In the U.S there are two ways people build retirement funds. They are 401(k) and IRA. The 401(k) is an employer sponsored plan. I can have a part of my pre-tax pay go directly to a 401(k) account. Then I go ahead and invest the money in the market buying stocks, mutual funds, bonds etc. But if the second scenario came true and I decide to withdraw and close the 401(k), the withdrawal causes a 10% or more penalty and 30%taxes. I can live with taxes, but not the penalty. As far as I am concerned it is like charging me for living frugally and saving money.
The second method is to have an IRA account. There are two types of IRA accounts. One is the traditional and the other is the ROTH IRA. The traditional IRA is very similar to the 401(k). It is funded with tax deductible money upto a maximum of 5K if you are less than 50 years of age and 6K if older. Individuals set up these plans. Money can be withdrawn anytime after 59.5 years of age. If I had to leave the country the withdrawal would invoke penalty and taxes.
As far as the ROTH IRA goes contributions are post tax. So, I do not pay taxes if I made a distribution when I am 59.5. In case of 401(k) and traditional IRA, the money that I withdraw when I am retiring is taxable income. For a country where taxes keep growing like the US, ROTH IRA seems a sensible way of doing things. Also, the principal that I put in can be withdrawn anytime after 5 years. However, earnings or profits made cannot be withdrawn without taxes and penalties.
So, it appears to me that retirement planning for a h1-b worker like me is screwed up. So, I think the best bet for a person like me would be to create a taxable portfolio and just get away with my money if need be.
