[Kochupengal]

I have worked in the USA for two short stints over the last decade. On both occasions, under the terms of the USA-India tax treaty, I was treated as exempt from payment of taxes in the USA.
Now, having reached the age of retirement I am now entitled to withdraw my benefits. My employers had paid ithese into a large US benefits investment facility that they use. These benefits include my own contribution, and the contribution of my employers. I am now told that this (smallish) amount will be taxed at 30%.

Is this correct? It seems to me that if my salary was exempt from tax, my contribution to benefits should also be exempt; if my employers did not think it necessary to withhold taxes on my salary, why is it necessary to withhold taxes on the benefits that they paid me?

Thanks for any help on this

[MukatA]

1. If you withdraw before 59 1/2 you must pay early withdrawal penalty.
2. Any income form 401k is taxable.
3. Any contribution of after tax dollars or non-taxable income may not be taxable. For this you will attach a form (number? I an not sure) with your tax return.
4. Evidently your 401k administrator will withhold tax and you will claim it on your tax return.

[Kochupengal]

1. If you withdraw before 59 1/2 you must pay early withdrawal penalty.
2. Any income form 401k is taxable.
3. Any contribution of after tax dollars or non-taxable income may not be taxable. For this you will attach a form (number ?? I an not sure) with your tax return.
4. Evidently your 401k administrator will withhold tax and you will claim it on your tax return.

Thank you for that informative reply. May I ask a few further questions:
1. Re 2. What does "income from 401k" mean?

2. In order to ask for expemption from witholding, one files a Form 8233 with the witholding agent. According to the instructions accompanying that form, the witholding agent checks to see whether the information is correct and then send one copy on to the ira. They have to then wait for 10days to see whether the ira have any objection before putting to exemption to effect. As far as I know this form is no filed with the return. In fact I did not ever file a return in the USA. I did and continue to do that in India.

3. Will I need to file a return in the USA even if I am exempt from tax according to the treaty?

Thanks again
Kochupengal

[AtlantaTaxExpert]

Kochupengal:

1) Money put into a 401K is tax-deferred, NOT tax-exempt. This means that, when you withdraw the money, it becomes taxable income. Even though your salary was tax-exempt, the 401K contributions for yourself and the employer's match became tax-deferred by your decision to participate in the 401K program.

2) The 401K distribution IS taxable income. Now, you MAY be able to get the 30% withholding suspended by filing Form 8233, but I doubt it. You can get the withholding back when you file your annual non-resident alien tax return (Form 1040NR). If your yearly distributions are LESS than your personal exemption ($3,500 for 2008), you will have NO tax liability and you will get the 30% withholidng back.

Withdraw MORE than the personal exemption (it changes every year) and you will owe income taxes on the 401K disbursement.

3) Yes; a Form 1040NR, plus a state tax return for the state where the 401K custodian is located, will be required each year you get a disbursement.