[US] Expat retiring in India

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boolda
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Joined: Wed Jun 09, 2021 10:28 pm

[US] Expat retiring in India

Post by boolda »

I am a US citizen planning to retire in India. I have 401K, Roth account here in the US and will not plan to earn anything from Indian sources. I think I understand the rules of 401k. The distribution will be taxable in the US and I can avoid paying taxes in India under double tax avoidance agreement. The problem comes with Roth. Which is not taxed in the US. How I can avoid paying taxes on the Roth distribution. Or should I not contribute any more to Roth.
vrr106
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Re: [US] Expat retiring in India

Post by vrr106 »

you might want to ask on a forum specifically set up for expat returns to India, I am sure that will be one of the most commonly asked questions
Chuckles960
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Re: [US] Expat retiring in India

Post by Chuckles960 »

This question is actually of broader applicability than just India (the subject line is unfortunate). I would be curious to know the answer.

In the US, income tax liability is based on the 1099-R form data that are sent directly to the IRS. A Roth withdrawal also results in a 1099-R but Box 2a (taxable amount) will be zero. It is money on which you have already paid tax, just like money you might withdraw from a bank account.

So I would guess that it is not taxable in other countries either. But the question becomes, how do other countries determine your US income for taxation purposes?

It may be that those countries ask you to submit your US tax return to them. For the reverse issue (US taxing foreign income), many foreign banks submit transaction information to the IRS. But again, bank transactions are not necessarily income, so I am not at all sure how that works.
SlowMovingInvestor
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Re: [US] Expat retiring in India

Post by SlowMovingInvestor »

boolda wrote: Sun Jul 11, 2021 6:44 pm I am a US citizen planning to retire in India. I have 401K, Roth account here in the US and will not plan to earn anything from Indian sources. I think I understand the rules of 401k. The distribution will be taxable in the US and I can avoid paying taxes in India under double tax avoidance agreement. The problem comes with Roth. Which is not taxed in the US. How I can avoid paying taxes on the Roth distribution. Or should I not contribute any more to Roth.
I am not familiar with specific provisions of the US-India double tax treaty, but I don't think India gives any special treatment to US 401k/IRA/Roth IRA accounts. To India, they're just like brokerage accounts.

So I think distributions from 401k, Roth etc. would not be taxable in India. However, any earnings in a 401k account, IRA, Roth etc. would be taxable in India.
SlowMovingInvestor
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Re: [US] Expat retiring in India

Post by SlowMovingInvestor »

Chuckles960 wrote: Mon Jul 12, 2021 1:38 pm
In the US, income tax liability is based on the 1099-R form data that are sent directly to the IRS. A Roth withdrawal also results in a 1099-R but Box 2a (taxable amount) will be zero. It is money on which you have already paid tax, just like money you might withdraw from a bank account.

So I would guess that it is not taxable in other countries either. But the question becomes, how do other countries determine your US income for taxation purposes?
No, it depends on whether the other countries specifically recognize US tax sheltered accounts such as 401ks and IRAs. If the treaty does not provide for that, then distributions will not be taxable because they're just like transfers between 2 accounts to the foreign country. However, any earnings in the IRA (dividends, capital gains) WILL be taxable as they're incurred (just as in a regular brokerage account).
Chuckles960
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Re: [US] Expat retiring in India

Post by Chuckles960 »

SlowMovingInvestor wrote: Mon Jul 12, 2021 2:02 pm No, it depends on whether the other countries specifically recognize US tax sheltered accounts such as 401ks and IRAs. If the treaty does not provide for that, then distributions will not be taxable because they're just like transfers between 2 accounts to the foreign country. However, any earnings in the IRA (dividends, capital gains) WILL be taxable as they're incurred (just as in a regular brokerage account).
But how do other countries determine your US income for taxation purposes? How would they determine what is earnings and what is a transfer?

In the US, realized capital gains and dividends within IRA/Roth accounts are not detailed in forms submitted to the IRS by the financial institution for tax purposes, since only withdrawals are taxed. How would one determine and report these to the foreign government? This part of your post does not make sense.

IRA/Roth withdrawals, and dividends and realized cap gains in post-tax accounts, are reported to the IRS by the relevant financial institution. But these forms are not sent to any other country.
SlowMovingInvestor
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Re: [US] Expat retiring in India

Post by SlowMovingInvestor »

Chuckles960 wrote: Mon Jul 12, 2021 2:29 pm
SlowMovingInvestor wrote: Mon Jul 12, 2021 2:02 pm No, it depends on whether the other countries specifically recognize US tax sheltered accounts such as 401ks and IRAs. If the treaty does not provide for that, then distributions will not be taxable because they're just like transfers between 2 accounts to the foreign country. However, any earnings in the IRA (dividends, capital gains) WILL be taxable as they're incurred (just as in a regular brokerage account).
But how do other countries determine your US income for taxation purposes? How would they determine what is earnings and what is a transfer?

In the US, realized capital gains and dividends within IRA/Roth accounts are not detailed in forms submitted to the IRS by the financial institution for tax purposes, since only withdrawals are taxed. How would one determine and report these to the foreign government? This part of your post does not make sense.
You have to determine it yourself by looking at account statements in the IRA/401K. Anyway Form 1099s are not sent to any other country, so it's your responsibility to determine income under applicable foreign tax laws.
Topic Author
boolda
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Re: [US] Expat retiring in India

Post by boolda »

vrr106 wrote: Mon Jul 12, 2021 12:18 pm you might want to ask on a forum specifically set up for expat returns to India, I am sure that will be one of the most commonly asked questions
Sorrry to bother you. Do you know of any such forum? If so, could you post the link please?
pasadena
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Re: [US] Expat retiring in India

Post by pasadena »

boolda wrote: Tue Jul 20, 2021 10:24 pm
vrr106 wrote: Mon Jul 12, 2021 12:18 pm you might want to ask on a forum specifically set up for expat returns to India, I am sure that will be one of the most commonly asked questions
Sorrry to bother you. Do you know of any such forum? If so, could you post the link please?
You're not bothering anyone, it's just that there might not be many people here with the knowledge that you need. Maybe start by asking in the subforum for non-US investors? Or one of the subs on Reddit like r/expats or r/India, or even r/ExpatFIRE.

I don't know of any such forum myself (I'm not Indian), but the first thing you should do is read and understand the tax treaty between the two countries, along with its technical explanation. There doesn't seem to be a social security totalization agreement.

I heard someone at work mention that there was a difference in 401k treatment if you take a lump sum distribution versus partial ones. I don't know if that's true or maybe I misunderstood.
carloslando
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Re: [US] Expat retiring in India

Post by carloslando »

boolda wrote: Tue Jul 20, 2021 10:24 pm
vrr106 wrote: Mon Jul 12, 2021 12:18 pm you might want to ask on a forum specifically set up for expat returns to India, I am sure that will be one of the most commonly asked questions
Sorrry to bother you. Do you know of any such forum? If so, could you post the link please?
R2I Club would be a good place to ask these questions: http://www.r2iclubforums.com/forums/for ... h-Strategy
Comparison is the killer of all joy.
TedSwippet
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Re: [US] Expat retiring in India

Post by TedSwippet »

boolda wrote: Sun Jul 11, 2021 6:44 pm I am a US citizen planning to retire in India. I have 401K, Roth account here in the US and will not plan to earn anything from Indian sources. ... How I can avoid paying taxes on the Roth distribution. Or should I not contribute any more to Roth.
There's been some previous discussion on this in the non-US investors forum. For example: H1B Exit Strategy 401K vs Roth vs Brokerage

Spoiler: it appears hard to arrive at a definitive conclusion.
coffeeblack
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Re: [US] Expat retiring in India

Post by coffeeblack »

manuvns
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Re: [US] Expat retiring in India

Post by manuvns »

boolda wrote: Sun Jul 11, 2021 6:44 pm I am a US citizen planning to retire in India. I have 401K, Roth account here in the US and will not plan to earn anything from Indian sources. I think I understand the rules of 401k. The distribution will be taxable in the US and I can avoid paying taxes in India under double tax avoidance agreement. The problem comes with Roth. Which is not taxed in the US. How I can avoid paying taxes on the Roth distribution. Or should I not contribute any more to Roth.
do you plan on being a resident of US after you retire or will you not return ? check with your tax advisor
Thanks!
SouthernInvestor
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Re: [US] Expat retiring in India

Post by SouthernInvestor »

From people I know retired abroad, very of them are tax compliant in their new jurisdictions.

Of course, that may say something more about my own social circle than it does about common (or proper) practice.
SouthernInvestor
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Re: [US] Expat retiring in India

Post by SouthernInvestor »

From people I know retired abroad, very of them are tax compliant in their new jurisdictions.

Of course, that may say something more about my own social circle than it does about common (or proper) practice.
Chuckles960
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Re: [US] Expat retiring in India

Post by Chuckles960 »

SouthernInvestor wrote: Wed Jul 21, 2021 9:41 am From people I know retired abroad, very of them are tax compliant in their new jurisdictions.

Of course, that may say something more about my own social circle than it does about common (or proper) practice.
I'm going to interpret your two identical posts as saying "very FEW" are tax complaint...

Indeed, how countries determine foreign income is not clear to me. Self-reporting does not work very well, as we might remember from the days when US taxpayers had to self-report cost basis for capital gains.
ShadowCat
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Re: [US] Expat retiring in India

Post by ShadowCat »

Unless a provision of a tax treaty explicitly provides otherwise, the principle in international taxation of individuals is that tax advantaged accounts in one country are never given tax advantaged protection in another country. This is true for US tax advantaged accounts in other countries but also the other way around as well (for example, the British ISA is not provided any tax advantage in the US).

I echo the comment above that says you should read through the US-India tax treaty. I've read through many US tax treaties but not the Indian one. At quick glance, it looks like it was signed in 1989 and brought into effect in 1991. This predates the existence of Roth accounts in the US which did not exist until 1998, and thus I presume that India provides no tax advantaged status to the Roth account as you have stated; I don't see any clause in the treaty that could even be misconstrued as providing some level of protection to a Roth account.

Consequently, there is nothing you can do to protect the Roth account from Indian taxation. The best you can do is sell and immediately rebuy all assets in the Roth account the day before you become an Indian tax resident. That will not cause a taxable event from the American side but will reset your cost basis on the Indian side. India then treats the account like normal from then on. As a US citizen, you can shield any US taxes on the Roth account forever.

As to practicality on how India would even know you have a Roth account and what your gains/distributions/dividends/etc are within the Roth account, that is a very interesting question. Provided you don't actually contribute/convert funds into the account nor take a withdrawal from the Roth account, there are no tax forms generated for the IRS and thus no tax forms for the IRS to share with the Indian taxing authorities. I highly suspect that Indian law still would require YOU to disclose the income and subject yourself to taxation regardless of whether or not the US and India share information.
tenkuky
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Re: [US] Expat retiring in India

Post by tenkuky »

Here are some posts (disclaimer I have no affiliation and cannot verify this information)
https://fidesire.com/2019/03/401k-withd ... trategies/
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