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goquest · Dec 15, 2011, 12:06 PM

I was a resident of US from India having a green card. Due to health reasons I could not maintain the green card status after 2004 although it is valid up to Sept, 2011. I am in India and wish to continue here and withdraw 401k with fidelity and jpmorgan. Both gave different rules fidelity told fed 20% taxes 10 % of that as state taxes , where as jpmorgan suggested filing W-8BEN form and recovering full amount. AS of today dec 2011 I don't hold any valid US visa and in India ! Which of these JPmorgan or fidelity.. Who is correct please suggest ? What should I do minmize tax losses ? At this point I am a student in India

smoothy · Dec 15, 2011, 12:29 PM

There is no way to get this without a tax penalty... because 401K contributions were made before taxes we taken out... under the conditions that taxes would be paid at the time it is taken out... and except in a very few specific situations... there is also a penalty for withdrawl before you reach the minimum age for disbursements.

And if you are a student... you are very unlikely to be in your 60's.

AtlantaTaxExpert · Dec 15, 2011, 02:15 PM

Smoothy has it correct: you WILL pay normal FEDERAL income taxes plus a 10% Early Withdrawal Penalty to the IRS.

However, no STATE taxes should be due, because you are no longer a U.S. resident and, by virtue of the fact that you spent all of 2011 in India, you are NOT a resident of ANY U.S. state.

By law, the 401K custodians should withhold at least 20% of the distribution amount, and ALL of the 20% should be sent to the IRS. This withholding CANNOT be mitigated by Form W-8BEN, because the 401K is considered to be deferred compensation, and NOT a pension as defined in the U.S.-India Tax Treaty.

You MAY be able to avoid the 10% Early Withdrawal Penalty by rolling the money into a rollover IRA, then withdraw the money from the IRA and claim the exception by using the money to pay your education exepnses. This option is available ONLY for IRA withdrawals, which is why you have to do the rollover. Whether a rollover can be done from India is a challenge, but one worth investigating.