[guran2]

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.

[guran2]

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...

[IntlTax]

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.

[SiewLim12]

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?

[guran2]

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!

[guran2]

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.

[IntlTax]

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.

[guran2]

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.

[SiewLim12]

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

[Anurag24k]

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.

[Anurag24k]

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

[me_saurav2000]

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.

[AtlantaTaxExpert]

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.

[nawaz76]

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