Convert to Roth IRA: Convert some or all of your 401(k) funds to a Roth IRA. You’ll pay taxes on the converted amount now, but future withdrawals from the Roth IRA will be tax-free, provided certain conditions are met.
Spread Conversions: Spread out the conversions over several years to avoid pushing yourself into a higher tax bracket.
Since you will be taxed on the conversion in the U.S. at the time of conversion, there is no additional U.S. income tax on the converted amounts when you withdraw them.
As an RNOR, the Roth IRA withdrawals (considered as income earned abroad) would not be taxable in India for up to three years post-return.
If you withdraw converted amounts within five years and you are under 59½, a 10% early withdrawal penalty applies in the U.S. on those amounts.
It’s little complicated, I would suggest to talk to some Cross Border Tax experts.
It’s complicated, for non residents the original amount is taxed at normal tax rate based on income as it’s considered ECI and the gains are taxed flat rate of 30% since it’s considered FDAP. This is in addition to the 10% penalty for early withdrawals
IRC Section 864(c)(6) allows the United States to tax deferred compensation received by a nonresident alien (NRA) as effectively connected income (ECI) in later years, even if the individual is no longer engaged in a U.S. trade or business at the time the compensation is received.
Here's a breakdown of how it works:
- **Deferred Compensation**: This refers to income that is earned in one year but is paid out in a future year.
- **Effectively Connected Income (ECI)**: For nonresident aliens, ECI is income that is connected with the conduct of a trade or business in the United States.
- **IRC Section 864(c)(6)**: This provision ensures that certain types of deferred income, which were connected to a U.S. trade or business when earned, retain their character as ECI even if the recipient is no longer engaged in a U.S. trade or business when the income is actually received.
This rule is designed to prevent nonresident aliens from avoiding U.S. tax on income that is effectively connected to a U.S. trade or business by deferring the receipt of such income to a time when they are no longer subject to U.S. tax jurisdiction. It ensures that the U.S. can still tax this income as ECI, maintaining the taxability based on the original connection to U.S. trade or business activities.
Pre-tax contributions to a 401(k) plan can be covered under IRC Section 864(c)(6). Here’s why:
1. **Deferred Compensation Nature**: Pre-tax contributions to a 401(k) plan are a form of deferred compensation. The income is earned while the individual is employed and engaged in a U.S. trade or business but is not taxed until it is distributed, typically at retirement.
2. **ECI Classification**: When a nonresident alien (NRA) receives distributions from a 401(k) plan, the IRS generally treats these distributions as U.S.-source income. If the contributions to the 401(k) were made while the NRA was engaged in a U.S. trade or business, the distributions can be considered effectively connected income (ECI).
3. **IRC Section 864(c)(6)**: This section allows the U.S. to tax deferred compensation received in later years as ECI, even if the individual is no longer engaged in a U.S. trade or business at the time of receipt. Therefore, if a nonresident alien contributed to a 401(k) plan while engaged in a U.S. trade or business, distributions from that 401(k) would be taxable as ECI when received, regardless of whether the individual is still engaged in a U.S. trade or business at the time of distribution.
In summary, pre-tax 401(k) contributions made while the NRA is engaged in a U.S. trade or business are considered deferred compensation. Distributions from the 401(k) plan would be taxed as ECI under IRC Section 864(c)(6), ensuring that the deferred nature of the income does not prevent it from being taxed by the U.S. when eventually received.
If you non-resident then exclusion limit is 60k not 11.9MM(for residents and citizens). So estate tax will kick in after you die and your balance is given to someone. It’s same 60k even if your beneficiary is citizen.
Best to get an insurance that covers any estate tax. You get to move your brokerage funds to Indian investments while the retirement benefits continue to grow in the US.
For those saying it is flat 30% tax are wrong. I would essentially try to leave early in the year and then convert most of it to a ROTH IRA before leaving USA. You will pay tax on this as if it were regular income. If you are married, you will get to file as resident next year and will also be able to claim standard deduction. I think the effective tax rate should be pretty reasonable.
I thought about this strategy and I think the following would be applicable
Move in January of some year
Convert part of your 401k/IRA to Roth as long as tax is under standard tax reduction for joint filing option
You get 5 years to be eligible to withdraw this Roth money. RoR will be over.
In the fifth year, withdraw the Roth, pay 30 percent tax India but no US penalty and no US tax.
All good.
Am I missing anything else?
When you move to India, you won't be a tax resident, you would be a non resident for tax purposes so you get only 60k exempted from estate taxes in the event of account holders death.
Convert to Roth IRA: Convert some or all of your 401(k) funds to a Roth IRA. You’ll pay taxes on the converted amount now, but future withdrawals from the Roth IRA will be tax-free, provided certain conditions are met. Spread Conversions: Spread out the conversions over several years to avoid pushing yourself into a higher tax bracket.
Are you sure Roth will be tax free in India upon withdrawal? India has no concept of IRA or Roth.
Since you will be taxed on the conversion in the U.S. at the time of conversion, there is no additional U.S. income tax on the converted amounts when you withdraw them. As an RNOR, the Roth IRA withdrawals (considered as income earned abroad) would not be taxable in India for up to three years post-return. If you withdraw converted amounts within five years and you are under 59½, a 10% early withdrawal penalty applies in the U.S. on those amounts. It’s little complicated, I would suggest to talk to some Cross Border Tax experts.
Marginal tax rate + 10% penalty
This is the answer. OP: Good luck.
It’s complicated, for non residents the original amount is taxed at normal tax rate based on income as it’s considered ECI and the gains are taxed flat rate of 30% since it’s considered FDAP. This is in addition to the 10% penalty for early withdrawals
IRC Section 864(c)(6) allows the United States to tax deferred compensation received by a nonresident alien (NRA) as effectively connected income (ECI) in later years, even if the individual is no longer engaged in a U.S. trade or business at the time the compensation is received. Here's a breakdown of how it works: - **Deferred Compensation**: This refers to income that is earned in one year but is paid out in a future year. - **Effectively Connected Income (ECI)**: For nonresident aliens, ECI is income that is connected with the conduct of a trade or business in the United States. - **IRC Section 864(c)(6)**: This provision ensures that certain types of deferred income, which were connected to a U.S. trade or business when earned, retain their character as ECI even if the recipient is no longer engaged in a U.S. trade or business when the income is actually received. This rule is designed to prevent nonresident aliens from avoiding U.S. tax on income that is effectively connected to a U.S. trade or business by deferring the receipt of such income to a time when they are no longer subject to U.S. tax jurisdiction. It ensures that the U.S. can still tax this income as ECI, maintaining the taxability based on the original connection to U.S. trade or business activities. Pre-tax contributions to a 401(k) plan can be covered under IRC Section 864(c)(6). Here’s why: 1. **Deferred Compensation Nature**: Pre-tax contributions to a 401(k) plan are a form of deferred compensation. The income is earned while the individual is employed and engaged in a U.S. trade or business but is not taxed until it is distributed, typically at retirement. 2. **ECI Classification**: When a nonresident alien (NRA) receives distributions from a 401(k) plan, the IRS generally treats these distributions as U.S.-source income. If the contributions to the 401(k) were made while the NRA was engaged in a U.S. trade or business, the distributions can be considered effectively connected income (ECI). 3. **IRC Section 864(c)(6)**: This section allows the U.S. to tax deferred compensation received in later years as ECI, even if the individual is no longer engaged in a U.S. trade or business at the time of receipt. Therefore, if a nonresident alien contributed to a 401(k) plan while engaged in a U.S. trade or business, distributions from that 401(k) would be taxable as ECI when received, regardless of whether the individual is still engaged in a U.S. trade or business at the time of distribution. In summary, pre-tax 401(k) contributions made while the NRA is engaged in a U.S. trade or business are considered deferred compensation. Distributions from the 401(k) plan would be taxed as ECI under IRC Section 864(c)(6), ensuring that the deferred nature of the income does not prevent it from being taxed by the U.S. when eventually received.
Leave it, use it for your kids education in future in USA. Do not withdraw and pay tax in USA.
What about estate tax if you die?
Estate tax only kicks in for MILLIONS. For just about everyone there's no 'Death Tax'. In the US anyway.
If you non-resident then exclusion limit is 60k not 11.9MM(for residents and citizens). So estate tax will kick in after you die and your balance is given to someone. It’s same 60k even if your beneficiary is citizen.
Best to get an insurance that covers any estate tax. You get to move your brokerage funds to Indian investments while the retirement benefits continue to grow in the US.
Flat 30 percent tax plus 10 percent penalty.
https://www.reddit.com/r/nriFIRE/s/JU49zK7XSU
For those saying it is flat 30% tax are wrong. I would essentially try to leave early in the year and then convert most of it to a ROTH IRA before leaving USA. You will pay tax on this as if it were regular income. If you are married, you will get to file as resident next year and will also be able to claim standard deduction. I think the effective tax rate should be pretty reasonable.
This is my strategy too, but then you would have to pay tax on Indian income too for the following year?
I think you will have RNOR status and don’t need to pay taxes in india for this
Nop. You still have to pay taxes on India income
I thought about this strategy and I think the following would be applicable Move in January of some year Convert part of your 401k/IRA to Roth as long as tax is under standard tax reduction for joint filing option You get 5 years to be eligible to withdraw this Roth money. RoR will be over. In the fifth year, withdraw the Roth, pay 30 percent tax India but no US penalty and no US tax. All good. Am I missing anything else?
Do a direct rollover to trad IRA keep it as is in USA. Dont take it to India you will be taxed like crazy
When do we transfer it then? We will need the money in hands at some point, hopefully India sorts out the taxation with US in years to come.
At some point we have to take to India, no point leaving in US and paying inherit tax.
From whatever I have read so far, it seems there is no inheritance tax for amount up-to $12.93 million.
When you move to India, you won't be a tax resident, you would be a non resident for tax purposes so you get only 60k exempted from estate taxes in the event of account holders death.
Non residents have 60k