401k withdrawal scenarios on Return to India

hi this is abov kicha and I welcome you

uh in this video I'm discussing uh

options that are available for uh

returnees to India uh people who have

worked in US theyve accumulated a

sizable sum in the 41k and or the IRA uh

so there always this big question is

that what are their options on return to

India now in this video I am doing some

scarios uh which we basically we are

evaluating some scenarios uh and the

pros and cons of scenarios then there is

a followup video that I'll be doing uh

after this video where I'll be actually

uh discussing the main factors that uh

we need to watch out for and some of the

strategies that we can do so please also

do check out the next video after this

video uh uh as a followup video then

that you know you'll get a better

understanding right so let us start so

basically some few scenarios here we can

take is that okay so you have worked in

us for like 5 6 years 7 years 10 years

and then you are coming to India now the

options that you have number one is the

option is that you can leave the fund as

it is right do not touch that fund leave

it as it is and then you would draw it

after 59.5 age 59.5 which is when the

there is no penalty 10% penalty is there

only the tax is applicable so you okay

check out my uh uh previous videos on

what is 401k Ira then uh check the 41k

taxation in us then there is a video

I've made 41k Ira taxation in India so

you'll get more clarity right on how the

taxation Works in us as well as India

this whole thing is a complex thing so

uh uh you need to spend some time uh

understanding uh the the product the

taxation in US taxation in India and

then the scenarios so first scenario is

that you leave at as it is and then you

withdraw it after age 59.5

uh second option is that you decide to

roll over to a Roth IRA so some people

do that they roll over the fund to the

Roth IRA because the fact that you know

withdrawals from Roth are taxfree and

it's good for estate planning especially

if you have like children who you know

may want need these funds so from an

estate planning perspective there is

this plus uh of moving to a Roth High uh

so so that's the second option third is

withdraw it completely before returning

from us some people

may decide to withdraw it totally before

returning they don't want the headache

so that's the third option fourth option

is withdrawing it after returning from

us in the RoR phase if within the RoR

phase if you are entitled to the two or

three years of RoR phase after return

from us uh in India you

get fourth scenario is you withdraw in

the aror phase fifth is that you

withdraw it after returning from the US

in the RO phase that means you are

resident aary resident as for the Indian

tax law and you withdraw it after

becoming an RO so let us discuss each of

the scenarios this may be a slightly

long video so bear with me uh the first

option leave it as it is and withdraw

after 59.5 so here what will be that tax

implication under the US tax there's no

tax till 59.5 nothing it's basically a

tax deferred investment that's why

that's why the advantage is there right

so there's no tax after that the

withdrawals are treated as income in us

and there is no penalty right so on the

full withrawal that you do in in us

there's the tax that you need to pay at

the uh graduated rates if you are a US

citizen or a resident or if you are

non-resident uh Alien then there is a

basically a chunk will qualify as uh uh

uh effectively connected income and it

will be tax tax taxable on graduated

rates and the other chunk which

represents income the dividend income

that will be taxable at 30% so that

division is there but yes the withdrawal

be treated as income in us and there

will be no penalty uh India tax now

India tax if you make an election under

Ru in 2021 a new regulation had come

section 89A which mandates that under

rule 21 AAA you can make a election and

uh that election has to be done in form

10e and you can defer the tax till

withdrawal right so it will not be taxed

every year in India it will be deferred

till your withdrawal so in the first

year of becoming a non a res in resident

aary resident you can file that form uh

with the Indian tax department and you

can do it online I'll make a separate

video on that form and the taxes will be

deferred till the withdrawal right now

Pros what are the good points good

points is that there's no tax penalty

your uh in US basically there is tax but

no penalty in US basically the funds

grow tax deferred in us for till 59.5

that's a big big Advantage uh the you

get a geographic IC diversification that

means your funds are not only in India

your funds are there in us which is a

very very big important thing very

important thing you should always try to

geographically also diversify that

reduces the risk of your portfolio and a

currency level diversification is also

there that means it's not only the INR

funds it's basically the USD funds so

both INR and USD you are splitting the

funds right so later on if you have the

US any USD delet goal like sending your

kids to for us education you have the

ready currency right where you have made

the Investments now cons the cons is

that amount is blocked to 59.5 so you

basically don't want to withdraw it

because there's a early withdrawal

penalty that that will apply and that

will eat away a big chunk of the gain

that happens uh second is estate tax

estate tax right estate tax liability

will arise if you because you will be

qualifying as an nonent alien as per us

tax law and more than 60,000 of us cist

assets if you have then there is EXT tax

that will apply and then it's uh from

ranging from 18% to 40% and there are

complications like filing form 709 you

have to wait for 9 months up to the

filing of the return and then you know

all that blockage is there so that risk

is there uh if if the amount is more

than 60,000 then then that risk is there

right okay option two option two is roll

over to a raw higher before returning

from us now here the in the US tax the

rollover amount is subject to tax right

before returning from I don't know

whether after returning from us you can

do a roll over to Roth IRA or not but uh

in US which is your last year in us if

you do a rollover then you have this

income existing income plus which is

subject to Tax Plus the rollover amount

will also be subject to tax and uh uh

but there is no penalty right that's the

good thing under India tax the income

from the Roth high now Roth is a bit

tricky in India it doesn't qualify for

rule AA election right if you strictly

go by the wordings of the

rule my interpretation is that Roth Roth

IA doesn't qualify for the benefit of

rule triaa so even if you make a rule

triaa election the income of of the Roth

IRA will still be taxable with the

dividend and capital gains every year

after becoming Ro so every year you have

to file a very complicated tax return in

India where you have to disclose the

income pay tax on the Roth income and

there is no FTC right there's no foreign

tax the credit of the us tax because

anyways the income is taxfree right so

in basically you have paid the tax on

that income the in the year that you

have made the

contribution uh and you you you are not

paying any further tax but Indian

government is taxing you every year so

it's a tax

disadvantaged uh investment from Indian

tax point of view when you talk talk

when you consider the Indian tax angle

right so the pros is basically no tax

liability on withdrawal in us so good

for if you want to do it for from an

estate planning perspective uh cons was

cons is definitely that you have to file

a complicated return in India every year

right uh so then there's no credit in

India of the tax paid in US due to the

year mismatch right so in India you are

claim filing the the pling tax in a

particular year in us the income this

particular income the tax has been paid

in a particular year different year

earlier year so there is a year mismatch

so you cannot claim any credit of the

tax the amount will be blocked to 59.5

because in in Roth also yes withdrawals

you can claim early but the earnings you

have to keep it till 59.5 right so that

still the blockages they are not exactly

till uh to the extent that of Ira is

there but traditional IRA but even dra

that uh slight uh the the the liquidity

issue is there plus the estate tax is

always is there if the asset is more

than 60,000 and um I will not recommend

in that from that point of view uh I

don't recommend this particular option

this is just my view there can be

different views here okay let us come to

option number three option number three

is withdraw completely before returning

from us so option three is for those

people who say that I don't have to do I

don't want to do anything with my us

Investments on return right I don't want

to make any complicated tax returns and

do competitions and you know pay a very

high amount to a Indian uh ca for making

all the returns and then expose myself

to scrutiny from the Indian tax

department for this foreign income I

just want to completely withdraw before

you returning from us in that case the

entire withdrawal will be taxed as

income as per the slab rate so you are

withdrawing as for the last year as a US

tax resident it will be withdrawn uh

entire withdrawal will be taxable plus

there will be a 10% penalty if you are

age below the age of 59.5 so that 10%

penalty implication will be there

India tax there is no implication

because you have withdrawn the funds

totally before you become an RO in India

so there's no tax tax implication in

India right the pros are basically Peace

of Mind Peace of Mind from taxation of

401k in India now taxation of 401k to a

large extent has now become kind of

simplified with the introduction of rule

AAA rule 21 AAA uh but still you don't

want to risk anything with

but second thing still rule triaa is 21

AAA is there but you have to do the

schedule FSI and Fa reporting every year

in the Indian tax return because you

hold the foreign asset right so you are

free from all those problems you have

done and dust it completely you have

come out of this 401K thing uh no

complicated return in India you save

money uh from the the fees that you pay

to a CA you have a simple return which

you can file on your own no need to take

help from a CA ready fund available okay

the amount that you withdraw now you

have a ready fund that you have

available for investment in India right

so that's again a big positive there's

no estate tax implication in us because

there's no Fund in us right so these are

Pros cons cons is basically the penalty

that will be applicable the tax will be

applicable so tax tax is actually not a

cons because tax is anyways applicable

if you withdraw it later also but uh yes

the penalty is applicable uh if you

withdraw before 59.5 no us

diversification in the Investments that

means your portfolio you lose this

opportunity of having a US

diversification right so it's uh or

basically what you can do is to remove

this Con whatever amount that you have

take it in India then you can a part of

that amount you can invest directly in

US stocks right or you can have invest

in Indian feeder funds basically which

invest in US Stocks like modil lawal and

others have U uh Indian funds which

which take exposure to the S&P 500 so

that way you remove that to a certain

extent uh then higher tax outl in the US

because in the in the year that you are

withdrawing that is the last year of

your stay in us where you have a US

income also plus you have this income

also so maybe the tax laab will be

higher right uh as compared to the

situation where you withdraw it after

returning from us right and one more

thing is that you need to also include

this distribution in your state tax

return right because you are still

continuing to live in us so in your

state you need to also file uh for the

state tax and you need to include this

distribution and the separate tax will

be applicable then we come to option

number four which is withdraw it after

returning to India in the aror phase so

if you qualify for the aror phase which

is 1 to 3 years after your return in

India and you withdraw then us tax again

you qualify as

now for us tax purposes you qualify as a

non-resident alien now again when you

come back become a non-resident alien

there's a flat 30% withholding that the

provider will do however when you file

the tax return you will be taxed at a

mixed of the slab rates and 30% that

means to the extent of your contribution

that you had done it will be taxable at

graduated rates now that rates will be

much less the slab rates that that tax

taxation will be much less because

there's now no no income in US you

probably are at a zero income in us so

this is probably the only income right

so that tax will be bit less then

there's a flat but uh for dividend what

you receive that's a flat 30% tax that

is not at graduated rates it's a flat

30% tax right whereas otherwise in the

US it would have been taxed it would

have been taxed at a 0 15 20% rate as

per your income right uh so it here it

will be flat 30% or 25% in case of indan

because there is a India us DTA is there

you can claim at a 25% right uh so that

is there and 10% penalty will be

applicable right because you are

withdrawing it before 59.5 India tax

will be nil no no any tax no any

reporting because it is the aror phase

that's the beauty of uh uh being in a

aror phase is you can you can do all the

settlement work all the clearing work of

your foreign financial affairs uh

without any uh tax complication in India

so that is a very good thing now Pros uh

no complications in India tax return

right because in the RAR phase also uh

you don't need to report anything and Ro

phase also you need to not report

because you have closed your uh whole

thing in the arage itself less tax

implication in us if no other income

right so that is a positive no state tax

return now because you have come out of

that particular you are not residing in

that state generally States Levy need to

require you to file a tax return only if

you are earning income living in that

state or there is a source of income

which is generated within that state

right so both the things are not there

so there's no requirement of a state tax

return so correspondingly that much less

tax also and so basically less tax as

compared to option three sorry it should

be option three right so it's a

basically less tax option as compared to

option three now cons now not all Ira

providers support your non- us residents

so if you uh try and update your non Us

address to your 41k in the year of

withdrawal or after the you know uh uh

you have left non not all providers will

allow you so basically before returning

from us only you have to move your IRA

to a uh provider which allows uh it for

non us resid like Fidelity right so that

hassle is there a direct to direct

rollover you can do Ira to IRA

rollover another con is that there is

30% withholding tax even if you file

w8ben still there will be a generally

there's a 30% withholding that the

administrator will do so India us treaty

is a weak treaty right so there's no

significant benefit only is instead of

30% tax for dividend uh it's a 25% but

still even if you state that treaty

Clause they will withhold full 30% then

what you have to do is that you have to

file a 1040 NR to claim a refund of the

excess tax right there will be certain

excess tax in that 30% you have to file

a 1040 NR uh and claim the refund of

that excess tax so you have to only file

the federal return no State return you

have to file then there is a estate tax

risk because the money if it is more

than 60,000 USD then there is estate you

live with that estate tax risk you

should not die right basically EST tax

risk is only if you have more than

$60,000 as a non-resident alien and you

die and then there is a very complicated

process that happens and there is a tax

that gets levied on your entire estate

right on the entire income uh not the

income in the entire fund then there is

a 30% tax on the ftap component which is

the dividend otherwise it would have

been less

that's also a con then the process can

stretch till like 2 three years after

return because you may want to kind of

withdraw in Tres not every year so that

means you know every year filing 1040 NR

every year you know uh doing all that

effort right so for someone who is okay

with doing that uh can do that for other

person who is just doesn't want to take

any risk he's saying like might as well

pay some extra tax but I want to get it

done for them option three is there but

yes option four has a potential of a

lesser tax right uh but then you have to

file 1040

NR then we come to option five which is

withdrawing it after return to India

which is RO right so option four was

aror withdrawing in aror option five is

withdrawing after return to India Ro

fees so R can be a situation where you

straight away are qualify as a so you

have only there in us for like two three

years and you return back and you have a

small accumulation in your uh 401k and

the year that you return you are in Ro

so those cases will fall here so what

will be the US tax the US tax will be as

per the slab rate plus a 10% penalty

right uh in India so it's not sorry it's

not as for slab rate it's basically

again it's a mix of the slab rate and

flat 30% because you'll be ConEd as a n

non-resident alien as per us tax law

plus there is a 10% plan penalty now for

India tax purposes again it will involve

a competition right here basically only

the income component not the complete

withdrawal will be taxable because

Indian government has the right to only

tax the income from the fund right so

earnings earnings will be taxable and

you can claim an FTC of the lower of the

India and US tax now in the year where

the withdrawal is done it will be

taxable in us and same year it will be

taxable in India also so there is a

possibility that when you compute the

tax as for the India tax law you can

claim a tax credit of the tax that is

paid in us right so not full credit is

available lower of the indiaan and the

US tax rate so accordingly those

computations have to be done so Pros is

that a less tax liability in us and

India if it is withdrawn cons there are

a lot of cons so one is that the not all

Ira providers support non- us residents

30% withholding even if you file wben

estate tax if it is more than 60,000 USD

that risk is there if you die within

that period 30% tax on fdap component

because you are a non-resident alien

complicated India return full credit of

us tax may not be available right

because there are certain rules then the

process

stretches of some years need to file

1040 NR to claim a refund of the excess

tax right so so all that thing is there

so again it is not recommended ideal

thing is withdraw before returning from

us or you would do it uh within if you

want to withdraw either withdraw before

returning or within the RAR phase which

is option three or four or the best

option is leave it as it is if you can

afford to do that right just leave that

Fund in in in us let that fund grow tax

deferred way right and at the same time

build the India fund and then there will

be this diversification will be also

there so this is it uh this is it

there's one more thing you can also

collect consider electing for periodic

payments right now here what in the

earlier options we have talked about

taking a lumsum payments right even if

you take it transes that will qualify as

a lumpsum payment one more option is

that you can consider electing for

periodic payments now periodic payments

is basically a complex thing because uh

you need to there are three methods that

the IRS gives which is called

substantial substantial periodic

payments and as for life expectancy

tables you get a fixed amount every year

if you opt for that there is no penalty

you can opt for that there's no penalty

and you can also take the DTA benefit

under article 20 Sub Sub sub article one

whereby the taxation will only happen in

India there's no taxation in US no

return filing in US taxation is only in

India there's no penalty in us right so

that is there that option is there but

it's a bit complicated you need to have

guidance of a financial adviser uh in US

to to to to evaluate and choose whatever

is the best option I that's why I have

not selected it in the options here but

that is definitely an option that you

can consider right so this is uh this is

uh basically the uh some options and the

pro and cons next we'll cover the uh

topic on what to do with your 40 401K on

return to India which is a a good

followup to this particular uh video so

do basically stay tuned and check that

out thank you so much for watching thank

you so much bye