Retirement Accounts in India Vs US

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After moving to US, I have been researching on what are the best ways to invest in this country. Having spent a lot of time planning for my personal finance in India over the last decade, I had to re learn what are the options we have in the US. So here are some learning , where I create an analogy  of what option we have in India vs. what we have in US. Here are some very broad picture of the options and not an exhaustive list for your retirement planning.
  • 401(k) Account in US Vs. Employee Provident Fund Account (EPF) in India  (403b if you work for a nonprofit)
    • Similarities : There is a defined contribution from employee and a matching contribution to certain from the employer to accounts. It is ear marked for retirement hence there is a penalty when you withdraw early, you can definitely take a loan against this money, and not attachable during bankruptcy, you can withdraw the amount beyond certain age which is typically 59-60 years. They have the tax advantages like deferring income tax early or later to support retirement savings.
    • What is Not Similar :
      • EPF - There is a fixed interest decided by the GOI part of the budget every year.   Money is managed by EPFO or by the company trust. There is no control of the investment decisions, but the returns are assured and the interest is credited as per the rate decided every year by GOI.  No opt out options, mandatory most of the places.
      • 401K – Full control of the money the moment the money gets to the account. We can decide where to invest based on the options provided by the company’s summary plan description. Here the companies provide various options for the employees and this is different with each company. The summary plan description for 401K of each company provides the details of matching , investment options etc. Usually the account is with some brokerage firm like Fidelity , Vanguard etc. where the firm has a contract and you can login anytime to change the investment decisions among the options you have – bonds, stocks, mutual / index funds etc.  No fixed interest rate, your investment decisions decides your return. Choice of opting out, but one request, please never opt out. Take the matching contribution and save in 401K :)
  • Individual Retirement Account (IRA) ( Traditional IRA or Roth IRA )  Vs. Public Provident Fund ( PPF)
    • IRAs and PPFs  are not exactly same. Both are independent of the companies you work, and a separate savings cum tax advantaged accounts, with an annual cap of how much you can invest every year(PPF is 150K INR, IRA 5500 USD Every year). PPF has a fixed interest rate decided and regulated by government of India and purely a debt instrument. But IRA in US is also a savings cum tax advantaged account provides an option of investing in places of your choices like Debt or Equity. Similar to PPF, you can open the IRAs with any private provider. For PPFs it is the banks, for IRAs it is Brokerage firms like Fidelity or Vanguard.  PPF is EEE Tax exempt i.e ( contributions are Tax exempt under 80x, interest earned in the account is exempt, on withdrawal after 15 years it is exempt of taxes).  But IRAs has options of Traditional & Roth – where Traditional is EET and Roth is a TEE. In Traditional IRA, you can put pre tax money which is exempt from tax, and earn interest which is exempt , and when withdrawing the money you would be taxed. But in Roth IRA which is a TEE means, You would put a after tax amount to the account, and  interest earned, and withdrawal after the stipulated time period is tax exempt.

11 comments:

  1. Hi, This is an excellent article. Having moved to US after spending considerable time in India, was looking for something like to make sense of the investment options here in the US. Thank you

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