[britefar]

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.

[AtlantaTaxExpert]

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.

[britefar]

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?

[AtlantaTaxExpert]

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.

[davensharma]

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

[AtlantaTaxExpert]

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.

[bennybenfari]

-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.

[AtlantaTaxExpert]

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.

[manirahul]

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.

[IntlTax]

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

[abhickul]

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.

[AtlantaTaxExpert]

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%.

[abhickul]

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..

[AtlantaTaxExpert]

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.

[IntlTax]

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.

[guran2]

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.

[IntlTax]

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

[guran2]

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!

[guran2]

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!

[IntlTax]

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!!