401(k), IRA and HSA: How America's Tax-Advantaged Accounts Work

Why these accounts exist

The American retirement system expects individuals to fund their own retirement and offers tax advantages in return. Money held in these accounts avoids some combination of tax on contributions, tax on growth and tax on withdrawals. Over decades, that difference compounds into the gap between a taxable balance and a meaningfully larger sheltered one.

For anyone used to Indian savings products, the important difference is that these are not fixed-return instruments like the PPF or FDs. They are tax wrappers around investments you choose, such as low-cost index funds from the plan's menu. The wrapper decides how the money is taxed; the investments decide how it grows. Both choices matter. If your plan's default investment is a target-date fund that qualifies as a qualified default investment alternative, it is designed to become more conservative (to reduce the risk of losses) as you get older.

The 401(k)

A 401(k) is a retirement plan offered through your employer. Contributions are taken from payroll automatically, either before tax into a traditional 401(k) or after tax into a Roth 401(k) where the plan offers one. The IRS publishes the annual limits. Enroll as soon as your plan allows; at a zero contribution rate you receive no match tied to your contributions.

The main feature, where your employer offers one, is the employer match. The company contributes alongside you, for example as a percentage of what you contribute, up to a share of your salary. Whether you receive the match depends on participating and on your plan's terms, including any age and service requirements; whether you keep it if you leave depends on the vesting schedule. Contributing at least enough to receive the full match is the first step in the order of operations below. Contributing less than the match requires means giving up part of the match.

The vesting schedule also deserves attention. Your own contributions are always yours, but the employer's match may become irrevocably yours only after a period of service. Read the schedule when you join and again before you resign, because leaving weeks before a vesting cliff has real costs. Our layoff guide explains what happens to the account when a job ends; the vested balance remains yours.

The IRA

An Individual Retirement Arrangement is an account you open yourself at any major brokerage, independent of your employer. Contributions to a traditional IRA may be tax-deductible, depending on your income and on whether you or your spouse is covered by a workplace plan. Roth IRA contributions are made after tax, and their growth and qualified withdrawals are tax-free; direct Roth contributions phase out at higher incomes. These income thresholds (other than those for married people filing separately) are adjusted for inflation, and the IRS's IRA pages lead to the current figures.

For immigrants, the IRA's value lies in portability and control. It stays with you from one employer to the next without paperwork, its investment choices span the whole market rather than a plan's list, and old 401(k)s can be consolidated into it through rollovers when you change jobs. To open one, a brokerage must collect a taxpayer identification number, such as an SSN. An ITIN is also a taxpayer identification number, but whether a particular brokerage will open an IRA with one is its own policy, so ask first. Funding it regularly is what makes the difference.

The HSA

A Health Savings Account is available only to someone covered by a qualifying high-deductible health plan (HDHP) who has no other health coverage except coverage the rules permit, such as dental, vision or telehealth coverage (a general-purpose health FSA that covers you counts as disqualifying coverage, including one through a spouse's employer), is not enrolled in Medicare, and cannot be claimed as someone else's dependent. It has a triple tax advantage at the federal level: contributions are deductible, growth is untaxed, and withdrawals for qualified medical expenses are untaxed. California, for one, taxes HSA contributions and earnings at state level. Unused HSA money is not forfeited; the balance stays yours across jobs and years. The use-it-or-lose-it rule belongs to the FSA, a different arrangement: FSA money left at the end of the year is generally forfeited, although a plan may offer either a grace period of up to 2 months 15 days or a carryover, but not both.

An HSA can also be invested rather than held as cash, and receipts for qualified medical expenses incurred after the HSA was opened can be reimbursed from it years later. Used this way, it works as an additional retirement account. After age 65 it behaves like a traditional retirement account for any purpose: non-medical withdrawals are taxed as ordinary income, with no penalty. If you are HSA-eligible and your cash flow allows, the HSA offers a combination of tax advantages that no other account described here matches.

Questions visa holders ask

Can I participate on H-1B, L-1 or OPT? Yes. Your visa category does not bar you. What counts is taxable US pay and an employer plan (or taxable compensation, yours or your spouse's on a joint return, for IRAs). Plans may set their own participation rules, such as minimum age and service, and job or business-unit classifications, as long as the plan still passes the coverage tests. Separately, the tax code lets a plan disregard 'employees who are nonresident aliens and who receive no earned income … from sources within the United States'. Read your plan's eligibility section; visa holders can participate and receive matches. One complication: in a nonresident-alien tax year, an IRA deduction requires taxable compensation effectively connected with a US trade or business. That is a question for a cross-border preparer, not a barrier.

'I might leave in three years, so why lock money up?' Because the match, once vested, is yours whatever your time horizon, the accounts remain yours wherever you live, and the money is less locked than it looks: it can be reached early, at a cost, as explained below. A short stay can change some investment choices, but not the case for participating.

'If I might return to India, is traditional or Roth better?' Traditional treatment assumes your future tax rate will be lower; Roth assumes it will be higher, or that you value tax-free flexibility. Your expected years in the US, the likelihood of a green card, where you plan to retire and how India treats each account all feed the decision. There is no universal answer. Model both scenarios, ideally once with a cross-border adviser.

Your first enrollment screen

The 401(k) portal comes with your first week's HR paperwork, and four fields matter. The contribution rate is a percentage of each paycheck: start at least at the full-match level, and turn on auto-escalation if it is offered, which raises your rate each year automatically. The traditional and Roth split follows from the decision above; where your plan offers Roth, splitting between both is allowed. The investment election decides where the money goes: for example a target-date fund matching your approximate retirement year, or the plan's low-cost index funds. The beneficiary is covered in the next section; do not skip it.

Then check a number the screen does not show prominently: each fund's expense ratio. Inside identical wrappers, higher fees reduce the amount left to compound. Compare each option's cost, including the plan's index funds, before you choose.

Beneficiaries: the form that can override your will

Every one of these accounts carries a beneficiary designation, and it generally controls over your will. A workplace plan pays the beneficiary named under the plan's documents, subject to the spousal-consent rules and qualified domestic relations orders; for IRAs and HSAs, the custodian's agreement and state law govern the designation. The failure to avoid is a form left blank (so the plan's default rules apply) or one naming someone from an earlier stage of life, discovered only when it can no longer be fixed.

Naming parents or siblings in India is not barred by federal rules, subject to your plan's or custodian's terms. If you are married, a 401(k) passes to your spouse by law unless your spouse signs the plan's written waiver, witnessed by a notary or plan representative, so naming parents requires that form. IRAs have no such federal rule. Name primary and contingent beneficiaries on day one, update them after every marriage, birth or divorce, and align the designations with your will and guardianship planning.

The order of operations

A suggested order (a planning default, not a rule): contribute to the 401(k) up to the full employer match first, because the match adds employer money to your account; then fund the HSA if you have a qualifying plan, for its triple tax advantage; then the IRA, additional 401(k) contributions or both, according to your traditional-versus-Roth decision; then taxable brokerage investing beyond the sheltered limits.

Two portfolio notes for NRIs. Inside these US accounts, compare each fund's costs. Outside them, note a separate risk: for a US person, an Indian mutual fund holding can fall under the passive foreign investment company rules, which bring a complex US tax and reporting regime on Form 8621 that can be unfavorable. Whether a particular fund is a PFIC is an entity-level question and a matter for a cross-border tax professional, ideally before you buy or before you become a US tax resident. Second, automate everything: percentage-of-paycheck contributions, auto-escalation if offered, and an annual one-hour review, so the plan works without relying on memory.

Taking money out early

The accounts are meant for retirement. For the 401(k) and IRA, early withdrawal generally costs income tax plus a 10% additional tax before age 59½, with specific exceptions listed by the IRS. HSA money not used for qualified medical expenses is taxed and generally carries a 20% additional tax, unless you are 65 or older or disabled (or the account passes on death). Roth IRA contributions (not growth) can be withdrawn at any time free of tax and penalty, which is one reason a Roth can also serve as a deep emergency reserve. Some 401(k) plans also allow loans against your balance, with their own rules and risks: if you leave the job, the loan can become due sooner.

Early access exists, but it is priced to discourage. The accounts work because that cost keeps the compounding uninterrupted. Treat them as one-way until they no longer are, and keep your real emergency fund in ordinary savings.

If you leave America

The accounts remain yours from India. Brokerages have procedures for nonresidents; some restrict new trading or certain funds. Balances up to $7,000 can be forced out after you leave, with small ones paid to you and the rest rolled into an IRA, so keep your address current. That $7,000 ceiling is set by statute and has changed before, so check the current figure in 26 U.S.C. 411(a)(11) ↗. Meanwhile the balances keep compounding. The usual choices are to leave everything invested until retirement age; to roll a 401(k) into an IRA for control and consolidation (check the pro-rata rule first if you use a backdoor Roth); or to withdraw, accepting income tax, the early-withdrawal penalty where it applies, and nonresident withholding under US rules and the India–US treaty.

The India side deserves equal care. Indian taxation of foreign retirement accounts has its own provisions, including section 158 of the Income-tax Act, 2025. If you are resident in India and opened a retirement account in a notified country while you were resident there and non-resident in India, and that country taxes the account's income on withdrawal rather than as it accrues, the income accruing in the account is taxed in India in the manner and tax year the rules prescribe. The United States was notified for this purpose in 2022 under the old Act, and that notification continues under the 2025 Act. This intersection of US distribution rules, treaty articles and the phase-in of Indian residency after return is where a cross-border CPA consultation before you move money is worth arranging. Do not cash out in a hurry on the way to the airport; that turns a portable asset into a tax event at the worst moment.

Mistakes to avoid

Leaving the match uncaptured, which gives up employer contributions year after year. Cashing out a 401(k) at every job change, which ends the compounding on that money and can bring income tax and an additional tax. Leaving contributions in a cash or money-market option, so the account sits in cash for a decade. Forgetting old accounts at former employers: track every account in one list, and consolidate through rollovers. Contributing to an HSA without investing it. Paying high fees for advice that the order of operations above and low-cost funds already cover; fees reduce the amount left to compound.

The habits that work are simple: enroll early, capture the match, automate, choose low-cost funds, review once a year, and keep the accounts when you move, whether across employers or across oceans.