Video transcript below (auto-transcription may contain errors):
Hello, and welcome. This is Abhinav. So in this video, I’m, discussing a short checklist, on people who return from US, and they want to keep their 4 one k alive after you after their return, maybe till age 59.5. Right? So, short checklist on that.
Now this is a specific video on this particular topic on keeping 41 k alive after return to India, what the actions person needs to do. You can also check my separate videos on 401k taxation in US, India, withdrawal scenarios of 401k, and general posts on the investments keeping investments in US. So those are separate videos also you can check to get an idea. Right? So first thing what you need to do see, 401 k is an employer plan.
Right? It will have certain restrictions. So first, you need to check the, the employer plan, see what are the terms of the plan, what are the restrictions. Right? For example, people who come, like, they are in TCS, and they come back to India, or maybe other any other company also.
I’ve observed this in other companies as well. They have certain restrictions when they come person into the same company. They cannot, anyway, withdraw the 4 zero one k till the time they are in that company. Plus, there are certain restrictions with respect to what you can do, what you cannot do, what investments you can make charges. So you need to study the terms of the 4 zero one k plan.
Alright? If you want to keep it in 4 zero one k. Right? So, ideally, the best thing is to move the funds to an IRA. Right?
If before moving to so if you have resigned from the job and you can do that, best thing is to move the funds to an IRA. Right? So you basically can roll over to an IRA. It’s a nontaxable event under US tax law. Right?
So either it can be a trustee to trustee transfer where you can give an give a request to your trustee in US who can, sorry, in the 401 k, who can then you can give a request to move it to, say, a Fidelity IRA. Right? So the funds get moved there, or you can get a rollover also. You can get a check and you have to deposit it. I think within 60 days, if you deposit to the Fidelity IRA, then it’s not a taxable event.
So check when you select the IRA provider. Ensure that it’s a, the provider supports non US addresses, like Fidelity is there or Schwab is there, because then when you are a non US non resident, it should be easy to exercise whatever the, you know, the transactions, from India. Right? Okay. Update non US address and phone number.
So do not, you know, do this thing that you keep your Indian, some, US friend’s address and all in so, ideally, non US address, you should do, update phone number, update in the IRA. Because then when you update that, the IRA the broker basically get they get the signal that you are a nonresident. Accordingly, the tax rates and everything get applied as what is applicable to the nonresident. So always better idea to update non US address. Filing a w eight b e n.
So, always when you have a when you move back abroad like, when you move abroad means move back to India, then you are an Indian tax resident. So you can file a w eight b e n, which is basically a certificate of your foreign residency. So, accordingly, the broker, when they give out any income and you realize any income, they apply the lower withholding rates as per the India US DTA. So under the India US DTA, there are lower rates with respect to, interest and with respect to dividends. So you get to claim those lower rates if you file a w eight p e n.
If you don’t have a w eight p e n or an item on file, the, the IRA administrator or the broker, they generally withhold a backup withholding of tax of 24%. So always better to update a w eight b e n once you return back to India. Now, once, you have returned back or once your fund is moved to the, IRA, you get wider investment choices. So you can have a relook at your investment portfolio within the within the 401 within the IRA, and you can now when you select the investment, you have to see the investment in line with your overall asset allocation. Don’t only see it that from the IRA point of view that, okay, I have hun I have, like, 30 rupees within the IRA.
Where should I allocate? No. You have to look it from first of all, you have to allocate the funds in the IRA to a financial goal. Now if it’s a long term financial goal towards your retirement, then you can take that much more risk, and then you can allocate that much more, towards risky assets, which is, equity, right, and less allocation towards debt or fixed income. Accordingly, you have to decide the asset allocation.
If you’re not clear on that, see a find a good, a registered investment adviser in US or India, whichever. Right? And then take their help and do the asset allocation. It should be my point here is that asset allocation has to be in line with your overall, investments and not just within the IRA. Right?
So then you can decide that okay. And then when you have the IRA, it will have lot of low cost investment options, which kind of index funds or low cost funds, then you can select those funds. Right? And you can have a relook. Now any transaction you do within the IRA does not does not attract tax in US, and till the time you are not status in India, it will not attract any tax liability to you in India.
So that is, like, the golden period. Till you are in your are not status, which is, like, 1 to 0 to 3 years, after your return, you can kind of plan everything accordingly. Now always important thing that once you return back from US to India, you when you become a nonresident alien as per, US tax law, basically non domiciliary, right, there is a 6 above any US assets US domiciled assets of more than 60,000 will attract a a state tax liability of 18 to 40%. So you have to relook at the US investments, the total value of the US investments, and keep it 60,000 below 60,000. Right?
Because anything above that, then it, 18 to 40% estate tax is applicable in the value of the investments. Right? Plus, there is a very complicated estate tax, return filing procedure, and, it will delay the, the, kind of grant of funds to your beneficiaries in India. Right? So if you have dependent beneficiaries in India, always ensure that your funds back in US are less than 60,000.
Right? I’ll make a separate video on how to reduce estate tax liability, the ways where you can avoid. Right? I’ll make a separate video on that, but one good way is to liquidate anything which is above the estate tax limit. And when you liquidate, there will be a 10% additional tax, which is kind of a penalty that’ll apply, in US.
So first, get the money in the US bank account, and then you can transfer it to India. Right? If you if you have become an Indian resident, then, first convert your account to a resident account and then take the money in India. Right? Do not continue or your NRO accounts after you become resident.
Then ex explore this. So there are facilities where you can claim a tax free withdrawal. So when you are seeing a withdrawal, you can claim a the 10% additional tax will not apply, which is like qualified education expenses, medical expenses, birth of child, and substantial periodic payments. So within your entire tenure of the 401 k, so your plan is to withdraw up to 59.5. But within this entire tenure, you can explore withdrawing for these specific purposes.
If those purposes are permissible, then you can take a withdrawal, which will be kind of a it will not have the 10% kind of additional tax. And if you take periodic payments, substantial periodic payments, then you can claim there are, I think, 3 methods that are there, and you’ll have to check with your, IRA provider on the and your adviser, financial adviser, whether you should opt for any of those methods. So if you take substantial equal payments, you may claim benefit under the article 21 of India US GTA, whereby the payments may be held as taxable only in your country of residence, which is which is India. Right? So you don’t end up paying tax in US and India and then claiming the FTC credit and all.
You can claim an exemption from US tax, and you can, claim that the income is taxable only in India under article 20. So that you can explore. Then, towards last year of the r naught in India, now that you’ve decided that you’ll continue it till your 59.5, you can reset the cost basis. Reset cost basis is basically simple. Someone asked me in comments also.
It’s just basically selling the investments in US, in the 401 k, and then after wait for some time and then maybe after re repurchasing it back. Right? So that’ll reset the cost basis. So if the cost basis of the investment was, like, 100 rupees, now, the value of the investment was 1.40, then it becomes the cost becomes 140. So for Indian tax purposes, because India will tax the income from the 401 k.
So whenever the India will tax the income, the cost basis for India purposes will become 1.40. So that kind of a planning that you can do, in US. There will be no US tax implication of this resetting of cost business within the 401 k that you do, within the IRA. Sorry. If you have moved to IRA, otherwise, 401 k.
Then filing form 10 EE online. So if first in the 1st year of your tax residency in India, of becoming an ROR, you can file a form 10 EE to the Indian tax department and which basically means that Indian tax department will give you a tax difference. So instead of offering the income of the 4 one k, which is otherwise taxable every year after you become an ROR, Indian tax department will say that, okay. We allow you to defer the tax till you, withdraw it in US. Right?
So in US, there is a taxation on the 401 k on the withdrawal in the year of withdrawal. Similarly, Indian tax department will also say that, okay. We’ll offer you this income to be taxed. The benefit of this is that you can claim the foreign tax credit. Right?
So the US tax that you pay in the year of withdrawal, because of the year is same, you can also keep claim the credit. So it will not result in double taxation. And your tax liability, the tax, payment is also deferred. So that’ll also help in saving more money in your in your IRA or 401 k. So that’s a very good way and a very good benefit that you get for 401 k I and traditional IRA.
For Roth, it is not in my view, it is not there for Roth. But for traditional 401 k and or, a traditional I for 401 k or traditional IRA, it will be available. But don’t file it if you plan to become an NR again. Because if you plan to become an NR, there are provisions in the concerned rule in the income tax act that then in the year that you become n r, then everything will anyways be taxed. So if your objective is that you’ll be living in India for, like, for your entire life, then then it makes more sense to file Form 10EE.
Then you can disclose for 1 k both the brokerage and the individual. So you have to disclose both things in the schedule f a. After you become ROR, every year, you have to disclose both the things, brokerage as well as the individual investments in the 4 one k. That is the ideal thing. Right?
But at least disclose something. If you don’t disclose in schedule FA, there is a flat 10 lakhs penalty under the Indian black money law. There is a relaxation given by finance at 2024, which says that if the investments are less than 20 lakhs, we will not impose the penalty. So that relaxation has been given. But, however, I’ll suggest, please go ahead and disclose, the brokerage as well as the individual investments in FA.
And the income in the FSI, also, you need to disclose. Right? Every year in the income tax return, after becoming the ROR. In your financial plan, as I already mentioned, tag the 401 k or the IRA amount to a financial because that will be a substantial amount, right, for people who are returning from US. Highly advisable.
Basically, till your US residency investing in 401 k and investing in IRA heavily, is highly advised. So because the tax benefits that you get so the investment in your 401 k is a significant amount. So but consider it as part of your overall asset allocation. Right? So these are some points.
I hope they were useful. Do share your thoughts, feedback, comment in the comment section. Thank you so much for watching this video. Thank you so much. Bye.