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    102628's Avatar
    102628 Posts: 4, Reputation: 1
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    #1

    Jun 19, 2008, 08:27 PM
    401K early withdrawal and filing the same on NRA staus
    I'm living in the state of Arkansas. Planning to do an early withdrawal of my 401K in the year 2009 and move to India. For that year, I'll be living in India and I'll have no other income than this for the whole year. I'll not pass the substantial presence test and so tax status will be non-resident alien.

    I'd need to pay the income tax to Fed for the amount withdrawn and the 10% penalty. Question is do I need to pay the state tax as well for this income on 1099-R. Since I'll never live in any state, will state tax apply? If so, will it be AR then?

    Would appreciate any guidance.
    MukatA's Avatar
    MukatA Posts: 7,110, Reputation: 176
    Tax Expert
    		  
    #2

    Jun 19, 2008, 10:45 PM
    When you withdraw from 401K, you will pay 10% early withdrawal penalty and the amount will be taxed as your ordinary income.
    Yes, the state may also like to tax you as they may argue that the money deposited in 401K was from the state sources.
    102628's Avatar
    102628 Posts: 4, Reputation: 1
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    #3

    Jun 20, 2008, 07:22 AM
    Thanks for the post. Any idea how much the penalty will be for the state of Arkansas? I understand for Fed, it's 10%.
    ScottGem's Avatar
    ScottGem Posts: 64,966, Reputation: 6056
    Computer Expert and Renaissance Man
    		  
    #4

    Jun 20, 2008, 07:30 AM
    States do not impose a penalty. The only penalty is the 10% early withdrawal penalty. But the state will impose a state income tax if applicable.
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
    Senior Tax Expert
    		  
    #5

    Jun 20, 2008, 09:11 AM
    Have you considered just rolling the money into an IRA, then managing the IRA from India, which is easily done using email and phone calls?
    102628's Avatar
    102628 Posts: 4, Reputation: 1
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    #6

    Jun 21, 2008, 08:03 PM
    Yes sir. I considered it and I'm in fact opening one. However I have a problem here. IRS is imposing a limit on the contribution. If the gross income is over 103K, any amount that is contributed to an IRA account of a person who already has 401K CANNOT be deducted.

    My wife does not have 401K and hence 5K that she is contributing for 2008 will be fully deductible (our gross income will not exceed 156K).

    BTW, to calculate the income to see if we are over this 103K limit, are we allowed to subtract the 5K deductible my wife is allowed to make from our gross income?

    Let's say our gross income is 104K. As such this is higher than the 103K limit. Are we allowed to deduct the 5K that my wife contributes to her IRA and make this as 104K - 5K = 99K before comparing this against the limit of 103K? In that case, I can open an account and contribute this year itself. Otherwise I need to open one just to rollover. Of course I can contribute but that cannot be deducted.

    Would appreciate your answer.
    102628's Avatar
    102628 Posts: 4, Reputation: 1
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    #7

    Jun 22, 2008, 10:23 AM
    Figured out the answer myself but just posting it so that no one else's time is wasted. Looks like I cannot deduct that 5K from our AGI to calculate the MAGI to check against the limit. I will open the IRA account only next year. Appreciate the help from all who replied.

    If I rollover my 401K to an IRA account, I don't have a cent in tax, I believe. Is that correct?
    AtlantaTaxExpert's Avatar
    AtlantaTaxExpert Posts: 21,836, Reputation: 846
    Senior Tax Expert
    		  
    #8

    Jun 23, 2008, 07:52 AM
    There s NO LIMIT on the rollover IRA, and you will pay NO taxes on the rollover.
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