This is the question that keeps NRIs up at night.
Not “which city should I move to?” Not “what school for the kids?” Not even “how do I ship my stuff?”
It’s this: “What happens to my 401(k)?”
I get it. For most of us who worked in the US for a decade or more, the 401(k) is the single largest financial asset we have.
We watched it grow through market booms and crashes.
We maxed out contributions every year. We got employer matches. And now we’re sitting on a pile of money that’s locked behind a wall of complex rules spanning two countries.
When I moved back in 2017, my 401(k) was one of the first things I had to figure out. I called my plan administrator.
They were confused. “You’re moving where? India?” I called my US accountant.
He said, “That’s outside my expertise.” I called an Indian CA. He said, “What is a 401(k)?”
Nobody had the full picture.
Nine years later, I’ve helped hundreds of people in our BacktoIndia community navigate this exact decision.
I’ve spoken with cross-border tax advisors, chartered accountants, CFPs, and returning NRIs who’ve been through it. This is everything I’ve learned.
First Things First. What Are Your Options?
You have four main choices with your 401(k) when you leave the US. Each has different tax consequences, timelines, and risks.
| Option | What It Means | Best For |
|---|---|---|
| Leave it in the US | Do nothing. Let it stay with your employer’s plan. | People under 59.5 who want continued tax-deferred growth |
| Roll over to an IRA | Move it from employer 401(k) to an Individual Retirement Account | People who want more investment control and flexibility |
| Cash out (withdraw) | Take the money out, pay taxes and possibly penalties | People over 59.5 OR those who need the money during RNOR window |
| Roth conversion | Convert Traditional 401(k) to Roth IRA | People in low-income transition years who want tax-free future growth |
There is no single right answer. It depends on your age, the amount in your 401(k), when you’re returning, and how long you plan to stay in India.
Let me walk you through each option.
Option 1: Leave It in the US (The Do-Nothing Approach)
This is what most returning NRIs do. And honestly, for many people, it’s the right move.
Your 401(k) stays with your former employer’s plan. Your investments keep growing tax-deferred. You don’t pay any taxes or penalties right now.
Pros:
No immediate tax hit. No penalties. Your money continues to grow.
Cons:
You’re managing a US financial account from India. Some plan administrators get nervous about foreign addresses. Customer service calls happen at midnight India time. And you have limited investment choices within an employer plan.
The catch: Just because you left the US doesn’t mean the IRS forgot about you. If you’re no longer a US citizen or Green Card holder, you’ll eventually need to file a W-8BEN form with your plan administrator to claim treaty benefits when you do withdraw.
A few things to watch:
Your employer plan may have a minimum balance requirement. If your balance is under $5,000, they might force you to roll it over or cash out. Over $5,000, they generally can’t force you out.
Some employers will not send distributions to a foreign address or foreign bank account. You’ll need a US bank account to receive the money when you eventually withdraw.
You must still report this account in your Indian tax return under Schedule FA (Foreign Assets) once you become a Resident and Ordinarily Resident (ROR). Not reporting can attract a penalty of Rs 10 lakh under the Black Money Act.
Option 2: Roll Over to a Traditional IRA
This is the most flexible option. And the one I recommend most often to community members.
A rollover IRA gives you the same tax-deferred growth as a 401(k), but with way more investment choices and easier account management. You can choose a brokerage like Charles Schwab, Fidelity, or Vanguard that’s comfortable working with non-US residents.
How to do it:
Open a Traditional IRA with a brokerage that accepts non-US addresses (Schwab and Fidelity are commonly used by NRIs in our community). Request a direct rollover from your 401(k) plan administrator to the IRA. This is a trustee-to-trustee transfer. No taxes. No penalties. No drama.
Important: Do a direct rollover, not an indirect one. With an indirect rollover, the money comes to you first, and you have 60 days to deposit it into the IRA. If you miss that window, the entire amount is treated as a taxable distribution. I’ve seen this happen to at least three community members. It’s a painful, expensive mistake.
Pros:
More investment choices. Easier to manage from India. Better for Roth conversions later. Some brokerages have better support for international clients.
Cons:
Not all US brokerages will open accounts for people with Indian addresses. Some may restrict trading or freeze accounts once they discover you’re living abroad. Do the rollover BEFORE you change your address to India.
This is critical. Several people in our community have been locked out of their brokerage accounts after updating their address to India. The compliance departments at US financial firms are increasingly cautious about foreign clients.
My recommendation: Open the IRA while you still have a US address. Do the rollover. Then update your address later. Or better yet, keep a US address on file (like a family member’s address or a registered agent).
Option 3: Cash Out (Early or After 59.5)
This means withdrawing the money. Simple in concept. Complex in execution.
If you’re under 59.5:
The US will charge a 10% early withdrawal penalty PLUS income tax on the full amount. For most people, that’s a combined 30% or more gone before you even see the money.
Let’s say you have $200,000 in your 401(k) and you cash out at age 45:
| Component | Amount |
|---|---|
| 401(k) balance | $200,000 |
| 10% early withdrawal penalty | $20,000 |
| Federal income tax (approx 22-24%) | $44,000 to $48,000 |
| Net amount received | Roughly $132,000 to $136,000 |
You just lost $64,000 to $68,000. That’s a third of your retirement savings.
For most people under 59.5, cashing out makes no financial sense. The math is brutal.
If you’re over 59.5:
No early withdrawal penalty. You pay only federal income tax on the withdrawal amount. If you’ve filed a W-8BEN to claim DTAA treaty benefits, the withholding rate may be reduced. Under Article 20 of the India-US DTAA, private pensions are generally taxed only in the country of residence. So if you’re a tax resident of India when you withdraw, the US may not tax you at all, or at a reduced rate.
The key phrase is “may.” The treaty application can be complex, and not all plan administrators know how to apply it correctly. Work with a cross-border tax advisor on this. It’s worth the fee.
Option 4: Roth Conversion (The Strategic Play)
This is the option most people don’t know about. And it can be incredibly powerful if timed right.
A Roth conversion means moving money from your Traditional 401(k) (or Traditional IRA after rollover) into a Roth IRA. You pay income tax on the converted amount now, but all future growth and withdrawals from the Roth are tax-free in the US.
Why this matters for returning NRIs:
The year you leave the US, your income often drops significantly. If you quit your job in March and move to India, your US income for that calendar year is much lower than a typical year.
That puts you in a lower tax bracket. Converting to Roth during this low-income year means you pay less tax on the conversion.
For example, if you normally earn $150,000 but your income in your departure year is only $40,000 (3 months of work), you have room in the lower tax brackets to convert a chunk of your Traditional 401(k) to Roth at a lower rate.
The India angle: India does not currently recognize the Roth IRA as a tax-exempt account. When you eventually withdraw from a Roth, the US won’t tax it, but India might. This is a gray area in cross-border taxation, and the treatment depends on your residential status at the time of withdrawal.
During the RNOR (Resident but Not Ordinarily Resident) period, your foreign income is generally not taxable in India.
So Roth withdrawals during RNOR years may escape both US and Indian taxation. That’s the sweet spot. But consult a cross-border tax advisor before counting on this.
The RNOR Window: Your Golden Opportunity
This is possibly the most important tax concept for returning NRIs. And most people don’t understand it until it’s too late.
When you move back to India, you don’t immediately become a “Resident and Ordinarily Resident” (ROR) for tax purposes. There’s a transition period called RNOR – Resident but Not Ordinarily Resident.
During RNOR, your foreign income (including 401(k) withdrawals) is generally NOT taxable in India.
How long does RNOR last?
It depends on when you return. Typically 2-3 financial years.
| Return Date | RNOR Duration | ROR Starts |
|---|---|---|
| Return in January-March 2026 (within FY 2025-26) | FY 2025-26 and FY 2026-27 (2 years) | FY 2027-28 |
| Return in April 2026 (start of FY 2026-27) | FY 2026-27, FY 2027-28, possibly FY 2028-29 (2-3 years) | FY 2028-29 or 2029-30 |
Source: Section 6 of the Income Tax Act, 1961
Here’s the critical insight. If you time your return to be at the start of a financial year (April), you can potentially get an extra year of RNOR status. That’s an extra year where your 401(k) withdrawals may not be taxed in India.
One community member saved approximately Rs 7 lakh in Indian taxes simply by delaying his return from February to April. Same year. Same move. Just two months later. Huge difference.
If you’re planning your return from the USA, this is one of the most important things to get right. Our detailed return to India checklist covers the timing strategy.
Section 89A and Form 10EE: The Rule That Saves You from Double Taxation
This is the section that most Indian CAs don’t know about. And it can save you lakhs.
Here’s the problem: Once you become ROR in India, your global income is taxable. India normally taxes income on an “accrual” basis. That means India would want to tax the annual growth (interest, dividends, capital gains) inside your 401(k) every year, even if you haven’t withdrawn a single dollar.
The US, on the other hand, taxes 401(k) income only when you withdraw it.
See the mismatch? India taxes it every year on paper. The US taxes it when you actually take the money out. Without relief, you’d end up paying tax on the same money twice, in different years, in different countries. And claiming Foreign Tax Credit becomes a nightmare because the timing doesn’t align.
Section 89A fixes this.
Introduced in the Finance Act 2021, Section 89A allows returning NRIs to defer Indian taxation on their foreign retirement accounts (401(k), IRA) until the year of actual withdrawal. This aligns Indian taxation with US taxation.
How to claim it:
You must file Form 10EE electronically on the Income Tax portal before filing your ITR. You do this in the first year you become ROR.
Once you file Form 10EE, the election is irrevocable. It applies to all future years for that account. You cannot change your mind later.
| Without Form 10EE | With Form 10EE |
|---|---|
| India taxes 401(k) growth every year on accrual basis | India taxes only when you actually withdraw |
| Double taxation likely because US taxes on withdrawal | Both countries tax in the same year, enabling FTC claims |
| Foreign Tax Credit mismatch | Clean FTC under DTAA |
Source: Section 89A, Income Tax Act 1961; Rule 21AAA; ClearTax
Critical warning: Even if you file Form 10EE and defer taxation, you MUST still disclose your 401(k)/IRA in Schedule FA (Foreign Assets) of your Indian tax return. Section 89A defers taxes. It does not exempt you from reporting. Non-disclosure attracts a Rs 10 lakh penalty under the Black Money Act.
This is one of those areas where a cross-border tax advisor pays for themselves many times over. If you’re dealing with double taxation issues, don’t try to figure this out alone.
The W-8BEN Form: Reducing US Tax Withholding
Once you leave the US and are no longer a tax resident, you need to tell the IRS. The way you do that for your 401(k) or IRA is by filing Form W-8BEN with your plan administrator or brokerage.
What does W-8BEN do? It tells the plan provider that you are a non-resident alien and that you want to claim tax treaty benefits under the India-US DTAA.
Under Article 20 of the DTAA, private pensions (which includes 401(k) distributions) may be taxed only in your country of residence. If you’re living in India, this could mean zero US withholding on your 401(k) withdrawals.
Without W-8BEN: The plan administrator withholds 30% (default rate for non-resident aliens).
With W-8BEN: Withholding may be reduced or eliminated based on the treaty.
Even if you overpay, you can file a 1040-NR (US non-resident tax return) to claim a refund. But it’s much easier to get the withholding right from the start.
File W-8BEN before you make any withdrawals. It’s valid for 3 years and must be renewed.
The US Estate Tax Trap Nobody Talks About
This one scares me. And it should scare you too.
If you’re a US citizen, the federal estate tax exemption is over $13 million. You probably don’t need to worry.
But if you’re NOT a US citizen and NOT a Green Card holder, your estate tax exemption for US-situs assets is only $60,000.
Yes. Sixty thousand dollars.
Your 401(k), IRA, US brokerage accounts, US real estate – they’re all US-situs assets. If you die while living in India as a non-US-citizen, and your US assets exceed $60,000, your heirs could face a 40% estate tax on the amount above $60,000.
| Scenario | Estate Tax Exemption | Potential Tax on $500K 401(k) |
|---|---|---|
| US citizen | $13.6 million (2024) | $0 |
| Non-US citizen, non-Green Card holder | $60,000 | Up to $176,000 (40% of $440K) |
Source: IRS Estate Tax rules for non-resident aliens
Let me make that real. If you have a $500,000 401(k) and you die in India as an Indian citizen with no US ties:
$500,000 minus $60,000 = $440,000 taxable. At 40%, that’s $176,000 your family loses.
This is why many returning NRIs who gave up their Green Cards or never became US citizens consider withdrawing their 401(k) strategically over time rather than leaving a large balance in the US. The estate tax risk is real.
If you’ve cancelled your Green Card or were always on H-1B/L-1, this applies to you.
Consult an estate planning attorney who understands cross-border issues. This is not something to figure out on your own.
Required Minimum Distributions (RMDs): You Can’t Avoid Them Forever
Even if you leave the US, the IRS will eventually force you to start withdrawing from your 401(k) or Traditional IRA.
Current RMD rules (SECURE Act 2.0):
If born between 1951-1959: RMDs start at age 73 If born in 1960 or later: RMDs start at age 75 (effective 2033)
Source: IRS RMD FAQ
The RMD amount is calculated by dividing your account balance (as of December 31 of the prior year) by a life expectancy factor from IRS tables.
What happens if you miss an RMD?
A 25% excise tax on the amount you should have withdrawn but didn’t. If you correct it within 2 years, the penalty drops to 10%.
Important for India:
RMD withdrawals are taxable income. Once you’re ROR in India, they’ll be taxable in India too (assuming you filed Form 10EE to align taxation with withdrawals). You can claim Foreign Tax Credit for US taxes paid on the same amount.
Plan ahead for RMDs. They increase your taxable income in both countries every year. If you have a large 401(k), the RMD in your 70s could push you into higher tax brackets.
Roth IRAs have no RMDs during the owner’s lifetime. That’s another reason some people consider Roth conversions before or during their return.
The Roth 401(k) Problem
If you had a Roth 401(k) at your US employer (not a Traditional 401(k)), the rules get tricky.
In the US, Roth 401(k) withdrawals are tax-free (assuming qualified distributions after age 59.5 and 5-year holding).
But India doesn’t recognize the “Roth” concept. India looks at the source of income. If money comes out of a retirement account, India may treat it as taxable income. The fact that the US doesn’t tax it doesn’t automatically mean India won’t.
This is an evolving area of cross-border tax law. There’s no clear precedent or specific guidance from the Indian Income Tax department on Roth accounts.
The safest strategy: Withdraw from Roth accounts during your RNOR years when foreign income is not taxable in India. This way, you avoid US tax (because it’s Roth) AND Indian tax (because you’re RNOR). That’s the ideal window.
If you have both Traditional and Roth 401(k) accounts, the withdrawal sequencing matters a lot. A cross-border tax advisor can model the most tax-efficient order.
Bringing the Money to India
Once you withdraw from your 401(k), you need to actually get the money to India. Here’s how that works:
Step 1: Receive the distribution in your US bank account. Most plan administrators won’t send funds directly to an Indian bank.
Step 2: Transfer to India via wire transfer or a remittance service. The money should go to your NRO (Non-Resident Ordinary) account, not NRE. 401(k) distributions are not “NRI earnings” – they’re income being repatriated, so NRO is the correct account.
For large transfers (over roughly $250,000 or Rs 2 crore), your bank in India will require Form 15CA and 15CB. Form 15CA is an online declaration. Form 15CB requires a CA’s certification. Without these, the bank won’t process the transfer.
If you’re sending large amounts from the USA to India, plan for the paperwork. It takes a few days to get Form 15CB done.
Step 3: Once the money is in your NRO account, you can convert it to your savings account after you change your NRI status to resident status and consolidate your bank accounts.
My Recommended Action Plan (Timeline)
Here’s what I suggest to people in our community based on hundreds of conversations:
6 Months Before Leaving the US:
Open a rollover IRA at Schwab or Fidelity (while you still have a US address)
Roll your 401(k) into the IRA (trustee-to-trustee transfer)
Max out any remaining 401(k) contributions for the year
Consult a cross-border tax advisor to plan your RNOR window
3 Months Before Leaving:
File Form W-8BEN with your IRA custodian
Keep your US bank account active (you’ll need it for future withdrawals)
Open an NRO account in India if you don’t have one
Consider timing your departure for early April (to maximize RNOR years)
First Year in India (RNOR):
If over 59.5, consider strategic withdrawals during RNOR (foreign income not taxed in India)
If considering Roth conversions, do them during low-income years
File US tax return (1040-NR) for any withdrawals
Start FBAR filing if your US accounts exceed $10,000
Year You Become ROR:
File Form 10EE on the Income Tax portal BEFORE filing your ITR
Disclose all foreign accounts in Schedule FA
File Form 67 for Foreign Tax Credit claims
Consult your CA to ensure proper ITR filing
Common Mistakes (From Our Community)
These are real mistakes made by real people in our group. Each one cost money.
Mistake 1: Cashing out the entire 401(k) in one year
A community member in his 40s cashed out $300,000 in one shot. He paid 10% penalty ($30,000) plus roughly 24% federal tax ($72,000). He lost $102,000. If he’d waited until 59.5 or withdrawn strategically over several years, he could have saved most of that.
Mistake 2: Not filing Form 10EE
Another member became ROR without knowing about Section 89A. India taxed the annual growth in his 401(k) on an accrual basis. When he later withdrew from the US, the US taxed him too. Double taxation on the same money. His CA didn’t know about Form 10EE until it was too late for that year.
Mistake 3: Not reporting 401(k) in Schedule FA
One member filed Form 10EE (good) but didn’t report the 401(k) in Schedule FA (bad). He received a notice. The penalty under the Black Money Act for non-disclosure of foreign assets is Rs 10 lakh per year. He was able to resolve it with his CA, but it was stressful and expensive.
Mistake 4: Changing US address to India before rolling over
A member updated his address to India on his brokerage account before completing the rollover. The brokerage froze his account due to compliance issues. It took 3 months and multiple calls to resolve. Always do the rollover first, address change later.
Mistake 5: Ignoring the estate tax risk
A member with a $400,000 IRA had no idea about the $60,000 estate tax exemption for non-citizens. He hadn’t set up any estate planning. If something had happened to him, his family could have faced over $130,000 in US estate taxes on top of their grief.
Frequently Asked Questions
Can I contribute to my 401(k) after leaving the US?
No. Once you leave your US employer, you can no longer contribute to their 401(k) plan. You can, however, continue to hold the account and let it grow.
Can I keep my 401(k) in the US forever?
Technically, yes. But you’ll eventually have to start taking RMDs at age 73 (or 75 if born after 1959). And you must report it in your Indian tax returns once you become ROR.
Is the 10% early withdrawal penalty waived if I leave the US?
No. The 10% penalty for withdrawals before age 59.5 applies regardless of where you live. There are a few exceptions (disability, death, substantially equal periodic payments), but moving to India is not one of them.
Do I need to file a US tax return every year even if I don’t withdraw?
If you’re not a US citizen or Green Card holder and you have no US income, generally no. But the year you make a withdrawal, you’ll need to file a 1040-NR. And you should always file FBAR if your aggregate foreign accounts (from the US perspective, your Indian accounts) exceed $10,000. From the India side, if you’re ROR, you must report all foreign accounts (including US ones) in your Indian tax return.
What about Social Security?
That’s a separate topic, but briefly: If you worked in the US for at least 10 years (40 quarters), you’re eligible for Social Security benefits starting at age 62. You can receive these payments even while living in India. The US-India Totalization Agreement doesn’t exist, so you cannot combine work credits between the two countries. Check our guide on Social Security for NRIs.
Should I hire a cross-border tax advisor?
Yes. Absolutely. If you have more than $50,000 in your 401(k), the cost of a good advisor ($500-$2,000 for a consultation) is trivial compared to the tax savings. A single mistake can cost you tens of thousands of dollars. This is not a DIY situation for most people.
Wrapping Up
Your 401(k) is one of the most valuable assets you’re bringing back from the US. Treat it with the same care you’d give to buying a house or planning your kid’s education.
The rules are complex. They span two countries, two tax systems, and multiple government agencies. But the good news is that the Indian government has created tools (like Section 89A) to prevent double taxation. And the India-US DTAA provides a framework for fair treatment.
The single most important piece of advice: Don’t make decisions in a rush. You don’t need to cash out your 401(k) the day you land in India. You have time. Use it to understand your options, plan your RNOR window, and work with advisors who understand both tax systems.
And if you’re still figuring things out, you’re in good company. This is one of the most discussed topics in our WhatsApp groups. Every week, someone asks about 401(k). Every week, someone who’s been through it shares their experience.
That’s the power of community.
Disclaimer: This article provides general information based on current US and Indian tax laws as of February 2026. Tax laws change frequently. This is NOT tax advice. Consult a qualified cross-border tax advisor for your specific situation. Every individual’s circumstances are different.
Sources:
- IRS 401(k) Plan Overview – irs.gov
- Section 89A, Income Tax Act, 1961 – incometaxindia.gov.in
- ClearTax Section 89A Guide – cleartax.in
- SECURE Act 2.0 RMD Rules – IRS
- India-US DTAA, Article 20 – incometaxindia.gov.in
- IRS Form W-8BEN – irs.gov
- US Estate Tax for Non-Resident Aliens – irs.gov
- Dinesh Aarjav & Associates – 401(k) Tax Strategy – dineshaarjav.com
If you’re planning your move back, join our WhatsApp community at backtoindia.com/groups – 20,000+ NRIs helping each other with real, lived experience. It’s free and volunteer-run.
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