After years of working in the United States and living the American dream, you are now considering going back to your motherland, India.

If you have built a substantial nest egg in your 401(k), one of the worries you may have when moving to India is what to do with 401k if you move back to India. 

Can you withdraw your retirement monies without losing your money? What options will you have? Also, what will be the tax implications of such withdrawals as a non-resident?

Keep reading to find answers to these questions and more. 

Can I Access My 401(k) Savings While in India?

You can access distributions from your 401(k) from anywhere in the world, including India. However, there are considerations that you have to keep in mind if you plan to withdraw money from your 401(k) while living abroad. 

Some of these considerations include your age and the tax implications. If you are below age 59 ½ when you move to India, you will owe income taxes and early withdrawal penalties on the withdrawal. Depending on your tax bracket, you can lose as much as 30% of the withdrawal to taxes.

If you are 59 ½ and retired, you can withdraw from your 401(k) plan penalty-free. However, you will still owe income taxes on the withdrawal. If you had a Roth 401(k) plan, you meet the conditions for a qualified withdrawal, you won’t owe any income taxes or penalties on the withdrawal. 

What Happens to My 401k If I Move to India

Leave the 401(k) behind

If you are not yet 59 ½ when you move to India, you can choose to leave the 401(k) behind in your former employer’s 401(k) plan. The money will stay invested in the asset classes selected by your employer, and you won’t have options outside of what the former employer offers. You can keep the money in the 401(k) plan until you reach age 59 ½ when you can make penalty-free withdrawals.

Rollover to a traditional IRA

If you want to keep your retirement money in the United States but not in your former employer’s 401(k) plan, you can choose to roll over the 401(k) to a traditional IRA. This option gives you a wider pool of investment options, and you can choose your preferred asset classes depending on your risk profile. Additionally, when you choose a direct rollover from 401(k) to a traditional IRA, you won’t owe any income taxes. 

Rollover to a Roth IRA

If you are in a lower tax bracket when you move to India, you should consider rolling over to a Roth IRA. Since a Roth IRA is funded with post-tax dollars, you will be required to pay income taxes on the amount you rollover. 

Subsequently, once you reach age 59 ½ and you have held the Roth IRA for at least 5 years, you can make tax-free withdrawals from the retirement plan. Unlike a traditional IRA, a Roth IRA does not require participants to take Required Minimum Distributions when they reach age 72.

Withdraw your money

If you prefer to cash out your 401(k) and take your money as you return to India, you can choose to withdraw from 401(k). Generally, once you have left your job, you are free to withdraw your 401(k) money. However, if you are younger than 59 ½, you will owe income taxes at your tax bracket and an additional 10% early withdrawal penalty. 

How is my 401(k) taxed if I move to India

When withdrawing your 401(k) from India, the Internal Revenue Service (IRS) has laid out rules and guidelines that you need to follow. Therefore, you should understand these tax implications, as they can significantly affect your savings.

Here are some of the tax implications you should look out for:  

Early withdrawal penalties

If you are under the age of 59 ½ at the time of withdrawal, you will have to pay early withdrawal tax. The IRS imposes a 10% penalty on the taxable amount withdrawn before the maturity of a 401(k) plan. The early withdrawal penalty applies unless you qualify for an exception, such as financial hardship.

Income tax

The funds you withdraw from your 401(k) in India incur an income tax in the United States. The IRS requires your plan administrator to withhold a percentage of your withdrawal for federal income taxes. The withholding rate can vary based on your total withdrawal amount, but usually, it is 20%.

India income taxes

India also has tax regulations on the income you receive, which can include your 401(k) withdrawal. You may be subject to Indian income tax on the funds you receive. It’s advisable to consult with an Indian tax professional to understand your Indian tax obligations.

Double taxation

The potential for double taxation exists when both the U.S. and India claim the right to tax the same income. To avoid double taxation, consider the Foreign Tax Credit (FTC) offered by the U.S.. You may be able to offset U.S. taxes owed with taxes paid to India.

Tax treaty

The United States and India have a Double Taxation Avoidance Agreement (DTAA). The DTAA states rules for taxing different types of income, including retirement benefits. Therefore, you can find out about the DTAA and take advantage of the agreement to reduce the tax you are liable to pay.

Tax reporting

You should properly report your 401(k) withdrawal to tax authorities in the U.S. and India. You will need to file tax returns depending on your tax residency status. Ensure you maintain accurate records of your transactions, forms, and withholdings to be on the safe side.

How to Choose the Right 401(k) Withdrawal Options

When you’re considering withdrawing your 401(k) while in India, you have several options to choose from. The options available to you may depend on your 401(k) plan and its terms, but here are some common withdrawal choices:

Lump sum payment

You can withdraw your entire 401(k) balance in a single payment. If you have an immediate financial need, a lump sum payment is the best option for you.

Periodic payments

Alternatively, you can go for periodic payments, either monthly or annually. Periodic payments provide a steady income stream, which can be useful if you want to have a constant flow of income.

Steps to Withdraw Money from 401(k) While in India

When you’re ready to start the withdrawal process, you need to understand the steps involved.. Here’s a step-by-step guide on how to withdraw your 401(k):

Contact your 401(k) plan administrator

Start by getting in touch with your 401(k)-plan administrator. A plan administrator is the person responsible for managing your retirement account. You can find their contact information on your plan’s website or your account statements.

Confirm your eligibility

Next, you should ensure you are eligible to withdraw your 401(k) from India. If you are past the retirement age of 59 ½ when you leave your job, you can withdraw your 401(k) penalty-free.

Know the taxes you will owe

Withdrawals from a 401(k) are generally subject to taxation. The IRS has specific rules for international withdrawals, and you may be required to withhold a percentage for taxes. When you understand the tax implications that apply to you, you have full knowledge of the deductions on your withdrawal.

Choose your withdrawal method

Decide on your preferred withdrawal method. You can either make a lumpsum withdrawal or choose periodic payments. The choice you make depends on your situation and needs.

Complete necessary documentation

When you contact your plan administrator, you will be provided with several forms and documents you need to fill out. Ensure you fill them out accurately and provide any additional information requested.

Choose how you get paid

Once your withdrawal is processed and approved, your plan administrator will arrange the disbursement of funds. They can send a wire transfer to your Indian bank account or send you a check, depending on your preference. Ensure you have agreed on the method you will use to receive your money.

What Next After Withdrawing Your 401(k)?

With your 401(k) successfully withdrawn in India, it’s time to chart your financial future. What are your post-withdrawal plans? 

You can choose to invest in exciting new opportunities in India and create a safety net for your family. Alternatively, you can decide to enjoy retirement money in this enchanting subcontinent.

Ultimately, you are the one to choose your financial course after you withdraw your 401(k). However, remember the decisions you make will shape your financial journey, so consider your options carefully.

Conclusion

Once you move back to India, you should consider what to do with your 401(k). If you need the money immediately to set up a business or fund your living expenses, you can choose to cash out the 401(k) and take the money. Be aware that you will owe income taxes, and a potential penalty if you are younger than 59 ½.

If you don’t need the money immediately, you can choose to keep your money in the United States. You can decide to leave the money in your former employer’s 401(k) plan to continue growing. Alternatively, you can roll over to a traditional IRA or Roth IRA to get access to a wider pool of investment options. You can let the money continue growing indefinitely until you reach age 59 ½ or later when you need the money.