I'm in the US (California) for the next one year. I just finished my MBA and started a job last month. It is very likely that I'll move out of US next year (maybe India). Does it make sense to add 18.5k in 401k this year and withdraw next year when I'm in a lower tax bracket in India? Currently I'm in about 35% tax bracket with 210k TC. Note that I'm not in MSFT anymore. Only $1k match by employer. I don't know exactly how tax computation works for 401k between US and India.
Several people have the same question. But the simple answer is don’t overthink it. Retirement money in any country is safe. U really don’t need to withdraw that money. But if u have to, may be because u want to setup ur own business or buy an apartment, U can withdraw the money to NRE account and i guess overseas income u don’t pay tax. But u might have to withdraw all at once and immediately. If money is large, hire a tax consultant might be very helpful.
Yes, you can withdraw when you are in a lower tax bracket if you’re going back.
After going back, will I pay tax to US gov or Indian gov for 401k money? And if US gov, then my INR income will surely fall in a lower tax bracket after converting to USD right?
Assuming it is normal 401 k with pre tax money - you only pay tax and any penalties on o my the amount you withdraw and you can practically withdraw at any rate till like 70 yr when MRD kick in So yes withdraw as you need - tax should be minima with Rs earning - or leave it here to pay for your kids tuition Do convert to IRA as 401 k is not restrictive compared to IRA Then convert to Roth IRA by paying taxes when income is low Then withdraw tax free years later
Estate tax, estate tax, estate tax
If you can avoid withdrawing, do that. Moving money to Roth IRA is even better as it'll grow tax free. In my case once I move back, I would like to buy a house and would like to use all my savings to pre-pay as much home loan as possible. So if you too have to withdraw in forseable future, better withdraw in the first two years (no taxes in India) and you'll pay less tax here as well. After two years, you'll have to pay taxes in India as well if you withdraw (which for most working folks would be 30%). So there's some calculation you'll need to do to find right withdrawal amount for every year.
India and US have double taxation avoidance treaty. Why would we have to pay tax in India even after 2 years for foreign income?
Assume you already fall into 30% bracket with your Indian income. So technically any 401k withdrawal amount will flat require 30% taxes to be paid to India. Based on the amount you withdrew, you'll also pay taxes in US and then pay 30% tax in India. This is double taxation. Luckily you can get tax credit for the taxes you paid in USA (due to double tax avoidance treaty). So effectively you'll pay 30% tax (US and India combined), no matter what amount you withdraw after two years. This would change if you don't have income in India or fall under a different tax bracket But I hope this clarifies what double tax avoidance treaty means. You can't escape taxes. 😁
Leave it untouched in the US and treat it as a retirement cushion that provides you exposure to the global markets. It’s a powerful hedge in the long term.
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