Watch: Roth IRA After Moving to India: RNOR, 5-Year Rule, Tax
DesiReturn video guide for NRIs on Roth IRA after moving to India, including RNOR timing, the 5-year rule, age 59 1/2, Section 89A uncertainty, Schedule FA, and withdrawal tradeoffs.
The full write-up, with the numbers and the links.
Chapters
- 0:00 Introduction
- 2:17 Roth IRA Taxation
- 5:19 Three scenarios
- 9:50 Decision Framework
Transcript
Auto-generated captions, lightly cleaned
0:00 Let me give you a situation that can quite lead cost you lakhs of rupees. You did everything right, invested in Roth IRA, paid taxes up front, let it grow tax free. Then, you move to India. Suddenly, the same tax free account might become taxable in India. In this video, I will walk you through three real scenarios and answer, should you withdraw Roth? What happens if you don't? And the situation where withdrawing the money could backfire with taxes and penalties. One wrong move can trigger US taxes, 10% penalty, and possible Indian tax. Keep in mind that 10% penalty cannot be claimed as a foreign tax credit in India.
0:54 Let's simplify Roth IRA. This is funded with post-tax money, and the money grows tax free in US. There are two critical rules. The first one is 5-year rule, where the account must be open at [clears throat] least 5 years. And the second one is age. You must be at least 59 and 1/2. Only then the earnings are tax free in US. Now, let's talk about early withdrawals and also the priority in which these are withdrawn. First, your contributions. They are tax free and penalty free. Conversions. This is when when you convert a traditional IRA to Roth IRA.
1:42 In this case, it would be tax free once you met this 5-year rule. And finally, the earnings. You would be paying US taxes and 10% penalty if you are under 59 and 1/2 or don't meet the 5-year rule. Please note, this 10% penalty is not just US problem. India does not recognize this penalty. So, you can't claim foreign tax credit. So, you effectively pay this as a debt cost. Now, the twist. India clearly doesn't
2:19 Recognize Roth IRA as a tax free. There is section 89A introduced in Finance Act 2021 that was designed to help returning NRIs avoid double taxation on foreign retirement accounts. And this is how it works. First, you file Form 10EE in your first year when you become a resident ordinary resident. Second, once filed, India deferred taxation until the year you withdraw the money from those accounts, which matches with US taxation. And finally, you use Form 67 to claim foreign tax credit under the India-US tax double taxation avoidance agreement.
Read the full transcript (11 more sections)
3:10 Please note, you have to file Form 10EE the first year you become a resident ordinary resident. Missing that window, you might lose this benefit permanently. Now, let's talk about Roth IRA gray area. Section 89A is designed to for the accounts where the withdrawals are taxable, such as 401k, traditional IRA. However, Roth IRA, when you withdraw the money, it's tax free in US. So, Section 89A clearly applies for traditional IRA, 401k. Roth IRA, it's actively debated.
3:56 Some tax professionals believe India would respect the tax free status in US. Others say it won't. So, there is no official confirmation yet on this. Until this clarity, Roth IRA might be treated in this gray area once you become a resident ordinary resident. Now, let's talk about what happens once you become a resident ordinary resident and how India may tax these Roth IRA on an annual They do tax are the first one is on the dividends. These dividends are considered as income from other sources and the Indian slab rates would apply. For the capital gains, if you're holding it for less than 24 months, they are taxable at slab rates. If you're holding it for more than 24 months, then it would be 20% with indexation benefit.
4:54 Also, this is very important from a compliance perspective. Even if you don't withdraw, you must disclose your Roth IRA in Schedule FA, which is the foreign assets on your ITR return once you become a resident. Non-disclosure of this could lead to a penalty of 10 lakhs under the black money act. Let's talk about the first scenario
5:19 Where you do nothing. Let's meet Ranj, age 45, contributed 120k to Roth IRA. He has gains of 180k, so a total portfolio of 300k. He moved to India and he did nothing. For the first two to three years when he was under RNOR, India doesn't tax on the foreign income, so he's safe. But he didn't do any planning during RNOR and he missed a golden opportunity. Once he become a resident ordinary resident, this is when things get expensive. He didn't file Form 10EE and he didn't take any action. So, the annual dividends in Roth IRA are taxable at slab rates. Capital gains inside Roth are also taxable at the slab rates or 20% depending on the holding period. The 180k gain that was built over years is now exposed to Indian tax
6:23 System. And every year he has to file Schedule FA in the ITR. Failing not to do that might bring a 10k penalty from a black money act. Finally, the Roth IRA, which is the tax free in US, is now potentially taxable every year in India just because no decision was made during the RNOR window. Let's take scenario two where you withdraw money during RNOR. Meet Priya, age 45, contributed 120k with a gains of 180k and a portfolio of 300k. She moved back to India, withdraw money during RNOR. Please note, RNOR only protects you from Indian income tax. It does not eliminate US taxes.
7:15 So, if she withdraws everything during RNOR, the contributions 120k, there is no taxes, no penalty. For the earnings, which is 180k, it's taxable in US and a 10% early withdrawal penalty. So, Priya has couple of approaches. She approached in a smartly. She withdraw only her contributions, which is 120k, no penalty, no taxes, and she left the earnings 180k invested for now. Once she become a ROR, she filed Form 10EE, but keep in mind, Section 89's applicability to Roth IRA is still debatable. So, she has a deliberate trade-off to make. First, withdraw everything, where she has to pay US taxes on the earnings and 10% penalty, but there is no risk of Indian tax later. It's a clean exit. There is some planning that can be
8:15 Done because you have an RNOR period for two to three years, you withdraw money so that you can lower the tax bracket. That is one thing to consider. The second, keep the money invested. There is a potential Indian tax risk, but you let the money work longer. There is no right or wrong answer. It depends on your tax bracket, the amount of money you have, and also it's your timeline. That's where you need to do a trade-off. Let's talk about scenario three, clean reset. Meet Amit, age 60, with a portfolio of 300k. He meets the 5-year rule and also 59 and 1/2 plus. So, during RNOR, he withdraws the entire Roth portfolio. He doesn't have to pay US taxes or penalty because he meet the 59 and 1/2 above criteria as well as the 5-year rule. No Indian tax during RNOR
9:16 Period and he reinvested this in a new portfolio, which is fresh. And so, his cost tax basis is going to be 300k. So, when this portfolio goes to 400k, he has to pay capital gains in India only for that 100k gain. So, he has converted this gray area potentially taxable assets into a clean, fully transparent portfolio. Let's talk through the decision framework. Ask yourself these four questions. What is your age? If you're
9:52 Below 59 and 1/2, 10% penalty on the earnings as well as the taxes. So, most probably you might want to withdraw only your contributions. If you're above 59 and 1/2, you have the maximum flexibility, and you can qualify for the tax-free and penalty-free withdrawals. Second, are you in R&OR window? If you are, then I think you have a planning window and use it. If not, then complaints become a priority. Third, how large are your gains? If you have a large unrealized gain, large future Indian risk if it's left in a Roth. If your gains are small, maybe you might want to consider just withdrawing completely to avoid potential risk and the compliance requirements.
10:44 And finally, are you compliant with the Indian taxation? First, have you filed form 10-EE in the first year you become a resident ordinary resident? If you have a traditional 401k or IRA, second, are you annually filing your schedule FA, which is a foreign assets disclosure while filing Indian tax returns? And finally, form 67, the year when you withdraw the money from your 401k or IRA, are you using this form to claim foreign tax credit under the DTAA? Treating Roth IRA as set and forget after moving to India is one of the biggest mistake because you're skipping the compliance filings like schedule FA and form 10-EE.
11:33 Roth IRA is one of the best tools in the US tax systems, but once you move to India, it becomes a strategic decision and a compliance responsibility. The first 2 to 3 years after moving to India is your golden opportunity to plan properly. If you want more breakdown like this real scenarios, consider subscribing because understanding and having this information and making the right decisions can save you lakhs over time.
