Background - 
I want to start investing money in my company's 401(k) plan. The Plan
allows me to invest up to 25% of my gross income into 401(k) plan and
my employer will contribute amount equal to half of my contribution up
to 15%. Meaning, if I earn $1000 per annum, they will contribute a
maximum of $75 against my contribution of $150 (15% of my gross
income). They will not put anything above that 7.5% even if I
contribute more than 15%.

Here is my question - I am a non-resident alien in United States and
my employer is currently sponsoring my permanent residence (green
card). However, I would like to return to my home country a few years
from now (about 5-7 years from today). At that point, I want to
withdraw my investment in 401(k) and take the money back with me. Now
what I want to know is - what penalties will I incur for early
withdrawal? Instead of investing in 401k, Will it be advisable for me
to just put the same money in, say, a CD account? Will something like
a CD earn more returns for me when compared to returns on my 401k
after penalties for early withdrawal?

Thanks.

You should never misss on the opurtunity of 401K  as it gives you great tax break.

Say if your income is 400 per annum and you max on your share you will
contribute 100 and employer will match 50% = 50
But the 100 that you put in is before taxes so if you are in 30% tax
bracket (fed+state) you are effectively only contributing 70.
Hence your contribution for 5 yrs = 70 * 5 = 350
Employers = 50* 5 = 250 
Total = 250 + 350 = 600

So effectively even if you made 0% return on your investments your 350
has become 600 in 5 years
Now when you withdraw you are subject to a 10% penalty unless you are
withdrawing it for purcahsing a new home , medical exp etc. PLUS all
the withdrawals becomes that years income
Say when you return to your country you could withdraw in a year
following the year that you returned. So that your gross US income is
smaller and you are in a smaller tax bracket and that spread
withdrawal over 2 years - dec and jan are 2 separate years.
Now if you were to remove 300 year 1 and 300 year 2 and say you are in
a 10% tax bracket then you total tax + penalty  = 20% So you receive
240* 2 = 480
Therefore your 350 has becomne 480 in 5-6 years assuming 0% retrun on
investments which is highly unlikely given that you could put in a
money mkt fund even in a 401K and get 2-4%

Your 70 put in a cd will become 470 in 5 years @ average 3% and after
tax you will be left with 430

your $350 has become 150*5 = 750 and not 600 as stated above.

Gurus please correct if I am missing some thing. I am not a professional.

You have to pay a 10% penalty + state penalty in some states. + the
amount of withdrawal is added to your income for the year and you pay
income tax on it.

1. When you return to your country your income in US could be $0 per
annum at that time you could withdraw from your 401K and pay only the
10% Federal + state penalty and get your money back. say when you
withdraw there is no incometax for income of less than $10,000 and
your withdrawal for that year is less than that then there should be
no income tax payment for you that year.

2. I think you can withdraw in equal annual payment up to your
retiring age at that time and not have to pay any penalty.

Now 401K also has many restrictions like you can only invest in the
securities that are in the plan and so depending on your plan you will
have to study what is the right option available. This is the most
difficult part.

It is possible to make a good rate of retun buch better than a CD but
if you study it well but on the other hand if you go in blindly it is
easy to loose mony in the different commissions let alone the bad
performance of the mutual fund. I will strongly recommend
http://www.fool.com.

Also consider IRA.

Stock market is said to give a better retun than any CD.

http://return2india.com/HyperNews/get/forums/finance/1298/1.html

http://www.irahelp.com/cgi-bin/forum/index.cgi/noframes/read/4691

Refer to IRS publication 590 (2004 version) www.irs.gov/pub/irs-pdf/p590.pdf

See page 39 under ?IRA distributions delivered outside the United States? 
Page 48 under ? Exceptions? for a list of exceptions to the 10 percent
additional tax/early distribution penalty

Thanks a lot guys for your valuable comments!