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Hypothetical situation.

Let's say I am an Indian citizen living in India (and have some income). And, I withdraw money from my 401(k) or IRA. If its a traditional 401(k) or IRA, I understand that I'll be paying taxes in the US. Would I need to pay taxes in India for the 401(k) or IRA withdrawals?

I understand that there is a Double Taxation Avoidance Agreement between India and the USA. Not too sure what that specifies with respect to 401(k) or IRA withdrawals?

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First of all depending on the type of IRA you may not have to pay taxes on withdrawals in the US at all. If you are withdrawing your principle from a Roth IRA then you don't owe taxes. Only when you withdraw the gains do you pay taxes on it.

You have two options for withdrawals: Lump Sum Withdrawal: If you take a lump sum withdrawal you will owe taxes to the US (30% for non-resident aliens of the US), and according to DTAA; Article 23, you will file your taxes with India declaring your IRA or 401(k) withdrawal proceeds and claim credit on the taxes you paid to the US.

Monthly Pension Withdrawal: You can also receive monthly pension payments and you will only be taxed in the country in which you are a resident of. This is according to DTAA, Article 20. You would then have to submit necessary documentation to your payer in the US so that they do not withhold any taxes in the US.

Just as a side note it might be just better to keep the money where it is and let it grow or roll it over to a Roth IRA if you are currently in a lower tax bracket for maximum savings of your principle.

Here is a link with more detailed information of what I provided you: http://articles.economictimes.indiatimes.com/2012-01-25/news/30663129_1_taxable-income-nri-401k-plan

  • Well, if the Roth IRA withdrawals (monthly pension) are going to be taxed in India after retirement, then isn't pre-tax IRA better? I wouldn't owe US any taxes and I would only have to pay taxes in India? Am I missing something? – Aayush Kumar Feb 11 '14 at 21:38
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Please consult at CA for specific's to your case. In general any income earned abroad can be brought to India tax free within 7 years. For more details refer to http://www.nritaxservices.com/ret_indn.htm

  • This seems different from the answer below and what's mentioned here: articles.economictimes.indiatimes.com/2012-01-25/news/… – Aayush Kumar Feb 11 '14 at 21:39
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    @AayushKumar The key difference is the timing. The article talks about withdrawing at 59 yrs. My answer is brining money back within 7 years. The answer differs from case to case basis and hence please consult a CA> – Dheer Feb 12 '14 at 2:23

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