I found a way to withdraw from 401k without paying taxes! :)
First, here's the 401k concept in a nutshell, at least the way I understand it: the money that you make and put in your 401k is not taxed. If you make $45,000 and put $15,000 in your 401k, you'll be taxed on only the remaining $30,000. The money in your 401k is taxed only when you withdraw it, either before you're 59.5 years old (in which case you pay a 10% early withdrawal penalty), or after. In either case, the money is treated as profit and is taxed accordingly. Am I right so far?
Now, here is my idea: the foreign-based income exclusion rule states that you don't have to pay income tax on the first $92,900 you'll earn while living abroad, provided you are "physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months (source-1 , source-2 ). To me, this seems like a perfect opportunity to avoid paying any taxes on your 401k earnings. It's so simple: wait until you're 59.5 years old, move someplace fun, cheap and foreign (Argentina?), spend most of the year there, withdraw $92,900 from your 401k and voila! - tax-free income. Of course, there are a number of restrictions and requirements put forth by the IRS, but it seems doable. If you're not yet 59.5, you'll still end up paying only a 10% early withdrawal penalty, and nothing more. Seeing how most of us pay a lot more than 10% in income tax, this seems like a ridiculously good deal. If you have more than $90K in your 401k, you may have to spend more than one year abroad to maximize the tax advantage. And it's quite a big advantage, too: if you were to withdraw $92,900 without bothering to become an expatriate, you'd end up paying $19,721 in taxes. (source )
So, did I get anything wrong or did I just come up with the most amazing retirement hack ever?