Hi,
I'm a foreign worker in USA. I have savings in 401k while I'm working in USA. If I leave USA for good (i.e. don't have plans to come back - at least not that I know of at the moment... never say never :), can I take my 401k savings out without penalty?

Thank you in advance for your assistance in this issue.

Britefar:

When you withdraw your 401K funds, by law the administrator will withhold 20% of the disbursement and forward it to the IRS as partial payment for the taxes owed. This is done whether you leave the cuntry or not.

However, it may not end there. Eventually, the IRS may track you down and eventually seek to collect any additional taxes owed. How successful they would be would depend on where you eventually settle down and how much money is involved. Some countries, like Canada, cooperate fully with the IRS and would enforce any collection action the IRS would initiate. Other countries, like the Grand Caymens, tend to be rather uncooperative with the IRS.

Of course, the smaller amounts of money tend to be overlooked in the big scheme of things. The IRS has limited manpower and resources, and therefore they tend to go after the biggest fish in the lake. Whether you would fall under the IRS radar is something you have to decide for yourself.

Thanks. I understand that I can use funds from 401k for graduate studies. Will the 20% be automatically deducted at the time I want to withdraw the funds also?

Yes, the 20% withholding is automatic.

Use of 401K funds for higher education is permitted, but it only exempts you from the 10% early withdrawal penalty. Taxes will still be due, hence the 20% withholding.

I don't believe there is an exception to the penalty if you are leaving the country. However, you have the following options -

1. Leave the money in USA until you are 55. Then you can withdraw it without penalties.

2. Take the distribution over your life time using acturial calculation, again to avoid penalties.

Keep in mind that lump sum distribution will trigger not only penalties, but also regular taxes.

Good luck,

Davis & Company, CPAs

BriteFar:

See my answers below. When the money is disbursed to you, 20% will be withheld and sent to the IRS as a downpayment for taxes owed. It may or may not be enough to pay off the entire tax liability, but it will alert the IRS to expect a tax return from you.

Also, as noted below, the IRS may come after you for the balance of the taxes in your home country, depending on the amount of money and the country in which you live.

-I'm looking to move to Canada in the future.
-I want to buy a home in Vancouver Canada.
-I have a good amount of money in my 401k.
-I'm 26 years old, I live at home with my parents, I'm working, 15 credits shy of completing my Bachelor's.
-How can I use that money in Canada?
-Will both sides tax me?
-Is there a penalty?
-What is the best solution?
-I hope this doesn't end up being a real headache.

Bennybenfari:

I believe Canadian companies have pension plans similar to 401Ks, and that there are provisions which allow rollovers from U.S. 401Ks to their Candian equivalents.

If not, I also believe Canada has the equivalent to U.S. IRAs, and that rollovers are permitted from U.S. pension plans.

If rollovers are allowed, they will be tax-free as long as you do the rollover from plan-to-plan without having any direct access to the money.

Do you know if US Government has any such ties with India for roll over of 401K amount to Provident Fund in India?
Greatly appreciate your help.

Thanks.

I am not familiar with rollover provisions from 401(k)s or IRAs in any U.S. tax treaty, including the one with India.

Hello,

I'm working in USA for last 5 years and have good savings in 401K. Now I'm planning to move to India for good.

I was thinking, I'll start taking money out of my 401K slowly, a part of it every year. That way, I'll make sure that when I declare that amount in that years' US tax-returns, I'll be below the taxable income (I won't have any other income in the US for that year, only the 401K withdrawals).

So, if in 2010 I take out 20,000$ out of my 401K, and if that's the only US income I have; I thought I'll end up paying the 2,000$ of penalty, and will get away from paying taxes on that. The next year, I'll take out another 20,000$ out and just pay 2,000$ penalty.

Is this plan workable? Or have I missed something?

Thanks in advance.

Unfortunately, you are missing something.

Once you leave the U.S. you do NOT complete the first page and the top half of the second page of Form 1040NR. The tax on the distribution from the 401K is calculated on Page #4, then assessed on the second page of the Form 1040NR. There is NO itemized or standard deduction nor any personal exemption, so the tax is assessed at a set percentage (I believe it is 10%), plus the 10% Early Withdrawal Penalty.

Like I said in earlier posts, the best course of action is to roll the money over into an IRA (Charles Schwab for sure will accept your business) and manage the account from India using Internet, phone and email). Once you hit 59.5 years of age, you can then withdraw the money from the IRA and pay the relatively low tax of 10%.

Thank you for your prompt response.

So even if I end up paying 10% penalty + 10% tax on the withdrawn amount, that 20% will still be lesser than the amount I saved on taxes by participating in the regular 401K. Will the 10% tax number be different if I withdraw the full 401K amount, or just a part of it every year?

Another question I had about my 401K account was, in case of death of the primary 401K holder before he reaches 59.5yrs age; will his family get the amount in the 401K?

Thanks..

If the tax is a FLAT 10%, it makes no difference in terms of the percentage of tax paid whether you withdraw it all at once or over time. Given that fact, plus the inflationary pressures on the U.S. dollar, it probably makes more sense to get it all out NOW versus waiting over time.

Yes, the family gets the 401K money if the family member (probably the spouse) is listed as the beneficiary. However, because the 401K is a pre-tax funded retirement plan, the income taxes will still be due when the money is withdrawn by the beneficiary.

The amount distributed from the 401(k) will be treated as two categories of income. The first category relates to the money that you and/or your employer contributed into the plan. The second category relates to earnings on the funds contributed. The first category of income will be taxable to you as effectively connected income (graduated rates, etc.) under section 864(c)(6). The second category of income (known as "earnings and accretions") will be taxable to you under section 871 at a 30% or lower treaty tax rate.

Now connected to the right thread:

I really appreciate your efforts to answer this question thread! It seems to me that "AtlantaTaxExpert" and "IntlTax" provides different answers as to the level and mechanism of US taxation. :)

I worked in the US in the 80'ties and have a substantial amount vested in my 401(k). I migrated out of the US almost 20 years ago and is a non-US citizen.
I am considering a lump sum distribution of the total and would really like to understand if the mentioned 10% flat rate tax is correct. I do not mind to pay these 10% but additional tax calculated according to other rules starts to hurt really bad. If the LSD is taxed with the bases of my world-wide income, then the tax bracket would be ridiculous.
Can you please clarify your answers above, prefereably with relevant references to IRS regulations and advisories.

Are you a resident of a country that has an income tax treaty with the U.S. and if so, which country?

My question is only focused on the US tax effects, given that I elect to be subjected to taxation in the US. If this becomes outrageously high, I will migrate to a country with a tax treaty and a tax level that suits me. I have sufficient freedom to be able to migrate to a country of my choice and can also elect when to execute my distribution. I fully understand how this will effect my tax situation and that is not my question.

What is unclear to me however, is the US mechanism for applying taxation and corresponding taxrate if I reside in a country where no tax treaty applies?

Specifically, related to previous answers:
The 1040NR form, page 4, item 78-87 has a table with rates, 10%,15%,20%. This should be explained on page 28 in the instruction and the instruction provides no explanation relating to this.
A previous answer suggested that these %-ages were tax-rates!
My interpretation is that these numbers instead represents possible withholding rates, which is nothing but an indicative rate of tax to be applied.
Withholding and final tax rate has no direct tie and will not finally determine tax to be paid.

Thank you for your effort to clarify my question!

Correction to my question above (rates!)

"Specifically, related to previous answers:
The 1040NR form, page 4, item 78-87 has a table with rates, 10%,15%,30%. This should be explained on page 28 in the instruction and the instruction provides no explanation relating to this.
A previous answer suggested that these %-ages were tax-rates!

Sections 871 and 881 impose a flat tax of 30% on certain U.S. source income paid to non-U.S. persons. This tax is often referred to as a withholding tax. The flat 30% rate is often reduced by treaty to lower flat percentages. The reduced rates are often 10% or 15%, depending on the applicable treaty and the type of income. Thus, the percentages listed are typically the tax rates!!

Pub 901, pages 35--37 provides taxrates for different sources of income that clarifies the tax situation when you reside in a country with a tax treaty. Using these tables, I deduce that the taxrate is flat-fixed, varying from 0% to 30%, depending on Country and source of income.

As I interpret this, a k(401) distribution consists of 4 components, pre-tax and after-tax contributions each divided into contribution and capital gain. Tax would be applied to :
a) after-tax contribution capital gain
b) pre-tax contribution
c) pre-tax contribution capital gain
Tax would not be applied to the remaining
d) after-tax contribution

So, my current understanding is that tax is applied to a),b) and c) identically according to the rates listed in pub. 901 for expatriates in countries with treaties, as listed in pub.901.
Item d) is tax exempt.

For countries, lacking treaties, tax is applied according to other tax schedules. This case is where I am unsure on how to calculate US tax.

Sections 871 and 881 impose a flat tax of 30% on certain U.S. source income paid to non-U.S. persons. This tax is often referred to as a withholding tax. The flat 30% rate is often reduced by treaty to lower flat percentages. The reduced rates are often 10% or 15%, depending on the applicable treaty and the type of income. Thus, the percentages listed are typically the tax rates!!!

Thanks,

Please help me to understand your reference to "Sections 871 and 881". What does this refer to? :confused:

I probably should know but I do not...

I agree that d) is not subject to U.S. tax on distribution. I would call a) and c) "earnings and accretions" rather than capital gain. The earnings and accretions would be subject to the flat 30% tax under section 871. The pre-tax contribution would be subject to graduated tax rates as effectively connected income. See sections 864(b) and 864(c)(6).

The section references are to the Internal Revenue Code of 1986, as amended.

I would to verify what I understand from the post. I'm on H1B visa and planning to withdraw middle of next year. I'll have $25K by then. My country have no tax treaty with USA. Thus, my total tax should be 10% tax and 10% penal fees. Is that right? Also, I cannot use standard deduction too?

I would to verify what I understand from the post. I'm on H1B visa and planning to withdraw middle of next year. I'll have $25K by then. My country have no tax treaty with USA. Thus, my total tax should be 10% tax and 10% penal fees. Is that right? Also, I cannot use standard deduction too?

This is an easy Q. to answer: I assume that your k(401) does not contain any after-tax component. It consists only of pre-tax investment and "earnings and accretions" (=gain on money in account). You will be subjected to 30% flat tax + and additional 10% early withdrawal penelty in the US. Your US tax+penelty will be 25k * 40% = 10k. Your net payout will be 15k and Uncle Sam will get 10k.
Depending on your country, you will also be taxed in your country of residence and will be taxed on the total amount 25k according to local tax regulations. In some countries you will have a credit for the US 10k already paid. In some other countries you will get no credit and have to pay full tax on the total distribution of 25k. Worst case I know of is 55% local tax which would mean 25k * 55% = 13.750 in local tax in addition to the US 10k. Your net will in this case be 1.250 $ and the tax men will get 23.750 $.:mad:
In several countries you have to expend the combined tax for one year and credit may be accounted for the subsequent tax year. That makes it important to plan WHEN, during the tax year to take the distribution.
You have to study local tax rules in your country of residence. This is something you should have been advised to do before deciding to join the k(401) plan!

Thank you to "IntlTax" and "AtlantaTaxexpert" for your persistence in answering this thread!

Now I know how to prepare and plan for my distribution. My combined tax savings, given the right execution of my distribution, will be in the 300k domain so you may rest assured that I am grateful to you both for your answers and helpful guidance in clarifying my issues.

Siew, Say that $20K of your 401(k) is from pre-tax contributions by either you or your employer and that $5K is from earnings generated on the funds invested in the plan. The $5K would be subject to the 30% flat tax. The $20K would be subject to normal graduated tax rates and the tax due would depend on the amount of the income you earned in that year.

I am not too familiar with the exceptions to the 10% penalty, but unless you are 59 and a half, it seems likely that you would owe a 10% penalty on the full amount distributed.

Siew, Say that $20K of your 401(k) is from pre-tax contributions by either you or your employer and that $5K is from earnings generated on the funds invested in the plan. The $5K would be subject to the 30% flat tax. The $20K would be subject to normal graduated tax rates and the tax due would depend on the amount of the income you earned in that year.

I am not too familiar with the exceptions to the 10% penalty, but unless you are 59 and a half, it seems likely that you would owe a 10% penalty on the full amount distributed.

The answer from IntlTax is absolutely correct, I would like to add one differentiation though.
Siew will be subject to a initial US 30% withholding on the distribution that will be augmented later to actual tax when the 1040NR is submitted the following tax year. Siew may then recover overpaid tax or owe outstanding tax.

Thank you Guran2 and Inltax. Now I realized that it would be better for me to withdraw the money after 59.

Hi,

1. I am from India and just inquired about the deduction if any on withdrawl of money from my 401k contribution.

2. I am contributing in principal financial group company under 401k plan.

3. Once I will be back to India after my job termination in US, I need to provide them the job termination proof

4. I also need to fill out the FORM called W8EBN (check IRS site for more details) and fax them the same.

5. As per their record because india and us have some tax treaty according to which after receiving my W8EBN form they will not withhold anything from my 401k money.

6. I can also instruct them for transferring the money as direct deposit to my US bank account.

7. The whole process takes 2 to 4 weeks time and you will get the money to your us bank account.

8. After submitting W8EBN form they will even not with-hold the 10% penalty.

Caution: even if there will be any tax I need to pay on the 401k money withdrawl. I would wait for the next tax year (next to the year I'll be leaving US), so that I will not have any income that year and only income would be 401k earning. In that way the tax bracket will be lower.

Note: Few of my other friends who faced the same situation they have received the money from 401K without any deduction. Also they haven't paid any tax on the same.

I can see the treaty on IRS side but not able to understand in 401k context. If anybody can understand please explain it here.

Here's the link from IRS...

India - Tax Treaty Documents (http://www.irs.gov/businesses/international/article/0,,id=169600,00.html)

Hi ANurag,

Can you please explain me if the same W8BEN rational is valid for an IRA as well for India specific cases... like yours? If so then it's really a big big advantage... but I'm really skeptical if something like this is possible in 401 or IRA. By the way where did u call and enquire? IRA or your 401 administrator? Also, how long back did your friends did this exercise... and if it'sbeen sometime back like 2-3 years.. and not had the IRS knocking at their doors yet.. then probably what u say is true.

ALCON:

Early withdrawals from EITHER 401K or IRA WILL incur the 10% Early withdrawal Penalty, plus be taxed as ordinary income by the IRS.

There is NO treaty exemption on this issue.

Anurag24k - Were you able to get the money in full without any withholdings or penalty?

I spoke to the principal they gave me the same procedure to fill W8BEN form and I will get the money in full.

Can you or anyone confirm?

Another Q - What happens if I join the same company but in India office, can I still withdraw my 401K stating I am terminated from US office?

TIA