Last week, Sridhar from San Jose called us. He's 52, has $480,000 in his 401(k), and plans to move back to India in two years. His question: "What should I do with my 401(k)?"
It's a question we hear weekly from US NRIs planning their next chapter. Your 401(k) represents years of disciplined saving and tax-deferred growth. Making the wrong move can cost tens of thousands in unnecessary taxes.
At Belong, we've helped hundreds of NRIs navigate this exact situation. This guide gives you actionable strategies: your three options, tax implications in both countries, DTAA benefits, compliance requirements, and timing strategies to protect your retirement savings.
Quick 401(k) Facts for 2025
For 2025, you can contribute up to $23,500 annually (up from $23,000 in 2024). If you're 50+, add $7,500 in catch-up contributions. Those aged 60-63 can contribute $11,250 extra - up to $34,750 total annually. The combined employee and employer limit is $70,000.
Your Three Options: Which One Is Right for You?
Option 1: Leave It Invested
Leave your 401(k) with your former employer until age 59½. Money grows tax-deferred, but withdrawals face 30% US withholding for non-resident aliens. Major downside: non-citizens face 40% estate tax with only $60,000 exemption.
Option 2: Roll Over to IRA
Traditional IRA: More investment flexibility, same tax treatment. Challenge: some institutions don't allow international addresses.
Roth IRA: Pay taxes now on the rollover, but future withdrawals are tax-free. No Required Minimum Distributions (RMDs). Better for estate planning.
👉 Tip: If returning to India with no US income, convert to Roth IRA during your low-tax-bracket year.
Option 3: Cash Out
Immediate access, but heavy taxes. Under 59½ pays 10% penalty + 30% withholding = only 60% of your money. India will tax it again if you're ROR.
Also Read - How Much Money Does an NRI in the UAE Need to Retire Comfortably in India?
Your Tax Status in India: Why It Matters
RNOR (Resident but Not Ordinarily Resident): Your first 2 years back in India. Foreign income (including 401(k)) remains untaxed in India.
ROR (Resident and Ordinarily Resident): After 2 years. India taxes your global income.
👉 Strategy: Return in April (start of India's financial year) to maximize your RNOR window. Take withdrawals during this period to minimize Indian tax.
Use Belong's Residential Status Calculator to check your status.
Also Read - Residential Status Under Section 6 Of Income Tax Act
DTAA: How It Protects You (and Where It Doesn't)
The India-USA Double Taxation Avoidance Agreement (DTAA) prevents paying taxes twice, but with limitations.
Monthly Pension Payments: Fall under Article 20. Taxed only in India (your resident country). The US won't tax these.
Lump Sum Withdrawals: Fall under Article 23 ("Other Income"). No DTAA benefit - both countries can tax. US withholds 30%, India taxes as global income. You can claim Foreign Tax Credit (FTC) for US taxes.
👉 Strategy: Set up monthly pension withdrawals instead of lump sums to benefit from Article 20.
Section 89A: Your Tax Deferral Shield
Union Budget 2021-22 introduced Section 89A - a game-changer for returning NRIs from the US, Canada, and UK. It allows taxation only when you withdraw funds, not on accruals.
File Form 10-EE (under Rule 21AAA) with your ITR to claim this benefit. This defers yearly tax in India on 401(k) growth, maintaining the same tax-deferred treatment you had in the US.
Important: Section 89A doesn't apply to 529 education plans - their growth is taxable in India.
Forms You Must File: Your Compliance Checklist
Before Withdrawal:
- Form W8BEN: Submit to your plan administrator to certify non-resident alien status and claim DTAA benefits
After Withdrawal:
- Form 1040-NR: US Nonresident Alien Tax Return to report income and claim refunds
- Indian ITR: Report in Schedule FA (Foreign Assets), FSI (Foreign Source Income), OS/CG, and TR (Tax Relief)
- Form 67: Claim Foreign Tax Credit for US taxes paid
Under FATCA and CRS, countries share financial information automatically. Not disclosing foreign assets in your ITR can lead to ₹10 lakh fine or jail time.
Repatriating to India: The Process
Open an NRO (Non-Resident Ordinary) account to receive 401(k) withdrawals. Wire transfer from US bank to Indian account costs $25-50.
For amounts above $250,000, file Forms 15CA and 15CB with Indian tax authorities. Read our detailed guide on filing 15CA and 15CB.
The Currency Risk Nobody Talks About
$500,000 in your 401(k):
- At ₹88/$1 = ₹4.4 crore
- At ₹91/$1 = ₹4.55 crore
- At ₹85/$1 = ₹4.25 crore
That's ₹30 lakh difference based purely on timing.
Use Belong's Rupee vs Dollar Tracker to monitor trends.
👉 Strategy: Keep a portion in USD-denominated investments even after returning to India. At Belong, we offer USD fixed deposits through GIFT City with tax-free returns and full repatriation.
Estate Tax: The 40% Trap
Non-US citizens face 40% US estate tax on assets exceeding $60,000. If you have $500,000 in your 401(k) and pass away:
- Taxable estate: $440,000
- Estate tax: $176,000 (40%)
Solutions: Roth IRA conversion, life insurance, systematic withdrawals, or withdraw before giving up Green Card. Learn more about India-USA DTAA implications.
When to Take Action: Your Timeline
3-5 Years from Retirement:
- Max contributions to $23,500 limit ($31,000 if 50+, $34,750 if 60-63)
- Review IRA rollover options (Schwab International, Fidelity support NRIs)
- Calculate your RNOR window timing
Retiring in Next 12 Months:
- File Form W8BEN with plan administrator now
- Open NRO account before losing NRI status
- Consult cross-border tax advisor about Section 89A
- Plan systematic withdrawal instead of lump sum
Already in India:
- Check status with our calculator
- If in RNOR window, take larger withdrawals now
- Set up monthly pension payments for Article 20 benefit
- File all foreign asset disclosures in ITR
- Use Form 67 to claim FTC
Common Mistakes That Cost Lakhs
- Taking lump sum too early: 10% penalty + 30% withholding + Indian tax = over 40% gone
- Ignoring estate tax: Non-citizens pay 40% on amounts over $60,000
- Missing RNOR window: Costs lakhs in preventable taxes
- Not filing Form 10-EE: Lose Section 89A deferral benefits
- Incomplete ITR disclosure: FATCA and CRS mean authorities already know - penalties are steep
Your Action Plan
Retire in India, Age 55+:
- Start monthly withdrawals (Article 20 benefit)
- Keep some USD via GIFT City investments
- Max out RNOR period withdrawals
Retire in India, Under 55:
- Leave 401(k) invested until 59½
- Roll over to IRA for better options
- Consider Roth conversion in low-income years
Unsure Where You'll Retire:
- Keep 401(k) flexible
- Build parallel India investments
- Maintain banking in both countries
Take the Next Step
Your 401(k) represents decades of hard work. Don't lose 30-40% to poor planning.
Do This Now:
- Check your 401(k) balance and vesting schedule
- Calculate your residential status
- Review RNOR eligibility window
- Compare investment options with our FD rate tool
Join 5,000+ NRIs in our WhatsApp Community sharing real experiences about 401(k) withdrawals, tax planning, and retirement strategies.
At Belong, we've built tools specifically for these decisions:
- NRI FD Comparison Tool - compare NRE, NRO, FCNR, GIFT City rates
- Compliance Compass - track all tax requirements
- Rupee vs Dollar Tracker - time your repatriation smartly
Download the Belong App for personalized recommendations based on your situation.
Retirement planning isn't about maximizing returns - it's about having freedom to choose where you live without financial stress. Your 401(k), with proper tax planning and compliance, can fund a comfortable retirement in Mumbai, San Francisco, or both.
The best time to plan was five years ago. The second-best time is today.
Related Reading:
- DTAA Between India and USA
- NRI Taxation Guide
- Best NRI Fixed Deposit Rates
- GIFT City Benefits for NRIs
- Converting NRI to Resident Account
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