Traditional IRA distributions taxation as non-resident

Question

I left the USA for India in 2019, and expect to be a non-resident for US taxation purposes when I turn 59.5. In the India-US tax treaty Article 20 Clause 1 states

"Any pension, other than a pension referred to in Article 19 (Remuneration and Pensions in Respect of Government Service), or any annuity derived by a resident of a Contracting State from sources within the other Contracting State may be taxed only in the first-mentioned Contracting State."

1. Does this mean that my traditional IRA distributions will be taxed only in India?

2. What about Roth IRA distributions? I know they will not be taxed in the USA. But will they be taxed in India as per the treaty? I was not able to identify in the treaty the clause that pertains to Roth IRA distributions.

I am debating between converting traditional to Roth, and leaving the traditional alone. But the decision will depend on how the money is taxed. If #1 is true, and Roth distributions are taxed again in India I'd rather leave the traditional IRA alone. If #1 is true, and Roth distributions are not taxed again in India then conversion might make sense. If #1 is false, I will consider conversion.

Answer 1

IRA distributions are not pensions or annuities as far as US law in concerned and so I don't think that Article 20 applies to them. I believe that what does apply is the Relief from Double Taxation clause which says in Section 2(a)

"Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax paid in the United States, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States."

If my belief is correct, then there is no advantage to converting a Traditional IRA into a Roth IRA (paying taxes on the value in the year of conversion). Take distributions from your Traditional IRA after turning 59.5 (from which 30% will be mandatorily withheld for US income tax since the money will be going to a non-US address). Note that tax withheld is not the same as the tax due; the latter amount is determined only when the US tax return is completed, and if the 30% is too much, you will get a refund of the difference. Yes, the total amount (that is, without the 30% withholding removed) will be taxable in India again, but you will get a credit against the income tax due to India in the amount of taxes paid to the US; not the 30% withheld. Also, be aware that the Indian tax year (April 1 till the next March 31st?) is different from the US tax year (which is the calendar year January 1 to December 31).

Oh, and India and the US don't have a tax treaty (the US Senate did not vote to approve it, as required by US law) but do have a DTAA (Double Taxation Avoidance Agreement) which doesn't have the same status as a tax treaty.

Answer 2

IRA distributions can be considered and reported as pensions if taken as periodic distributions and not a lumpsum payment. However, if it's not being considered as a pension due to some reason, you can rollover the IRA into an annuity which should more likely be distributed tax-free to NRAs in India and taxed in India as ordinary income. See the tax rates at https://www.irs.gov/pub/irs-utl/Tax_Treaty_Table_1_2019_Feb.pdf To claim a 0% withholding instead of the default 30% for all distributions to NRAs, one should submit the W8-BEN form to the IRA trustee before the distribution so they can apply the correct withholding. Even if 30% has been withheld due to non-filing of W8-BEN, one can claim a refund of the tax when filing the tax return 1040-NR.