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?</I?Try and get your employer to provide a proforma income and tax statement. You may find that the $80,000 exclusion still leaves you with substantial taxable income. Depending on employment conditions, you may find that company provided housing, living, auto, home leave air fares, etc. all get counted as reportable income. Count all the actual pay as well; you may have international premium, area premium, hardship premium, sizable extra work week premium which can double your stateside pay basis. Also, if the employer puts you under a tax equalization program, the employer may end up with the benefit of the $80,000 exclusion. Also, if the employer is putting you under hypothetical tax, a 401K contribution will reduce your hypo tax cost.
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