"I have moved back to India, but I still have funds in my 401(k) account in the US. What should I do?"

If you’ve recently returned to India after working in the US, you might be grappling with the question of how to handle your 401(k) retirement account. This detailed guide outlines your options and the tax implications of 401(k) in India, helping you make an informed decision.

Disclaimer: This article provides a general overview of managing a 401(k) after returning to India. For personalized advice, consult a qualified financial or tax advisor.

What Is a 401(k) Plan?

A 401(k) is a US employer-sponsored retirement savings plan that allows employees to contribute pre-tax income. Contributions lower your taxable income for the year, and employers often match these contributions up to a certain percentage. Funds in a 401(k) are locked until the age of 59½, with early withdrawals incurring a 10% penalty along with applicable taxes.

What Are Your Options for Managing a 401(k) After Returning to India?

1. Leave the 401(k) Plan As Is

You can choose to leave your 401(k) account untouched until you reach the age of 59½. At that point, you can withdraw the funds, which will be subject to US taxes.

Considerations:

• The plan’s flexibility depends on the employer’s policy.
• If your employer terminates the plan, you will be required to either withdraw the funds or roll them over into an Individual Retirement Account (IRA).

2. Rollover to a Traditional IRA

A Traditional IRA offers greater investment flexibility compared to a 401(k). Rolling over funds from a 401(k) to a Traditional IRA has no immediate tax implications.

Considerations:

• Some financial institutions may not permit opening an IRA with an international address.
• Ensure you check the specific policies before initiating the rollover.

3. Rollover to a Roth IRA

Roth IRAs are funded with post-tax dollars, meaning withdrawals (up to the amount contributed) are tax-free. This option is ideal if you expect to be in a higher tax bracket later in life.

Considerations:

• Taxes must be paid on the amount rolled over from a 401(k) to a Roth IRA at the time of conversion.
• Roth IRAs do not mandate minimum distributions, making them suitable for long-term savings.

What Are the Tax Implications for Withdrawals?

Lump Sum Withdrawal

If you decide to withdraw your 401(k) funds as a lump sum, here’s what you need to know:

• US Tax Implications: The IRS taxes income sourced from the US, including 401(k) withdrawals.
• Indian Tax Implications: As a resident of India, your global income is taxable in India. Under NRI taxation guidelines, the taxation also depends on your current residential status, whether you are classified as Resident but Not Ordinarily Resident (RNOR) or Resident and Ordinarily Resident (ROR).

This leads to potential double taxation, but relief is available under the India-US Double Taxation Avoidance Agreement (DTAA).

Monthly Pension Withdrawal

If you opt for monthly withdrawals:

• Tax in India: Under Article 20 of the DTAA, private pensions are taxed only in the recipient’s country of residence. If you are residing in India, the withdrawals will be taxed only in India.
• Avoid US Withholding Tax: Ensure proper documentation is submitted to the IRS to avoid withholding taxes.

Key Considerations Before Making a Decision

• Cash Flow Needs: Do you need immediate access to funds, or can you leave them invested?
• Tax Brackets: Compare your current and future tax brackets in both India and the US.
• Investment Goals: Consider your risk appetite and long-term financial objectives.
• Documentation: Properly file and document taxes in both countries to claim applicable credits.

Conclusion

Managing your 401(k) after returning to India requires careful consideration of tax implications and financial goals. Consulting with an independent financial advisor is crucial to navigate the complexities and maximize your returns.

How Dinesh Aarjav & Associates Can Help

At Dinesh Aarjav & Associates, we specialize in providing end-to-end consultancy for NRI returning to India. From navigating the DTAA to managing your 401(k) and other financial assets, we ensure a smooth transition. Reach out to us today for tailored solutions to meet your unique financial needs.