In this video, Abhinav is discussing about what to do with what to do with your 401k/Traditional IRA on return to India
Video transcript below (note that auto transcription can cause some errors):
Hello, and welcome. This is Abhinav, and, in this video, I am discussing a big question in the mind of every, NII who returns from US, what to do with my 401 k or IRA on return of return to India. Right? It’s a very, very complicated thing. So, there is no one clear answer.
So let us start. First of all, disclaimer. There is no one answer. There are many, many factors involved. It requires a careful analysis as it represents, significant chunks.
So, basically, when you are in US, there’s always this tendency to, max out the, 401k. That’s the advice that everyone gets from everywhere that max out the 401k. However, the understanding has to be also there that, US is basically a tax trap, if you are not planning to live in the US. If you’re planning to return to the US return from the US, then there are several kind of penalties and all things come up. Right?
So person has already maxed out his 401 k. So a significant corpus, is there in the 401 k. So what to do with the 401k? So there are tax implications in US as well as India. Right?
And you if you do proper tax planning, proper strategies, then you can minimize the tax liability, and you can minimize the hassle. Right? So basically advisable to consult a tax professional who specializes in US and India tax, who knows what 401 k is there and what is a 401 k taxation in US and India to advise you on this matter because this requires some thought. There is no clear yes or no answer. Right?
Okay. And the answer depends on the person’s situation, financial situation, lot of other factors. So what from my side I have done is that I have done a separate video where I have taken up some scenarios, and I’ve discussed pros and cons of the scenarios. Right? So what are the scenarios that we have taken?
You can check that separate video that I have done for one case scenarios you can search, and you’ll find. So scenarios are like leaving it as it is and withdrawing after 59.5, ruling over to a Roth IRA, withdrawing completely before returning from US, withdrawing in the r NOR phase, withdrawing in the ROR phase. All these five scenarios, I’ve, I’ve, explained the US tax implication, the India tax implication, the pros as well as cons. Right? So that video also you can get you can check to get a understanding.
So this is a more broader video on what are the factors that we need to look at. Right? So what are the factors to decide, right, whether to withdraw or not? So first is your cash flow in India post return. So how are you placed post your return?
Right? Is it that you will need funds in India? Can you wait till 59.5, with respect to the IRA funds, or you’ll need those funds in India to kind of, you know, build a house, or you have big some big expenses that are coming up, or you want to retire in India and that, the IRA will be your income in India, right, post retirement income in India. So how your cash flow situation is? Do you have, like, sufficient, post return income in India, where whereby the IRA funds can be act as a diversification in your portfolio?
How your overall portfolio is structured, that needs that is a one big factor. Because if you will need the IRA funds in India, then it’s a no brainer to withdraw it. Don’t wait for 59.5. But if you have sizable corpus or or you can create a sizable India corpus, then the US, the investment of 401 k can act as a very good kind of a balancer, as a diversifier. Right?
And the money is growing tax free. And there is this beneficial provision under section 89 a rule triple a election you can do where the from a tax point of view, things have become much more easier now after 2021. Before that, there was no such provision of tax deferral in India. Now Indian government also has given that benefit. So first is a cash flow thing.
Second, your long term money requirements. Where do you plan to retire? If you retire in India, you should ideally build a INR heavy portfolio with some diversification in US, like 20, 30% maximum. If you want to go back to the US, then you have to focus on creating a US b portfolio with some diversification to India. Right?
So that is also you need to decide what is your long term money requirements. Do you have a requirement of sending your child to US? Right? If that is a crystal clear requirement that I want to explore that option of US or your son is a US citizen, right, then you might want to send him to US. So then in that case, it may make more sense to keep the money in US.
Right? Readiness to keep the funds in US as a portfolio diversification. Now this is also important. When we talk about portfolio diversification, geographical and currency diversification, not many people are ready for it. So after returning to India, there is this tendency that you would want the money to be in the country that you are living.
Right? Though there is this benefit in the diversification, it can be achieved being in India and contributing to, like, Indian mutual funds, which have exposure to US stocks. Now you have S and P 500 based Indian mutual funds also. Right? So so for someone, you know, that will be maybe a key point.
I don’t want to keep my money in US. I don’t know whether I’ll be able to withdraw or not withdraw. There’ll be some problems, some paperwork that is involved. So that is again a factor. So that’s why I said there is it’s it me this particular question should not be looked at only from a tax standpoint or a financial standpoint.
It also needs to be evaluated from a person’s mindset standpoint. Some people are k are okay with keeping funds, and they’re very tax tech savvy and everything. Right? Keeping money in US, investing in various markets. Some people are not, comfortable with that.
They want the money in India in in Indian mutual funds, and they can see the statements. Right? So depends. There’s no right or wrong. It basically, you should get a proper sleep in night, right, after you have made the investment.
There is no point making an investment just for the sake of tax or, some returns, and you don’t you not getting a proper sleep at night because this is basically fund represents a significant chunk of your retirement funds, so you don’t want to take that risk. Right? Okay. Next is a potential estate tax liability. Now there is a $60,000, estate tax liability.
Over and above $60,000 of US situated assets, if you have as a nonresident alien, that means as a nonresident as per US tax law, you it’s a very, very low threshold. So if you have, like, 2 lakh dollars in in in your four zero one k and you keep in US and you die, right, there’ll be an estate tax that will be levied on your entire excess amount of 1 lakh 40,000. Right? So not only the income, but the entire amount. And there’s a very complex process of you filing a estate tax return in form 706 and waiting for a certain period.
After that, only you can get the funds. So that is again a consideration on keeping the money versus withdrawing the money in 401 k. Right? And lot of people, lot of NRIs, they forget this. They don’t care they don’t know about this this estate tax requirement, estate tax liability, potential liability.
Then there is the complex tax and reporting requirements in India. See, understand one thing. Any country will have will tax the foreign income and assets. Right? Now that country, for example, India.
India doesn’t recognize 401 k. Right? India will tax the 401 k. Now benefit is that there is a section 89 a provision that has come from 2021. So at least a bit, it is relaxed that at least the taxation has been deferred.
If you elect in rule, under rule 21, triple a, if you elect in form 10 e e, then you can defer the tax. However, schedule FSI and schedule FA computations you have to do every year. So if you keep the 401 k in US, you have to you have to be ready to pay a CA to do all these computations every year in your tax return. Right? Because if you don’t do those computations, if you don’t disclose, then there is a penalty under black money law, which can even lead up to imprisonment.
That is so stringent. Right? So you don’t mess up want to mess up on that. Plus, the Roth IRA, there’s this very, very tricky situation where Roth IRA doesn’t get the rule to 21 triple a benefit. As per my interpretation of tax law, it might not get, so it’s taxable every year.
So there’s no such benefit of investing in Roth IRA if you’re planning to return to India. Then there are issues with tax credit mismatch. So although you can get the credit of US taxes, but in some cases, there is this mismatch between the year mismatch because of which tax you have you are paying in India for a certain year, you have paid tax in US in a different year, so you cannot get the credit. Right? So all these kind of complications are there.
So either you have a very good kind of a tax adviser who understands the particular 401 k taxation very well, and you are ready to pay him a certain amount, because the terms are complicated. So, that is again a factor to decide whether you want to keep the, the 401 k or you want to, cash out before, coming to India. Then some pointers I have, just think on those these point these lines. There is no one clear answer, as I said. A lot of factors going, and, it’s better to consult with some professional before taking a decision because it’s all about your finances, a major big chunk of your finances.
Most important thing is that keep the fund value in the US domicile funds. That means your US IRA or your US stocks or anything below $60,000. It should not be more than $60,000. That is to avoid estate tax otherwise the as I said 18 to 40% tax on any amount in excess of $60,000 right so presently this is the limit of 60,000 for non resident alien so that’s the first consideration how much is your 401k If it is less than 60,000, no problem. Then you can evaluate it possible.
More than 60,000, first thing you need to do is that you can move it to, like, other domiciles like, Ireland. You can check out Irish, domiciled ETFs. Right? Okay. 2nd, now if you if the, 401 k value is insignificant, like, 10,020, $30,000, not that much value.
It’s like you have worked only for 2, 3 years. Withdraw it before returning from US. Just withdraw. Right? That will be my suggestion.
And, before returning to from US, you can just withdraw. That’s the least complicated way. You can get done with it, and then you can invest amount in India. Now if you have a long term financial goal in USD, for example, your child’s education in US, or you are okay to keep the funds in US for diversification purposes till age 59.5, I will suggest and this is the best option right if your funds are significant you are okay with keeping the money in US for till 4059.5 please this is the best option for you Keep the funds in the IRA up to the estate tax limit of 60,000. Right?
But above that, move to something like an Irish domicile funds, or there are certain gifting strategies you can do that you can gift certain, in certain ways. Right? So but the but the IRA thing you can, like, move to, the Irish domiciled funds preferably in the last year of the US or in the are not phase. I will suggest this preferably do it within the last year where you are in the US. Otherwise, in the are not phase, still that potential estate tax liability will be there if you die.
Also reset the cost basis in the last year of r naught. Right? So what basically you can do is that in the last year of r naught, you reset the cost basis. Right? And then any growth from the year that you have done the, the last, cost basis to the withdrawal India will tax that withdrawal.
So reset the cost basis, sell and repurchase the assets in the last year of R naught. That way you can minimize the tax liability. Then you can make rule AAA election in the 1st year of ROR so that you can tax defer it, till the withdrawal in US after each 59.5. Make sure to file the Indian tax return after becoming ROR and file the schedule FSI and FA, which is generally in ITR 2 and ITR 3. In ITR 1, you don’t get that option, so you have to select ITR 2 or ITR 3.
So you disclose the income and asset, very clearly, and then you withdraw after each 59.5 to avoid the tax 10% tax penalty in US. This is the best kind of an option that you can think of if your funds are significant, if you’re okay with keeping the funds. Then, 4th option is you don’t have a long term financial goals. You don’t want portfolio diversification. You or you need the funds in India.
Then you can withdraw in equal parts starting last year in US, right, and to the last year of r naught. So, for example, you had 3 years in r naught, in India. So you have, like, 4 years within which you can, like, divide your entire 20,000 into 4 kind of tranches you can withdraw, right, to reduce the or you can withdraw in 3 tranches, in the 3 years that you are in r naught. So that way, you can kind of try and reduce your tax liability, in US, and ensure that, there’s no kind of tax complications in India after becoming an ROR because you clear off the entire thing in the r naught period itself. Right?
Okay. So these are some pointers for you to think over, and, I know there there’ll be lot of queries on this, on this subject. It’s a very, very kind of a top of the mind question. So please feel free to put your queries in the comment section. I will try to help you to the best of my ability.
Thank you so much for watching this video. Thank you so much. Bye.