My husband just got a job that will require him to basically live in Kuwait for the next 12 months or so. This means he will be earning his first $80K free from federal taxes (with no local/foreign tax implications). We have discussed the idea of participating in his company's 401k but came to the conclusion that it makes no sense. Would that not just be saving money tax-free so we could pay taxes on it later? Since the money is already tax-free, why not invest it in something that does not require paying taxes on the principal upon withdrawal?

IMHO, the situation is a wash.

Options.

Put money in 401k if company match. An advantage. The interest/dividends earned from that investment grow tax deffered. So that is an advantage. Can change investments/allocation without worrying about tax consequences. Another advantage.

Buy and hold a stock/index fund. No capital gains tax until sell, and most likely at a lower rate than income tax. Advantage. Dividends generated will be taxed at current income tax level. Potential disadvantage.

Personally, if you have a good index fund option in the 401k, I'd put money in up to the match. Then any other in a taxable account.

JLC