Taxation

Managing Your US 401(k) and IRA from India

One of the most common questions we hear from returning NRIs is: What should I do with my 401(k) or IRA once I'm back in India? The good news: you have options. The bad news: the wrong option can be expensive. This guide walks through the tax rules, penalties, and practical trade-offs so you can make an informed decision.

Your four main options

Once you leave the US, your retirement accounts don't automatically close or move. You generally have four choices for a 401(k):

• Leave it in the US with your former employer's plan provider.
• Roll it over to an IRA in the US (Traditional or Roth).
• Withdraw the money and move it to India.
• Convert to a Roth IRA and pay US tax now in exchange for tax-free growth later.

For IRAs you already hold, the main question is whether to keep, convert, or withdraw.

Option 1: Leave your 401(k) in the US

Many returnees simply leave their 401(k) untouched. It continues to grow tax-deferred in the US, and you don't trigger any immediate US tax or penalties.

Pros

• No immediate US tax or early-withdrawal penalty.
• Continued tax-deferred growth.
• Often lower fund expenses than Indian alternatives.
• USD exposure can be useful if you still have US liabilities or future visits.

Cons

• You may lose access to some plan features after leaving the employer.
• Some 401(k) providers restrict non-resident account holders or require a US address.
• Withdrawals in retirement are taxed in the US, and may also be taxable in India.
• Required Minimum Distributions (RMDs) begin at age 73 (or earlier for some).

Option 2: Roll over to a US IRA

Rolling a 401(k) into a Traditional IRA is usually a non-taxable event in the US. It also gives you more investment choices and a single place to manage the money.

If you expect to be in a lower US tax bracket in a future year — for example, during the RNOR period or a year with little other US income — a rollover can set you up for a cheaper Roth conversion later.

Option 3: Withdraw and repatriate the funds

Withdrawing from a 401(k) or Traditional IRA before age 59½ usually triggers a 10% early withdrawal penalty in the US, plus ordinary income tax on the full amount. After age 59½, the penalty disappears but the income tax remains.

The net amount can then be remitted to India. Keep in mind:

• The US plan provider will typically withhold 10% for federal taxes (more if you don't file a W-8BEN or claim treaty benefits).
• You may need to file a US tax return to claim a refund of excess withholding.
• India may also tax the withdrawal, but the India-US DTAA usually allows a foreign tax credit for US taxes paid.

How the India-US DTAA affects you

The Double Taxation Avoidance Agreement (DTAA) between India and the US is the key document here. For most returnees, the relevant articles cover:

• Pension and annuity income — generally taxed in the country where the beneficiary is resident, with some exceptions.
• Other income — typically taxed in the country of residence.
• Foreign tax credit — taxes paid in the US can usually be claimed as a credit against Indian tax liability on the same income.

The exact article depends on whether the distribution is treated as a pension, annuity, or other income. A cross-border CA can help you file Form 67 and claim the credit correctly in India.

The 10% early withdrawal penalty explained

The US Internal Revenue Code imposes a 10% additional tax on distributions from 401(k) and Traditional IRA accounts before the account owner reaches age 59½. This is on top of ordinary federal income tax.

There are limited exceptions — for example, substantially equal periodic payments (72(t)), disability, or certain medical expenses — but most returnees will not qualify. The penalty cannot be offset by the DTAA foreign tax credit in India; it is a pure cost of early access.

Roth IRA considerations

Roth IRAs are funded with after-tax dollars. You can withdraw your contributions at any time without US tax or penalty. Earnings are tax-free in the US if the account has been open for at least five years and you are over 59½.

For returnees, Roth conversions can be attractive during years when you have little or no other US income — for example, during the RNOR window. You pay US tax on the converted amount at a lower rate, and future qualified withdrawals are tax-free in the US. However, India's view of Roth gains is complex; get professional advice before converting.

RMDs: Don't forget them

Traditional 401(k)s and IRAs in the US are subject to Required Minimum Distributions. Currently, RMDs must begin by age 73. The penalty for missing an RMD is steep — up to 25% of the amount that should have been withdrawn.

If you plan to retire in India, make sure you have a process to receive RMDs, report them in both countries, and claim the appropriate foreign tax credit.

FBAR and FATCA reporting

Even after moving back, Indian residents with US financial accounts may still have reporting obligations:

• FBAR (FinCEN Form 114) — required if the aggregate value of foreign financial accounts exceeds $10,000 at any time during the year.
• FATCA (Form 8938) — required if foreign assets exceed higher thresholds.
• Indian Schedule FA — report foreign assets in your Indian income tax return.

Keeping a US IRA or 401(k) means you still have US financial assets to report. Many returnees underestimate this, so build it into your annual tax calendar.

Leave it in the US vs. repatriate: a quick comparison

Practical next steps

1. List every account. Gather statements for all 401(k)s, IRAs, and pension plans. Note the provider, balance, and account type.
2. Check plan rules. Ask each provider what options are available to non-residents, including address requirements and withdrawal procedures.
3. Model the tax cost. Estimate US tax, penalty, and Indian tax for each option. Include the DTAA foreign tax credit.
4. Decide on a strategy. For most returnees, the lowest-cost path is either leaving the money in a US IRA or doing a Roth conversion during a low-US-income year.
5. Set up reporting. Add FBAR, FATCA, and Schedule FA deadlines to your calendar.

Related BackToIndia guides

• NRI Tax & Residential Status
• NRI Investments & Retirement
• NRI Banking & Money Transfer

Bottom line

There is no single right answer for every returnee. If you are many years away from retirement and don't need the cash, leaving the money in a US IRA often makes the most sense. If you need the funds soon, or you want to simplify your finances, withdrawing may be worth the tax cost — just budget for the 10% penalty if you are under 59½.

The most important step is to get personalized advice. A cross-border tax professional can model your exact numbers and make sure you don't pay tax twice on the same money.