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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.

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    From an Indian tax point of view as this income was accrued when the person was Non-Resident Indian, he can bring back the funds anytime into India and it would not be taxable. There would be no tax benefits/adjustments for taxes paid on this in US. – Dheer Dec 31 '13 at 4:46
  • @Dheer I doubt it. Since the money was not taxed then, it is not considered to have been accrued then for tax purposes. Deferred taxation works both ways. I'm not familiar with Indo-US treaty, but absent treaty - 401k withdrawals would definitely be taxable when withdrawn. – littleadv Dec 31 '13 at 6:03
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    Possibly. I am not 100% sure, but as much as I recollect, if I earn say 100,000 in USD by working in US and for that year I am not a Indian resident for tax purpose, then when I bring back that 100,000 into India anytime its tax free in India. Further if use that 100,000 and invest where ever and make money, its tax free whenever I bring that money into India. However once I bring that money into India, any interest earned or profits is taxed, not the original amount. – Dheer Dec 31 '13 at 6:39
  • @Dheer as I said - better talk to a tax professional, I'm not familiar with Indian tax law. But since many other foreign nationals will want to know the answer to the question, I prefer to be more generic. – littleadv Dec 31 '13 at 6:45
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    Agreed. A professional advisor is needed. Hence I posted my stuff as comment rather than answer :). – Dheer Dec 31 '13 at 7:00
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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.

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    There is still a 10% early withdrawal penalty. I'd recommend small conversions to Roth each year, small enough to avoid tax. And then after 5 years, no withdrawal penalty, if I understand a recent thread here correctly. – JoeTaxpayer Dec 31 '13 at 2:00
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    You both forget the tax treatment in India... Not something to ignore. – littleadv Dec 31 '13 at 4:25
  • As long as you are not in the U.S. for more than 30 days in a calendar year (check the exact number), you are not required to pay U.S. Income Tax. The 10% penalty probably still applies. – ChuckCottrill Dec 31 '13 at 20:34
  • @ChuckCottrill this not true for US-sourced income. Its taxable even if you're not in the US at all. – littleadv Jan 5 '14 at 21:52
  • The tax rate is 10% under $8900, and 15% under $36000 annual income, and taking the standard deduction further lowers tax liability. – ChuckCottrill Jan 13 '14 at 19:04
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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!

  • Default tax withholding is 20%. – JoeTaxpayer Jul 27 '16 at 4:51

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