How to Withdraw 401(k) from India – A Step-by-Step Guide

NRIs employed in the USA tend to contribute to a 401(k) retirement account, which has tax benefit under US regulations. Although this plan enables creation of a retirement corpus, NRIs who shift back to India should be aware of the procedure and tax implications for withdrawal of their 401(k) amount.

Understanding 401(k) Retirement Accounts

A 401(k) is a company-sponsored retirement program through which employees invest a part of their salary prior to tax deductions, and the employers contribute, too, in most instances. There are two varieties:

• Traditional 401(k): The contribution is pre-tax, and withdrawal is subject to tax at the prevailing rate.
• Roth 401(k): The contribution is after-tax, so withdrawal from retirement becomes tax-free.

Moreover, NRIs may opt for Traditional IRA and Roth IRA, both of which permit rollovers from 401(k) and are flexible in accordance with future tax strategy.

401(k) Withdrawal Options for Returning NRIs to India

When you return to India for good, you have three options available for dealing with your 401(k):

1. Leaving Your 401(k) as Is

   You have the option to leave your 401(k) account with your employer, which will continue to grow tax-deferred. But if your employer chooses to stop managing the fund, you might be required to withdraw or roll it over. Maintaining your account in India could also prove difficult.

2. Rolling Over to an IRA

   In order to escape being taxed immediately, you can rollover your 401(k) to a Traditional IRA. Under this plan, your funds are allowed to continue growing tax-deferred. But if you withdraw earlier than age 59½, there is a penalty of 10%, with certain exceptions like payment for medical costs, purchase of a first house, or funding for higher education.

3. Cashing Out Your 401(k)

   If you withdraw your 401(k) amount prior to becoming 59½ years old, you will incur a 10% early withdrawal penalty as well as income tax applicable in the USA. In order to avoid tax effect, withdraw in a financial year when you have either no or negligible income in the US.

Tax Implications of 401(k) Withdrawals for NRIs

Taxation of 401(k) withdrawals is complicated because India and the USA have different tax laws. Here’s what you should know:

The USA taxes 401(k) withdrawals when they are redeemed, whereas India taxes worldwide income on an accrual basis.

Because of this disparity, NRIs coming back to India could be subject to double taxation, which can be avoided under the Double Taxation Avoidance Agreement (DTAA).

The 2021 Indian Budget had a proposal to postpone tax in India to withdrawal and permit tax credits of tax paid in the USA.

Conclusion

Managing your 401(k) withdrawals while relocating to India requires careful tax planning. Consulting a financial expert can help optimize your tax liabilities and ensure a smooth transition.

FAQs

1. What is a 401(k) plan?
   Ans- A 401(k) plan is a USA retirement savings scheme under which an employee saves part of his or her salary, occasionally with the addition of employer funds. It assists in saving in a tax-deferred or tax-free manner.
2. Are NRIs able to withdraw money from their 401(k) once they relocate to India?
   Ans- Yes, NRIs can withdraw money, but it will be taxed and may be subject to a 10% penalty if withdrawn prior to age 59½.
3. How are 401(k) withdrawals taxed in the USA?
   Ans- Withdrawals are taxed as regular income in the USA, and if withdrawn prior to 59½, an extra 10% penalty is added.
4. How is India taxing 401(k) withdrawals?
   Ans- India tax global income, including 401(k) distribution, but tax credit can be claimed on US taxes paid under DTAA.
5. If I simply keep my 401(k) plan unchanged after joining India, what will be the consequences?
   Ans- Your money will remain tax-deferred but require monitoring, and your employer could ask you to do something someday.
6. Is a roll-over to an IRA advisable for NRIs?
   Ans- Yes, rolling over to an IRA supports tax-deferred growth and prevents instant withdrawal taxes. Still, some US financial institutions are not supportive of non-US addresses.
7. May I roll over my 401(k) to a Roth IRA?
   Ans- Yes, but you will be required to pay tax on the rolled-over amount. Future withdrawals will be tax-free in the USA, hence it is good for long-term savings.
8. What are the exceptions to the 10% early withdrawal penalty?
   Ans- You may escape the penalty in instances of medical bills, purchase of a first home, permanent disability, and educational expenses at higher levels.
9. How do I minimize tax liability on 401(k) withdrawal?
   Ans- Draw in a year of low or no US income, or use the DTAA to avail yourself of a tax credit in India.
10. What modifications did the 2021 Budget introduce for NRIs withdrawing 401(k)?
    Ans- The Indian government introduced provisions to align tax periods and allow tax deferral until withdrawal, preventing double taxation.

Disclaimer: The information provided here is for educational and informational purposes only and should not be construed as financial, legal, or tax advice. Consult with a qualified professional before making any investment decisions. We do not accept any liability for errors or omissions in this information nor any direct, indirect, or consequential losses arising from its use.