I was in US from Aug 2002 to Dec 2007, initially as F1 (including OPT) until Sep 2006 and on H1 thereafter.

I took an internal transfer and working with the same company now in India.

I filed 1040NR for 2002 - 2006 and for last year i.e. 2007 I filed 1040 since I qualified for it as First Year Choice.

I have money in 401k which I would like to withdraw, what would be the best way to minimize taxes and penalties on this withdrawal.

Looking forward to suggestions.

Filing as a resident alien in 2007 may or may not have been correct; it depends on WHEN in December 2007 you left the country.

As for the 401K withdrawal, your best bet is to roll the money over into an IRA, then manage it from India using phone calls and email.

The problem is finding an brokerage firm or mutual fund that will allow you to open a rollover IRA.

Why filing as resident alien is wrong?? Even if I left on Dec 1st or lets say nov 30th 2007, I am eligible to file as resident alien.

If you withdraw money from 401K, you will pay 10% early withdrawal penalty and the amount withdrawn will be taxed as ordinary income. If you withdraw in 2008, you will file nonresident tax return for 2008.
This may still be the best choice for you. If there is no activity in the account for over a year, you may be some fees charged.

There is a grace period that allows you to file as a resident for the entire year if you leave in late December. However, it is NOT 30 days long. If you left on 1 Dec 07, you should have filed as a dual-status alien, NOT as a resident alien.