Thursday, September 10, 2009

R2I - What to do with the 401(k) account?


Have you decided to Return to India (R2I)? Wondering what to do with your 401(k) account? Handling your 401(k) account is one of the big things in R2I checklist. This blog post explains the different things you can do with your 401(k) account, during your R2I. (Also read: R2I Planning Guide)

When you quit job during your return to India, your 401(k) account will move to 'terminated status'. On your last day of employment, you'll be given a 'participant distribution' form. You'll have to decide what you want to do with your 401(k) account.

You'll have the following options:

1) You can still maintain your 401(k) account without making any contributions to it. You'll be allowed to manage the funds. You can wait till your retirement to close your 401(k) account. You'll need to pay taxes only when you close the account (i.e., after your retirement). Many 401k providers allow you to manage the account online. So, you don't have to be worried about remotely managing the account from India.

2) You can close your 401(k) account. In which case, there is a 20% federal tax + 10% penalty for early withdrawal. You'll have to settle the remaining taxes (based on your income bracket), when you file your taxes next year.

3) You can rollover the funds to an IRA account. No tax will be deducted when you rollover the funds to an IRA account. However, when you close the IRA account in the future, you'll be taxed.

4) You can rollover the funds to a Roth IRA account. Tax will be deducted when you rollover the funds to a Roth IRA account. However, when you close the Roth IRA in the future, you won't be taxed.

Filling the 'participant distribution' form is a must on your last day of employment or a few days after that.

You should talk to a financial adviser for greater insights.

Note:
  • You'll be in Resident but not Ordinarily Resident (RNOR) status for the first two years after your R2I. Subsequently, you'll have to pay taxes in India, for the money that you are bringing from USA. Yes, you'll be taxed twice.
  • Some people will close their 401(k) after they R2I. They'll withdraw funds in small amounts so that they'll fall under the 'minimum' tax bracket. That way, they'll have to pay very less tax to the US government. However, after 2 years, you'll have to pay taxes in India too (since you won't be in the RNOR period)

Related posts:

Return to India (R2I) - 25 things to do
R2I - 401(k) closure FAQs
How can I get my Social Security benefits/money?