Watch: Moving to India? 5 Best Options for Your 401(k) Funds
Moving to India with a 401(k)? Compare leave-in-US, IRA rollover, withdrawal timing, 20% withholding, RNOR window, and India tax before you cash out.
The full write-up, with the numbers and the links.
Chapters
- 0:00 Introduction
- 0:44 Important information before we dive into options
- 4:18 Option 1 (Leave in employer sponsored plan)
- 4:56 Option 2 (Roll over 401k funds to Traditional IRA)
- 7:16 Option 3 (Roll over 401k funds to Roth IRA)
- 8:36 Option 4 (Withdraw 401k funds during RNOR)
- 11:53 Option 5 (Withdraw 401k funds during ROR)
- 12:55 Summary and substantial periodic withdrawal
Transcript
Auto-generated captions, lightly cleaned
0:03 Hello everyone welcome back to Desi Return today we are going to dive into an important topic what should one do with their 401K funds once they decided to move back to India so this is a continuation to our previous video where we talked about benefits of investing in 401k and whether one should invest in 401k if they have plans to move back to India soon this video should complement the previous and gives more insights into what are the different options you have for the 401K funds and which option would be appropriate for you before we
0:44 Dive into the different options here I wanted to talk about few things so that we are all on the same page and then decide which option is better for you the first with 401K funds if you withdraw the funds before 59 and a half years there is a 10% penality unless there are certain certain circumstances which we won't dive into second the funds that you withdraw from a traditional 401K would fall under earned income and you have to pay taxes in us there are different tax statuses in us a resident and non-resident and in the link in the descript description below can provide information to determine which status do you fall into please note if you're are not a US citizen or a green card holder and you're living in India you would fall under a nonresident
1:46 For tax purpose couple of things for a non-resident so you won't be available to take advantage of standard deductions you can't file as a married file jointly so there are certain differences between a resident or a non-resident when you're doing a tax filing in us so please keep that in mind in India there are three different statuses non-resident resident the third one is resident but not ordinary resident so this is a a tax status that Indian government has provided to help nris moving back to India permanently for a smooth transition this is available up to 3 years and during the rnor global income is exempt from income tax in India except the income is from a business or a profession that is controlled from India so this is an important phase when moving back to India that could help
2:46 From a tax planning third estate tax if if someone passed away and there is something called an estate tax that you have to pay you are a US citizen the threshold is $13 million as of 2024 for a non-resident it is $60,000 so this $60,000 is across all the assets that you have in us and the estate tax could be up to 40% so keep that in the back of your mind when you're selecting a particular option because this is an important thing to be considered and the last one is there has been some changes in the tax loss especially in 2021 where in the case of a 401k or a IRA funds the funds are taxed only at the time of withdrawal and not on the unrealized gains this is for a traditional 401k or an IRA however these tax laws are not
Read the full transcript (14 more sections)
3:48 Very clear for Roth IRA because the earnings on the Roth IR are not taxed in us because this is an after tax contribution however the earnings are not tax exempt in India so if you take a conservative approach these could be taxed in India at the time of withdrawal so that might not be very beneficial to have the funds in an Roth IR so let's dive into
4:19 The different options that you have when you made a decision to move back to India and what to do with your 401K funds first one leave the funds in your employed sponsor plan this could be the easiest one there is no additional work that you have to do however the funds that you have in an employer sponsored plan is very limited and also the expense ratios could be very high so this is not something that I would recommend I think at least you can roll over those 401K funds into a traditional IRA funds which is the second option
4:57 Which we will dive into so rolling over your traditional you are rolling over your 401K funds into traditional irf funds in this option there is no 10% penalty that you have to pay there is no income tax because the rolling over from a 401 to Ira is completely acceptable and it doesn't cause any tax event however when you have the funds in an IRA that is provided by a custodian you have much more many more options to invest in and the expense ratios are quite low so that gives a lot more flexibility in where you can invest and the expense ratios would be very very less so these custodians are like Fidelity Vanguard and several so if someone have plans to move back to India it might be a good idea to open an account with Fidelity or a vanard because they accept a foreign address later so it's better to open the account
6:00 While you are in US however you can't transfer the 401K funds until you leave the job so once you leave your employer that's when you would have the opportunity to roll over your 401K funds into an IRA what are the pros of this option this gives a lot of diversification so if you're looking to have funds Diversified in us and have the funds maintained in US Dollars this could help you and if you have plans in the future to be back in us or the kids to be back in us this can provide some Corpus fund to help out down the road so these are the pros in terms of the cons keep in mind about the estate tax especially if you're a nonresident and if you the estate tax limit is only 60,000 keep that in mind it's a complex tax filing where you have to report your assets in Us in India while of filing so that
7:00 Requires you know working with the CPA from a tax filing purpose but this could be an option for someone who wants a diversification or who have a different plans in a long term let's talk about the third option in the third option you want to roll
7:18 Over your 401K funds into a Roth irn not a traditional irn in the Roth IRA you don't also pay the 10% penality because you are rolling from a 401k to an IRA however you would pay the tax on the rollover because a Roth iri is a after tax contribution so the amount that you're rolling over you have to pay tax on that in that fiscal year however as we discussed earlier the tax loss for the Roth IRA earnings are not clear in India so it might not be the best idea if you have plans to live in India for a long time it has the same kind of pros and cons like the pros diversification and if you want to use the funds in the future it could help from a estate planning however the cons is the same like know 60,000 estate tax that you are applicable complicated tax returns and
8:19 More than that the tax law of India like you know like applying the taxes for the earnings is not very clear so this is not maybe something that I would recommend if you have plans to live in India now let's talk about the
8:37 Option four you want to withdraw the funds while you are in RN o phase so you have been living abroad for quite some time you qualify for ronr phase this is where you can do some tax planning if you want access to the funds and you want to you know you don't need the access to this Corpus later in the long term and you want to keep the tax filing simple you can definitely withdraw These funds during an RNR phase and some of the pros are it's definitely keeps the tax filing simplified and you can minimize the tax that you have to pay because there is no tax in India at the time of withdrawal and U in terms of the cons you have to pay 10% penality and some income tax in US so now let's walk through an example of withdrawing 401K funds during RNR
9:41 Phase let's assume that you have 100,000 in your 401k and you have two years of RNR pays as a tax resident and you would be considered as a non-resident from a US tax purpose if you have more years that you qualify for an R office you have more flexibility and if you have only one year you know changes but let's in this example assume that you have two years of RN R phase and assume you're withdrawing 50k in each year of the 100K 401K funds that you have so you have to pay 10% penality on this 50k which is equivalent to $5,000 and since you are a non-resident you have have to file as a single filer when you're filing the taxes in us so for a single filer the based on the marginal rates the total amount of tax
10:42 That you would pay for the 50k income assuming you don't have any additional income in US is about $653 so in total including the penality and the taxes it would be $1,053 for a $50,000 withdrawal this is the taxes and penalty that you would pay in us but you don't pay any taxes or anything in India because you're in RNR phase and this 11,000 is equivalent to 22.1% of the overall 50,000 so you would have this money available to invest in India and there is no tax complications that you have to manage don't have to worry about the estate tax so I just want to walk you through an example to understand what is the amount that you would pay and evaluate whether this option makes sense and also keep in mind you don't have to take everything out of your 401k and you can
11:44 Do some optimization during this RNR phase based on your needs of the funds and also the less complexity from a tax violence and the last one is you want to
11:55 Withdraw the funds when you are in roor Phase which is an resident phase resident ordinary resident so for some people they might not qualify for a RNR phase because of the the duration they were abroad or for different reasons or maybe after the RNR you trying to withdraw the funds in this situation you have to pay the income tax in India also in addition to the penality the income tax that you would pay in us so if you withdraw the funds the 10% is applicable as well as the earned income tax that you have to pay in us and there is also like income tax that you have to pay in India however there is a foreign tax credit from a double taxation avoidance treaty there's a foreign tax credit that could be applicable but please work with the CPA to do this option these are the different options
12:55 That you have and from my perspective if it is all possible either you want to leave your funds in an IRA or you want to withdraw during an RoR phase or in certain extent maybe during an hour or depending on your situation these are the main three things that I see people want to dive into dwell into and see which would be much more appropriate for them based on their long-term plans based on their citizenship immigration status depending on their risk level tax filing situations in addition to all these the there is also another option called substantial periodic withdraw this is a very complex one I won't be diving into this this is something that could be beneficial for someone to take a periodic withdraw payments from now till age of 60 there is no 10% penalty but you have to pay the income tax when you withdraw These funds and there are different C calculations on how you do the withdrawal amount which we won't
13:57 Dive into in this video you hope this content is helpful and if you have any feedback please provide your feedback in the comments and thank you very much for watching
