required minimum distribution”.
- On average, your 401k money will double every 10 years. Past performance does not guarantee future performance!
Is it worth contributing to a 401k if you are going back to France in the next few years?
A best practice that I have put in place to simplify this decision is to calculate if you will likely have around $ 100,000 in your 401k by the time you leave the United States including your company match. (If you have a smaller sum, nothing prevents you from leaving it in your account, but why bother with an account in the United States for a small sum?) So you will have, in 10 years, $ 200,000 then $ 400,000 in 20 years, $ 800,000 in 30 years etc.
If you stay another 5 years in the US and you can maximize your 401k, you will hit $ 100,000 – 5x $ 19,500.
If you stay another 3 years, you should have at least $ 40,000 in your 401k today – $ 40,000 + 3 × 19,500.
There is no equivalent to a 401k in France, even an “assurance vie” or a PEA are not as attractive
If you don’t expect to reach $ 100,000, then just put your company match if there is one and contribute to CFE.
Traditional 401k or Roth 401k?
The question to ask is, will I be in a lower tax bracket when I retire or not? If so, a traditional 401k is the way to go if not, use a Roth 401k.
In general, I recommend that my clients contribute to their 401k before tax: the salary they receive today is probably more than what they would spend in retirement so they are probably in a higher tax bracket today. When they retire, they will only withdraw the money they need.
If you’re making $ 150,000 or more, a traditional 401k is probably better, but it depends on the situation.
If you are early in your career and/or are below the 24% tax bracket, a Roth 401k is probably better.
Of course, it is impossible to predict the future. Roth 401k or 401k, the main thing is to invest in a tax-efficient account.
Your company is not contributing …
If your company isn’t contributing, it’s still worth putting some money into your 401k. For example, if you are in the 24% tax bracket, the money you put in your 401k pre-tax has a guaranteed 24% return on investment in the first year not including state taxes. If you live in California and are in the 9.3% bracket, that’s a 33.3% (24% + 9.3%) ROI!
Guillaume Decalf from www.ouifinancial.com – email@example.com
After a 15-year career in the technology sector, nine of which in the United States, Guillaume changed careers by obtaining his license as a financial advisor and creating Oui Financial, a company specializing in financial planning and investments for French and Franco-American families in the United States. He is based in San Francisco, California, but serves clients all over the United States.
MerciSF is not responsible for the material contained in this article.