With the recent good news in the Union Budget of 2021-22 concerning no double taxation on retirement accounts for NRIs, withdrawing 401k from India has become easier now. Many tax difficulties and struggles have been eased out. NRIs in the United States of America are often worried about what to do with their 401k if they move back to India, especially focusing on how to withdraw 401k from India keeping in check that they don’t end up paying double taxes. In this article, we will focus on the aspect of 401k withdrawal from India while understanding the tax implications in all the possible cases once you cross the threshold age of 59 and a half (59½).
Also Read: What to do with your 401(k) if you move back to India
Understanding 401k from a tax angle
There are different types of 401k accounts and each account has a different tax angle attached to it. Let’s do a quick round-up on 401k taxation in India as it will help us understand how the taxation will work once you return to India and then withdraw the 401k here.
Types of 401k Retirement Account:
- Traditional 401k (matched by employer): In a traditional 401k, your contributions are matched by your employer and it is a defined contribution pension account.
- IRA (self-sustained): An IRA refers to Individual Retirement Account which simply means that the contributions aren’t matched by the employer. You fund your own account.
Fun Fact: The 401k is called so as it is defined under subsection 401(k) of the Internal Revenue Code in the United States of America.
Now, we need to dig deep into another layer (tax specific). We understood what a traditional 401k and IRA is but now we need to understand how we can break them further on the basis of taxation. So here it goes: There are two types of 401k account based on how you choose to pay/deduct your taxes.
- Traditional 401k: Here, your contributions are made out of pre-tax dollars (the contribution amount is deducted from your taxable income in the year you make the contribution). The taxes are paid upon withdrawal on the entire amount (contributions plus the earnings). Basically the taxes are deferred till withdrawal and premature withdrawal attracts tax along with a 10% penalty.
- Roth 401k: Here, you contribute to the account using the pre-taxed money which makes the principal contribution tax-free at withdrawal. Although, earnings and dividends are liable for taxation.
Keep up with this jargon: Traditional refers to a tax deferred growth with taxable withdrawals and Roth refers to a tax paid contribution with tax free withdrawals.
Understanding the Individual Retirement Account (IRA)
The Individual Retirement Account is not matched by the employer and account holders can choose to rollover to an IRA once they decide to leave their employer. Rolling over though has different tax implications based on the account you are rolling over from. Let’s check out:
| Type of 401k | IRA Rollover | Taxation |
|---|---|---|
| Traditional | Traditional | No tax implications |
| Roth | Traditional | Tax deferred growth; withdrawal taxable |
| Traditional | Roth | Immediate tax to be paid on contributions and growth |
| Roth | Roth | No tax implications |
Note: In a Traditional IRA, when you hit the age of 70 and a half (70½), you need to make a mandatory withdrawal called Required Minimum Distributions (RMD) while there is no such thing in the case of a Roth IRA.
Withdrawing 401k from India
Many NRIs who return to India wonder “Can we withdraw 401k from India?”. What will be the tax implications? What’s best that can be done to maximize the profits and minimize the taxation. Well, we have answers for all your questions. Just that sometimes it can become complex to communicate everything here so you can get in touch with our expert directly on WhatsApp or on a call using the button below or at the end of the article to plan out the perfect 401k transitions and withdrawals from 401k moving to India.
Is 401k Taxable in India
A simple answer: The global income of a Resident Indian is taxable in India. So, if you are an NRI who has a plan of spending your retirement in India, then you need to understand about these tax implications arising from the 401k withdrawals.
Let’s revise how Taxation Works in the Case of 401k Account:
- Traditional 401k and IRA: The complete withdrawal will be taxed which includes your contributions and earnings.
- Roth 401k and IRA: Here, only the earnings will be taxed as the tax on the contributions were already paid.
Now, you are in India at the age of 59 and a half (59½). How will taxation work? Do you have to pay taxes both in India and in the US? Let’s understand considering how you will withdraw the funds:
- Lump sum withdrawal: Earlier, a lump sum withdrawal would have been taxed both in the US and India (DTAA instrument used; Article 23 “Other Income”). However, there’s good news since the Budget 2021 added no double tax on foreign retirement accounts for NRIs, there might be certain relief on that front.
Note: 30% tax withheld in the US to manage your taxes there. Calculations are made and then you either pay extra taxes or file for a refund based on the liabilities.
- Monthly Pension: Monthly Pensions are taxed only in India (Resident Country) as per Article 20 of DTAA (social security benefits and public pensions not included). Although, you are required to submit the necessary documents in US so that they don’t withhold any tax.
Note: If you cash out your 401k before the age of 59 and a half (59½) then there is a chance that it will attract an early withdrawal penalty of 10% on top of the taxes.
SBNRI Recommends: If you fall in a lower tax bracket and have been a US Citizen then it is better to set your monthly pension limit in such a way that it falls below the minimum taxable amount in the US. This way you will only report your earnings in India after returning.
Also Read: DTAA: Double Taxation Avoidance Agreement Guide for NRI
India US Tax Treaty 401k
The double taxation and its struggles are evident for NRIs and commendable efforts have been taken towards improving them in the Union Budget 2021-22 by the Finance Ministry of India. Earlier, there were various issues around taxation that caused trouble and frustrated the NRIs in India. Some of them were:
- Mismatch in period of taxability in India and USA. To tackle this, the Union Budget 2021-22 proposed to insert a new Section 89A to the Act to provide that the income of a specified person from a specified account shall be taxed in the manner and the year as prescribed by the Central Government
- Struggle in getting the credit for taxes paid in India in a foreign jurisdiction
- Funds are taxed on a receipt basis in the USA while on an accrual basis in India. Availing of the benefits of DTAA becomes difficult in such a scenario
- Taxes can be deferred in the USA (traditional 401K/IRA) but during withdrawal the taxes burst out and if that adds in with the struggles related to getting credit for taxes paid in India, it frustrates the NRIs
401k after Moving to India
SBNRI understands the struggles NRIs go through considering the withdrawals from their 401k retirement account in India. Even though we have tried to make the taxation aspects clear and transparent, doubts and queries can always arise and it’s a good thing if that happens. The more questions you ask, the more informed you become and eventually the entire process becomes very convenient and seamless.
You can just click on the button below to get in touch with our expert directly on WhatsApp and share all your doubts and queries regarding withdrawing 401k from India. Also, visit our blog and Youtube Channel for more details.
Withdrawing 401k from India: FAQs
Yes, you can withdraw your 401k from India. You can choose from a lump sum distribution or a monthly pension.
Yes. You can withdraw your 401k if you are leaving the country. If you cash-out your 401k before the age of 59 and a half (59½) then there is a chance that it will attract an early withdrawal penalty of 10% on top of the taxes.
After casing out before maturity, your 401k account is worth 70% of your balance. The deducted 39% consists of 10% for the withdrawal penalty and 20% to cover federal income taxes and further you may owe more or less when you file your return depending on your tax bracket.
On moving back to India, you can let your 401k be as it is till you turn 59 and a half (59½). Post that, you can withdraw the funds from your 401k in India either as a lump sum amount or monthly pension.
The capital gains from retirement funds are taxable in India. Moreover, pension income may also be taxable in India. However, the foreign tax credit may be claimed in India or the US under the DTAA, depending on the residential status.
You can withdraw the fund from your 401K when you leave the US. However, the amount that you withdraw is taxed as ordinary income if you are not 59 ½ or older. When leaving, you need to inform your plan provider that you are no longer a US tax resident.
