401K of a foreign national

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401K of a foreign national

Postby niranjanasu » Wed Mar 28, 2007 3:29 pm

I have read the Boglehead's Guide to Investing and came to these boards (both) through that book. I have been visiting these forums for more than a year without posting. I am learning a lot here.

I am an Indian national who came to US to do my Masters degree and right now working as a software professional in H1 visa. I have been contributing to 401K and Roth IRAs. If I decide to go back to India after some time, how can I take the money invested in 401K without incurring the penalty? Can I transfer the retirement funds to foreign countries retirement funds/schemes/etc? Similarly I have been contributing to Social Security also. Do I have to forget that money when I go back to India?

When I was browsing the mutual funds available in India, most of the funds have expense ratio more than 2. Is it normal in other countries? Do you know any index fund available in India? Thanks for all the information.
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Tax Law

Postby Laura » Wed Mar 28, 2007 4:44 pm

niranjanasu,

The tax situation in the United States is complicated. On the question of Social Security you should check out the social security website and the IRS website. Type in tax treaty and see if there is something with India.

On the question of avoiding withdrawal penalties if you return to India I believe the news is bad. You would be required to pay the penalty if you take the money out early. On the other hand, you are probably permitted to keep the money in an IRA in the United States (do the rollover from the 401k). When you age you could then start withdrawals without the penalty and the money would grow tax deferred until withdrawal. Alternatively, you could roll to an IRA then convert to a Roth and it would grow tax free.

Hope this gives you some ideas. I am not an expert so make sure and research what I said.

Laura
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Maybe keep money in U.S.

Postby frose2 » Wed Mar 28, 2007 4:47 pm

This is a mess. I face a similar situation. This is my current understanding of the situation, based on somewhat incomplete research.

I don't know of any exemption from the 10% penalty if you leave the US. US tax law looks unfavorably on persons -- especially US citizens and green card holders -- who leave the US.

If there is no such exemption, it would seem offhand that you have two alternatives, (i) pay the U.S. tax + 10% penalty in one big lump before you go and move the money tax free to India and invest it there, or (ii) keep the money here after you return to India.

If you keep the money here after you return, you will presumably have to pay the US nonresident alien tax rate of 30% on the distributions. You may also have to pay Indian tax on distributions or even on the year-by-year appreciation. You also need to locate a US custodian which will hang onto the money for you.

In your case, whether it is worthwhile to pay the US tax + 10% penalty (and to keep contributing to those accounts) may depend on what the Indian authorities will do to your IRA distributions if you don't take the money back with you.

You may want to see if the US and India have a tax treaty or a social security treaty which could limit the taxation of your IRA distributions.

As for avoiding high expense ratios, if the Indian tax and securities regulatory authorities tolerate it, you might be able hold ETFs from a country with which India has a tax treaty. I believe that Bylo Selhi, a Canadian poster on these boards, holds US ETFs.
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Better to keep money in the US.

Postby vamsik » Wed Mar 28, 2007 5:55 pm

I am in a similar situation to you (Indian national working in the US).

India and the US do not have a SS treaty yet. (basically because India does not have anything similar to SS for all citizens). From time to time, we hear of these things being worked on. It might still happen in a few years.

As far as 401(K), you probably cannot avoid the 10% penalty if you want to withdraw the money before age 65. If you need the money before that, it is better to wait until you move back to India. If you do not have other US income at that time, you could minimize US income taxes. I believe India and US do have a tax avoidance treaty, so you would not pay Indian income taxes on this distribution.

The best option might be to treat it as retirement money and let it remain here invested in US stocks (in the 401k or an IRA). It is harder to get access to the US stock market from India (though things are changing).

hope that helps
-vamsi
(Long time lurker, first post).
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Re: 401K of a foreign national

Postby mudfud » Wed Mar 28, 2007 6:24 pm

niranjanasu wrote:I have read the Boglehead's Guide to Investing and came to these boards (both) through that book. If I decide to go back to India after some time, how can I take the money invested in 401K without incurring the penalty?


If you are withdrawing modest sums (around $10,000/year) then most of this will be covered under the standard deduction/personal exemption so all you'll pay in taxes is 10%, which is not bad (I'm assuming that the SD and PE will still be applicable).

I was in India briefly earlier this year, and out of curiosity I checked out the index funds, and there are funds with ER of 0.8% or so. Still very expensive but getting better. Not sure of the fund names, but I think I found this in the Economic Times.

But I think a greater issue will be that you will be exposing yourself to single-country risk, if most of your investment are in Indian equities. I think it will be better to leave at least some of your investments in the US where you can buy whatever you want at a low cost.

Best,
Mud
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Postby tfb » Wed Mar 28, 2007 6:28 pm

What's wrong with just leaving the money here? You have online access for everything. Turn on electronic delivery for statements etc. and it will work just as if you were physically here.
Harry Sit, taking a break from the forums.
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Social Security

Postby mudfud » Wed Mar 28, 2007 6:35 pm

Niranjanasu,

Check out this site
http://www.ssa.gov/pubs/10137.html
Under certain conditions you may be able to get social security in India.

Best,
Mud
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There is a US-India tax treaty

Postby frose2 » Wed Mar 28, 2007 7:02 pm

I've checked now: There is a US-India tax treaty. http://www.irs.gov/pub/irs-trty/india.pdf. You probably need to read it. It is not clear to me if it has any effect on the taxation of IRA distributions.
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