# 401K tax implications on returning to India (both Roth and Traditional)



## bi3423 (11 mo ago)

Hi all,
I have a *Traditional-401K* account and* Roth-401K* account. I was wondering what tax will I incur if I *move back to India* and try to withdraw these *after turning 59.5 years* as a *Resident of India*. Here is my understanding for taxes in each country:

*US Tax*

Traditional 401K: Whole sum is taxable on withdrawal.
Roth 401K: No Tax implication
*India Tax*

Traditional 401K: Whole sum is taxable on withdrawal.
Roth 401K: I don't know the answer. 

*Need Clarification:*

India Tax on Roth-401K: Will India tax me just on the earnings in this account? Or the whole sum?
Double Taxation: Is there a chance I can get taxed twice in India and US? Are there ways to avoid this via tax credits?


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## Moulard (Feb 3, 2017)

TL-DR

It will depend. You will end up paying the higher of the two tax rates, possibly split between the two countries.


The longer version

There isn't really enough information to answer here. 

Will you be a US Person when you withdraw (either US citizen or permanent resident who has not formally handed back their green card)?
Will you be a tax resident or National of India when you withdraw ?
On broad principles, the country where you are a tax resident will have the right to tax you on your global income. The country where you are not a tax resident will have the right to tax you on income sourced within that country.

The US-India Tax treaty addresses to some degree the double taxation that will result.

Both accounts, I believe would likely fall under the private pension (Article 20) 

According to Article 20 (1)



> Any pension, other than a pension referred to in Article 19 (Remuneration and Pensions in Respect of Government Service), or any annuity derived by a resident of a Contracting State from sources within the other Contracting State may be taxed only in the first-mentioned Contracting State.


So they would be US taxable as they are US sourced.

Given the treaty also allows a country to tax its citizens and tax residents as if the treaty was not in effect, you need to then refer to Article 25 which covers the Relief from double taxation that would result.

According to Article 25(2)



> 2. (a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax paid in the United States, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States.


So basically India will allow you a deduction in Indian tax payable on your US sourced income up to the tax that would be owed on that portion of your income. 

So as a hypothetical example..

If US Taxes on it were $100 And Indian Taxes $50 you would pay the US $100 and you would get a deduction in the amount of India Income tax of $50
If it were the other way round pay $50 to the US and would get credit for that $50 and owe India $50

Familiarise yourself with the tax treaty and the technical explanation which explains in non-diplomatic terms the intent of each clause






India - Tax Treaty Documents | Internal Revenue Service


India - Tax Treaty Documents




www.irs.gov





If you are a US Citizen or Greencard holder be mindful of the saving clause which nulifies a number of treaty benefits for US persons.


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## bi3423 (11 mo ago)

Moulard said:


> TL-DR
> 
> It will depend. You will end up paying the higher of the two tax rates, possibly split between the two countries.
> 
> ...





Moulard said:


> TL-DR
> 
> It will depend. You will end up paying the higher of the two tax rates, possibly split between the two countries.
> 
> ...


Could you comment about Roth 401K? Roth 401K is funded using after-tax dollars, so I already paid taxes on the principal in the US. I hope the principal is not taxed again in the US.


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## Bevdeforges (Nov 16, 2007)

bi3423 said:


> Could you comment about Roth 401K? Roth 401K is funded using after-tax dollars, so I already paid taxes on the principal in the US. I hope the principal is not taxed again in the US.


It all depends on the tax treaty between the US and whatever country you're residing in when you start withdrawing funds from a Roth plan. (Is there now a Roth 401K - or do you mean a Roth IRA?) If the treaty grants taxing rights to the US exclusively, then there may not be any local tax on the withdrawals when resident abroad. But there are a few tax treaties that grant primary taxation rights to the country of residence - and that's a whole different story.

The other "catch" is to see what the country of residence's mechanism for acknowledging the double taxation relief. It's not always that you get credit for what you paid to the "other" country.


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## JustLurking (Mar 25, 2015)

Moulard said:


> According to Article 20 (1)
> 
> 
> > Any pension, other than a pension referred to in Article 19 (Remuneration and Pensions in Respect of Government Service), or any annuity derived by a resident of a Contracting State from sources within the other Contracting State may be taxed only in the first-mentioned Contracting State.
> ...


Are you sure about your interpretation of this treaty clause? It seems the other way around to me. From the treaty Technical Explanation:


> Paragraph 1 provides that private pensions and any annuities derived by a resident of a Contracting State from sources within the other Contracting State are taxable only in the State of residence of the recipient.


Of course, the US's nasty saving clause and then the whole tax credit thing comes into play where the recipient is a US citizen or green card holder and not a US nonresident alien.


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## Moulard (Feb 3, 2017)

JustLurking said:


> Are you sure about your interpretation of this treaty clause?


I am an idiot, you are right, I got it the wrong way round. India will have the primary right to tax. 

Serves me right for getting distracted part way through posting and coming back without rereading the original statement... somehow in that 15 minutes I got turned around.




JustLurking said:


> Of course, the US's nasty saving clause a


Savings clause could come into play which is why I made the comment on being a US Person - Private pensions are rarely if ever protected from the saving clause



bi3423 said:


> Could you comment about Roth 401K? Roth 401K is funded using after-tax dollars


It will depend on domestic Indian tax law. 

I am not familiar there are bound to be rulings on the topic you could investigate.

Not uncommon for these sorts of funds to simply be treated as trusts, in which case yes, it is entirely likely that the corpus would be not assessed or exempt and only the growth would be taxed...


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