Why Financial Planning?

Planning is bringing the future into the present so that you can do something about it NOW.

I am working in the US what should I do with my 401k plan before moving back to India? This is a very common question considering the number of non-resident Indians that are working in the USA.

NRIs working in the USA participate in one of the retirement plans commonly known as 401(k) plans. The 401(k) is a qualified retirement plan with deferred tax benefits under US tax laws. NRI employees can invest a part of their salary in the 401(k) account, however, the employer may or may not match your contribution.

Types of 401(k) Retirement Accounts

Among the six different 401(k) retirement plans and a 403(b) plan, NRIs can opt among the following three types –401(k), Traditional IRA, and Roth IRA/401(k).

              Must Read – Pension plan for NRIs In India – Dream retirement 

401(k)

If your employer offers the defined contribution 401(k) plan, then they are matching your contributions to your corpus. Contributions made before taxes and therefore the entire sum is taxable at withdrawal at prevailing rates.

Because of the matching contribution from the employer, a 401(k) is offering the best way to quickly save for your retirement. The investment options are also limited to those offered by the employer.

401k plan before moving back to India

Traditional IRA

A self-sustained retirement plan, an IRA has only your contributions. You can open a new IRA account or when you leave your job then you can roll over your 401(k) into one. You can decide your investment options – aggressive or conservative. Here also, contributions are made from pre-tax income and the tax is deferred until withdrawals.

       Check – Why Should NRIs Save for early retirement

Roth IRA/401(k)

Investments in Roth IRA are made from post-tax income, making withdrawals (of principal) tax-free. Any earnings, however, are taxable at prevailing rates. Early withdrawals do not attract taxes or penalties as investments were made post-tax. Earnings also become tax-free if you hold the account for more than five years or have turned 59½.

Which plan should you opt for?

As the 401(k) plans significant tax benefits and a matching contribution from the employer, if you are eligible, they do go for it.

For others, if post-retirement you expect to be in a lower tax bracket, then opt Traditional IRA otherwise Roth IRA is a better choice. Usually, salaried people would be in the lower tax bracket at the time of their retirement, thus we suggest opting for Traditional IRA for them. For businesspersons, and high-flying professionals like physicians, attorneys, Roth IRA is suitable.

Similarly, if you don’t think that you will be in the USA till the time you retire and would come back to India then again Roth IRA is a better choice.

What to do with the 401k plan before moving back to India?

If you have invested in the 401(k) or the Traditional IRA, then moving back to India before you turn 59½ may attract penalties and tax liabilities on the entire corpus.

You must opt between if you are going to cash out, leave the fund as it is, or rollover to another account.

Let’s discuss each of them here one by one.

Leave your 401(k) as it is

If you choose to not do anything your employer will continue to manage it without any contributions. You would be able to defer taxes and earn tax-free growth till you turn 59½.

One downside is that if your employer decides to pull out of the fund, you will have no option but to either cash-out or roll over to an IRA. It means you will have to keep in touch with your employer, even after you are back in India, which can be an issue for many.

    Must Read – Planning for Retirement In India – 5 Easy steps NRI Can use

Rollover to an IRA

By rolling over your 401(k) to an IRA you can lower your tax liability and need not pay the 10% penalty as you are still invested in a qualified account and not withdrawing.

A penalty of 10% will apply if you withdraw from this account before 59½ years of age. But certain exceptions apply for emergency and big-ticket expenses. These include out-of-pocket medical expenses, buying your first home, permanent disability, and qualified higher-education expenses (including tuition, books, supplies, room, and board) at eligible institutions.

One problem with opening an IRA is that many companies do not cater to non-US addresses, so get clarity on this aspect before opening the IRA. Another concern is that when you turn 70, you must compulsorily start withdrawing under the Required Minimum Distributions requirements.

You can also transfer your IRA fund to a retirement fund in your home country, but you will have to pay taxes in the USA on the withdrawal. As India has DTAA with the USA, you can claim tax credit here while filing IT return based on the taxes paid in the US. India US tax treaty 401k is part of it.

Check – 10 Best NRIs Investments options in India 2021 – High return plans 

Rollover to a Roth IRA

The investment made in the Roth IRA account is from post-tax dollars, so it is less complicated. At the time of withdrawal, contributions are tax-free, only the earnings are taxed at the prevailing rates.

While moving back to India, if you fall are in a lower tax slab, then you can consider a roll-over to Roth IRA. You will pay taxes on the amount you are rolling over, but all subsequent withdrawals would be tax-free in the USA. As RMD does not apply to Roth IRA, you can continue to save even after you turn 70 for purposes like children’s higher education, or their seed money.

401k moving to india

401k withdrawal from India

If you cash out your 401(k) before you are 59½ or permanently disabled, then a 10% early withdrawal penalty is applicable over and above the appliable tax, in the case of 401(k) and Traditional IRA.

If your children are staying longer in the USA, then making them designated beneficiaries would make later withdrawals tax-free.

If there is a need to cash out, then wait for the next tax year, if you can. As you would have no US income in that year and fall in a lower tax bracket. The 10% penalty would still apply if you were younger than 59½.

In general, if you plan to come back to India sooner than later, then Roth IRA accounts are the best bet considering lesser tax-hassles and offering liquidity.

401k India – FAQs

What Is a 401(k) Plan?

A 401(k) plan is a tax-advantaged, defined-contribution retirement account offered by many employers to their employees.

What Types of 401(k) Accounts Are common?

There are two basic types of 401(k) accounts: traditional 401(k)s and Roth 401(k)s, sometimes referred to as a “designated Roth account.” The two are similar in many respects, but they are taxed in different ways.

What are the tax implications of a Roth?

With a Roth, employees make contributions with post-tax income but can make withdrawals tax-free.

How much can I contribute to a 401(k)?

The maximum amount that an employee or employer can contribute to a 401(k) plan is adjusted periodically to account for inflation.

How much do you match?

A common example might be 50 cents or $1 for every dollar the employee contributes up to a certain percentage of salary.

What is a company-matched 401k?

Many employers offer to match employee contributions, either dollar for dollar or 50 cents to the dollar, up to a set limit.

What if the employer contributes to a traditional 401(k)?

As of 2020 and in 2021, the basic limits on employee contributions are $19,500 per year for workers under age 50 and $26,000 for those 50 and up (including the $6,500 catch-up contribution). If the employer also contributes or if the employee elects to make additional, non-deductible after-tax contributions to their traditional 401(k) account (if allowed by their plan) the total employee/employer contribution for workers under 50 for 2021 is capped at $58,000, or 100% of employee compensation, whichever is lower.

What is my username?

Username: Your username (up to 15 characters) can be a customer ID that you’ve chosen or your Social Security number (SSN).

What if I withdraw money?

You can’t usually withdraw any of the money without a tax penalty until you’re 59½.

Are 401(k)s popular among NRIs?

401(k) plan has grown to become the most popular type of employer-sponsored retirement plan in America. As we Indians are biggest savers in the world – NRIs love 401k.

Can I withdraw my 401K in India? 

Yes, you can. You can choose between a one-time payment or a monthly pension.

What to do with the 401k moving to India?

You must opt between if you are going to cash out, leave the fund as it is, or rollover to another account.

Check – NRI income tax slab rates

Budget 2021 – Return to India 401k Issue

Budget 2021 promised to address the double taxation issue by taking into account the specific needs of NRIs. An example of this is income from retirement accounts opened outside of India. It is common for NRIs working in the US to invest in 401(k) accounts to take advantage of tax benefits. (Or people working in Singapore investing in CPF or in UK Qrops)

Workers working temporarily in the US and later returning to India faced different tax laws in both countries. Returning home as residents of India, they paid taxes on their worldwide income, which is on an accrual basis. And since the source of such income (in this case, the retirement account) comes from the US, it also became taxable in the US under US tax laws, regardless of whether or not residing in the US.

In addition, there is the issue of different tax periods for the respective countries. NRIs usually pay taxes on the same retirement income with no tax credits in India and the US, albeit in different years. Personal taxes, Payable on a calendar year basis in the USA, Germany or Singapore, and on a fiscal year basis in India.

First of all, check if your country of residence has a DTAA with India. Earlier there were doubts as to whether such recurring NRIs would receive tax relief for such taxes paid in India under the Double Taxation Agreement (DTAA). This will likely be resolved soon by the government.

India US Tax Treaty 401k Double taxation and the fight for it is clear for NRIs and the Ministry of Finance of India has made commendable efforts to improve this in the 2021-22 Union budget. Earlier, there were several tax-related issues in India that plagued NRIs and caused problems.

Read – New Indian Tax Rules For NRIs

Some of these were: Non-compliance in the taxability period in India and the USA.

“To address this, the Union Budget 2021-22 proposed adding a new Section 89A to the Act to ensure that the income a particular person derives from a particular account is taxed in the manner and yearly prescribed by the crediting of the Central Government Challenge.

Funds for taxes paid abroad in India are taxed on a receipt basis in the USA and on an accrual basis in India”

Now you know what are the options that you have before moving back to India 401k. If you have any questions regarding this add them in the comments. If you have experience related to how to withdraw 401k money from India – must share it in the comment section.

401k plan before moving back to India
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Hemant Beniwal


Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A. He started his Financial Planning Practice in 2009 & is among the first generation of financial planners in India. He also authored Bestseller book "Financial Life Planning". 

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