I am not a U.S. citizen. What happens to my 401K if I have to go back to India?
Can I distribute (withdraw) my money at that time without paying the penalty?
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You will always pay the 10% penalty and the income tax on the money, so even if you withdraw amounts below the taxable limits - you still pay 10% tax. However, you can probably offset that from your Indian tax liability on the money.
If you convert it to Roth - you should check with an Indian tax accountant/adviser what the Indian tax treatment would be. It is likely that "Roth" advantages are unrecognized by foreign countries, so you may end up paying taxes on both the conversion (in the US) and the distribution (in India).
Check with a tax adviser who's knowledgeable about the Indo-US tax treaty and the tax laws in both the countries, this may be trickier than people with no international tax experience may think.
Nothing "happens" to it. It works the same way regardless of whether you are a U.S. citizen or resident or not. Taxes and penalties work the same way on withdrawal.
That said, if you are not in the U.S. and don't have any income in the U.S. in a particular year in the future, you can take advantage of the fact that your U.S. tax that year will probably be zero. Then, if you withdraw a little bit, even if they count as taxable income, your U.S. income will still be so low that it may be under your personal exemption, or if not at least it will be taxed in the lowest tax bracket.
If you withdraw 401K then 10% penalty is applied. Also the amount you withdraw is considered as "Income" for that year. Whether you go back to India or Not, the amount is considered Income.
Depending on the reason you state during withdraw, the Income tax (default @ 10%) might be "withheld" (Note: Sometime they may not withhold tax).
If you are relocating to India, as per international tax rule (between India & US), when filing tax in India then you are supposed to show this as income (the 401K amount) and pay tax according to the total income including amount earned in India (could be upto 30%!!). If there was tax "withheld" in US, you can show it as International tax paid and pay the difference between 10% and your tax rate (upto 30%).
If you are relocating to India, but still filing in US (it's possible) then 401K amount will be taxed at US tax rate (could be upto 35%).
In either case (filing in India or US) the amount "Withheld" can be shown as tax paid, but yet you will pay the tax difference (could be 20% or 25% more) as per the income for that year.
You are not supposed to pay tax in two countries for the same year, as per regulations (might end up with Audit in both country).
Hope it helps!