If you're an NRI with a 401k retirement plan, you're sitting on one of your biggest assets. But managing it when you return to India requires careful planning across two complex tax jurisdictions. The IRS updated contribution limits for 2025 to $23,500 annually (up from $23,000 in 2024), and if you're over 50, you can add another $7,500 in catch-up contributions. For those aged 60-63, there's an even bigger opportunity with $11,250 in additional contributions.
Your decisions about when to withdraw, how to structure distributions, and which tax benefits to claim will determine how much of your hard-earned savings you actually get to keep. Many NRIs lose tens of thousands of dollars simply because they didn't understand the RNOR window, estate tax implications, or DTAA benefits.
This comprehensive guide covers everything you need to know about 401k retirement planning as an NRI. We'll walk through the three main options you have, explain tax implications in both countries, show you how to use Section 89A to avoid double taxation, and give you specific action steps based on your timeline.
Key Takeaway
Managing your 401k as an NRI requires understanding both US and Indian tax systems to protect your retirement savings.
Here's what you'll learn:
- Your three main options for handling your 401k and which suits your situation
- How Section 89A eliminates double taxation and saves thousands in taxes
- Critical timing windows including RNOR period, age 59.5 rules, and RMD at 73
- The estate tax trap hitting accounts over $60,000 and strategies to avoid it
- Strategic withdrawal planning using DTAA benefits to minimize dual taxation
What is a 401k and How Does it Work for NRIs?
A 401k is an employer-sponsored retirement account where you contribute pre-tax salary. Your employer might match contributions, and your money grows tax-deferred until withdrawal.
For 2025, you can contribute up to $23,500 if under 50. Ages 50-59 get an extra $7,500 catch-up contribution (total $31,000). But if you're 60-63, the catch-up jumps to $11,250, allowing up to $34,750 annually. This is the Super 401k catch-up contribution. The combined employee and employer limit is $70,000 for 2025 ($77,500 with catch-up).
Traditional 401k contributions are pre-tax, growing tax-deferred. You pay taxes on withdrawal. Early withdrawals before 59.5 trigger a 10% penalty plus income tax.
Roth 401k contributions are after-tax. Qualified withdrawals are tax-free in the US, but India may still tax them since you never paid Indian tax on this income.
Most NRIs have traditional 401k accounts, but understanding both types matters when planning your India return.
Can NRIs Keep Their 401k After Returning to India?
Yes, absolutely. Your 401k doesn't close when you leave the US. You have three options, each with different tax implications.
Your 401k follows US rules regardless of where you live. But once you're a resident of India, Indian tax laws also apply to your global income, creating a dual taxation scenario you must manage.
Your Three Core Options Explained
Option 1: Leave it invested
Money grows tax-deferred, avoiding early penalties. Downside: non-resident aliens face 30% withholding on withdrawals, plus estate tax risk over $60,000.
Option 2: Roll over to IRA
Transfer to Traditional or Roth IRA for more investment control. Traditional IRA maintains tax-deferred status. Roth requires paying taxes now but gives tax-free withdrawals later. Challenge: finding institutions accepting international addresses.
Option 3: Cash out
Immediate access but most expensive. Under 59.5 means 10% penalty plus income tax in the US, then India taxes it too if you're ROR (Resident and Ordinarily Resident).
How is 401k Taxed for NRIs in the United States?
The IRS considers 401k withdrawals as US-source income, taxable regardless of where you live.
The 30% Withholding Rule
As a non-resident alien, the IRS automatically withholds 30% from distributions. On a $50,000 withdrawal, $15,000 goes to withholding upfront. You receive $35,000.
Submit Form W8BEN to your plan administrator before withdrawal. This certifies non-resident status and lets you claim India-USA DTAA benefits, potentially reducing withholding.
Early Withdrawal Penalties and RMDs
The 10% early penalty before age 59.5 is harsh. Withdrawing $50,000 early costs $5,000 penalty plus $15,000 withholding, leaving just $30,000. Exceptions exist for medical expenses exceeding 7.5% of income, first-time home purchase ($10,000 max), or permanent disability.
At age 73, you must start Required Minimum Distributions (RMDs). Not taking your RMD triggers a 25% penalty on the amount you should have withdrawn, even if you're in India. Roth IRAs have no RMDs, making them attractive for some NRIs.
What Are Tax Implications in India?
This gets complex. India taxes based on your residential status.
Non-Resident Indian (NRI): India only taxes India-sourced income. Your 401k withdrawals aren't taxable in India.
Resident but Not Ordinarily Resident (RNOR): First two years back in India. Foreign income, including 401k, remains untaxed in India. This is your golden window.
Resident and Ordinarily Resident (ROR): After two years. India taxes your global income, including 401k withdrawals.
Maximize withdrawals during your RNOR period. Return to India in April (start of financial year) to effectively get two full years of tax-free foreign income.
Once ROR, withdrawals are added to your income and taxed at slab rates. A $50,000 withdrawal could mean ₹12.6 lakhs in taxes if you're in the 30% bracket.
What is Section 89A and How Does it Help?
Section 89A, introduced in Union Budget 2021-22, is a game-changer for NRIs from US, Canada, or UK. It defers Indian taxation until you actually withdraw from your 401k, matching US tax treatment.
Without Section 89A, India would tax your 401k growth every year based on account value, even if you haven't withdrawn anything.
Filing Form 10-EE
File Form 10-EE under Rule 21AAA in your first year as ROR in India. Missing this window means losing the benefit. The form requires account details, contributions, and earnings from your 401k statements. File electronically with your Income Tax Return.
Once filed, India taxes only actual withdrawals, aligning with US taxation and preventing double taxation on growth.
Limitation: Section 89A doesn't apply to 529 education plans. Their annual growth remains taxable in India on a mark-to-market basis.
How Does DTAA Protect Your 401k?
The Double Taxation Avoidance Agreement prevents full taxation in both countries, but protection depends on withdrawal structure.
Monthly Pension vs Lump Sum
This distinction is crucial and can save you tens of thousands of dollars in taxes. How you structure your withdrawals determines which DTAA article applies and dramatically changes your tax burden.
Monthly pension payments fall under Article 20 of the India-USA DTAA. This article states that private pensions are taxed only in your country of residence. If you're living in India and set up monthly pension withdrawals from your 401k, the US won't tax these payments at all. You only pay tax in India at your applicable slab rate. This is a massive benefit because it completely eliminates US withholding tax.
For example, if you set up $3,000 monthly pension withdrawals ($36,000 annually), you avoid the 30% US withholding entirely. You'll pay only Indian tax, which could be 20-30% depending on your other income. Compare this to a lump sum where you lose 30% to US withholding upfront.
Lump sum withdrawals fall under Article 23 as Other Income. This article doesn't provide the same protection. Both countries can tax the withdrawal. The US withholds 30% upfront, and India taxes it as ordinary income based on your slab. You can claim Foreign Tax Credit in India for the US taxes paid, but you're still dealing with both tax systems, multiple forms, and the hassle of getting refunds.
The strategic move for most NRIs is setting up systematic monthly withdrawals instead of taking large lump sums. This way, you benefit from Article 20 and avoid US taxation entirely. You get regular, predictable income taxed only in India where you can better manage your overall tax liability.
Claiming Foreign Tax Credit
When you pay US taxes, claim credit in India by filing Form 67 with your Indian tax return. You need proof of US taxes paid (Form 1040-NR and receipts). If you paid $10,000 in US and owe ₹12 lakhs in India on the same income, Form 67 reduces Indian tax by ₹8.5 lakhs.
Should You Leave It Invested or Withdraw?
This depends on age, financial needs, return timeline, and tax situation.
Leaving It with Former Employer
Makes sense if you're far from 59.5 and don't need money immediately. Investments grow tax-deferred, avoiding early penalties. Downsides: maintaining employer communication, estate tax over $60,000, managing from India is cumbersome. Some employers require $100,000 minimum balance.
Rolling Over to IRA
More control and flexibility. Traditional IRA maintains tax-deferred status with no taxes on rollover itself. Schwab International and Fidelity work with NRIs, though policies change.
Roth conversion is strategic but timing matters. Pay taxes now on conversion during your first year back in India with no US income. You'll be in the lowest bracket. Future withdrawals are US tax-free. No RMDs. Better estate planning.
Cashing Out
Usually most expensive but makes sense for small balances (under $30,000) or urgent needs. Understand the costs: 10% penalty under 59.5, 30% withholding, plus Indian tax if ROR. A $50,000 withdrawal could leave just $25,000.
Cash out during RNOR period to avoid Indian tax. File Form W8BEN to reduce US withholding.
The Estate Tax Trap
US estate tax takes 40% of your assets over a certain threshold when you die. And for non-US citizens, that threshold is shockingly low compared to what US citizens get.
If you're a US citizen or green card holder, you get an estate tax exemption of over $13 million in 2025. But if you're not a US citizen and never had a green card, your exemption is only $60,000. This creates a massive tax trap that most NRIs don't realize exists.
Here's how devastating this can be. If you have $500,000 in your 401k and you die while living in India without US citizenship: $500,000 minus $60,000 equals $440,000 subject to estate tax. At 40%, that's $176,000 your heirs lose to US estate taxes. Your 401k, IRA, and US brokerage accounts all count toward this limit. Even if accounts are in both spouses' names, each account is evaluated separately based on ownership.
Many NRIs work hard to build these accounts, never touch them after returning to India, and then their families get hit with massive tax bills upon death. Your heirs must file Form 706-NA within 9 months of death.
Mitigation Strategies
Systematic withdrawals: Start regular distributions after 59.5, moving money to India gradually. This reduces US-situs assets over time.
Roth conversion: No RMDs let you withdraw strategically on your timeline while reducing account balance.
Life insurance: Offset estate tax liability. $300,000 in 401k might need $100,000 policy for liquidity.
Change structures: Some explore Irish-domiciled ETFs or non-US structures, removing assets from US estate tax (requires professional advice).
How to Transfer Money to India
You need an NRO (Non-Resident Ordinary) account to receive 401k withdrawals. NRE accounts won't work because 401k money is foreign income coming through proper channels. Check our guide on NRE vs NRO accounts for details.
For amounts over $250,000 (roughly ₹2.1 crores), file Forms 15CA and 15CB with Indian authorities. Form 15CA is online declaration. Form 15CB needs CA certification. Banks won't process large transfers without these.
When Should You Take Action?
If Retiring in 3-5 Years
Maximize contributions to 2025 limits. Review IRA options with international addresses. Calculate RNOR window timing (returning April maximizes benefit). Consider Roth conversions during low-income years.
Last 12 Months in US
File Form W8BEN now. Open NRO account before losing NRI status. Consult cross-border tax advisor about Section 89A. Decide on strategy while you have easy access to plan administrator.
Already Back in India
Check residential status (NRI, RNOR, or ROR). If in RNOR window, prioritize withdrawals now. Set up monthly payments for DTAA Article 20 benefit. File foreign asset disclosures in tax return (Schedule FA and FSI). Use Form 67 for Foreign Tax Credit. Consider financial planning strategies balancing US and Indian assets.
Common Mistakes to Avoid
Taking lump sum too early: Priya withdrew $200,000 at 54, paying $20,000 penalty, $60,000 US tax, ₹48 lakhs Indian tax as ROR. Over 40% loss.
Ignoring estate tax: Vikram left $400,000, died at 53. His family faced $136,000 estate tax.
Missing RNOR window: Suresh waited until ROR, costing ₹18 lakhs in taxes on $100,000 withdrawal.
Not filing disclosures: Meera didn't report her 401k for three years. Under FATCA/CRS, authorities already knew. She faced penalties and revised returns.
Your Action Plan
Check your residential status now. Calculate RNOR window timing. Review balance against $60,000 estate threshold. Work with advisors understanding both tax systems.
For detailed guidance on returning to India and managing finances, explore our resources for NRIs.
The best time to plan was five years ago. The second-best time is today.
Frequently Asked Questions
Can I withdraw my 401k if I'm no longer in the US?
Yes, your 401k remains accessible from anywhere, including India. Request distributions through your plan administrator as lump sum or monthly payments. Money wires directly to Indian bank accounts. You'll face 30% withholding as non-resident alien unless you file Form W8BEN and claim DTAA benefits. Learn about managing NRI investments across borders.
How much tax will I pay in India?
Depends on residential status. NRIs pay no Indian tax. RNOR (first two years) pays no Indian tax on foreign income. ROR pays Indian slab rates up to 30% plus surcharge and cess. Claim Foreign Tax Credit for US taxes. Section 89A and Form 10-EE defer tax until withdrawal.
Should I convert to Roth IRA before returning?
Strategic if timed right. Best during first year back with no US income when you're in lowest tax bracket. Convert while staying in 12% or 22% bracket. Future withdrawals are US tax-free with no RMDs. However, India may still tax Roth withdrawals.
Must I report my 401k in Indian tax returns yearly?
Yes, if you're Indian resident (RNOR or ROR), report in Schedule FA (Foreign Assets) even without withdrawals. Disclose account value, contributions, earnings. Under FATCA/CRS, Indian government receives this from US. Not reporting risks ₹10 lakhs penalty. Form 10-EE defers tax but disclosure remains mandatory. See NRI tax filing guide.
What happens if I die while living in India?
Without US citizenship, heirs face 40% estate tax on amounts over $60,000. On $300,000 account, taxable is $240,000, resulting in $96,000 taxes. Heirs file Form 706-NA within 9 months. Some DTAA relief exists but exemption stays $60,000. Best protection: systematic withdrawals, Roth conversion, or life insurance. For cross-border finance guidance, consult estate specialists.
About the Author
By Prakash
CEO & Founder of InvestMates
Prakash is the CEO & Founder of InvestMates, a digital wealth management platform built for the global Indian community. With leadership experience at Microsoft, HCL, and Accenture across multiple countries, he witnessed firsthand challenges of managing cross-border wealth. Drawing from his expertise in engineering, product management, and business leadership, Prakash founded InvestMates to democratize financial planning and make professional wealth management accessible, affordable, and transparent for every global Indian.
