Many NRIs working in the US accumulate savings in retirement accounts like 401(k) and IRA.
When they return to India permanently, they need to decide what to do with these funds.

This article explores the options and tax implications for managing these accounts after returning to India.
2. Understanding US Retirement Accounts
a) 401(k) Plan

Employer-sponsored retirement savings plan with tax benefits.

Contributions are either pre-tax (Traditional 401(k)) or post-tax (Roth 401(k)).
Withdrawals after 59½ years are taxed as per US tax laws (except Roth, which is tax-free if conditions are met).

b) Individual Retirement Account (IRA)
Two types: Traditional IRA (tax-deferred) and Roth IRA (tax-free withdrawals).
Early withdrawal (before 59½ years) attracts a 10% penalty + income tax (except certain exemptions).

3. Key Considerations for NRIs Moving Back to India

Residency Status: Once an NRI becomes a Resident Indian, their global income may become taxable in India.
Taxation: Income from US retirement accounts could be subject to tax in both India and the US (but relief is available under the India-US DTAA).

Currency Exchange Risks: Funds left in US accounts are subject to USD-INR fluctuations.
Investment Options in India: Consider shifting funds to Indian investments that may offer better returns or tax advantages.

Taxation in India and DTAA Relief
Under the India-US DTAA (Double Taxation Avoidance Agreement):
The US has the first right to tax US retirement accounts.

India may tax the same income, but relief is available via foreign tax credit.
If structured correctly, double taxation can be minimized or avoided.

Here’s a comparison  for the options NRIs have for managing their 401(k) and IRA when returning to India:

1. Leaving the Money in US Accounts:
   This option allows funds to continue growing tax-deferred, and withdrawals after 59½ years may have a lower tax impact. Additionally, it helps avoid immediate tax burdens in both India and the US. However, it comes with certain downsides, such as currency risk (USD vs INR), continued US tax filing requirements, and the requirement to take Required Minimum Distributions (RMDs) starting at 73 years for Traditional 401(k) and IRA accounts.

2. Withdrawing the Funds and Transferring to India:
   Choosing to withdraw the funds provides liquidity for investments or expenses in India and eliminates the need to maintain a US account. However, this approach has significant tax implications. If withdrawn before 59½ years, there is a 10% early withdrawal penalty. Additionally, the withdrawn amount is taxed in the US as ordinary income, and depending on the amount, it may push the individual into a higher tax bracket. There could also be potential taxation in India, though the Double Taxation Avoidance Agreement (DTAA) may provide relief.

3. Converting a Traditional 401(k) to a Roth IRA:
   This option allows for tax-free withdrawals in retirement and eliminates RMD requirements, unlike a Traditional 401(k). However, the conversion itself is taxable in the US at the time of conversion, meaning the NRI would need to pay taxes upfront on the transferred amount. Moreover, the Indian taxation of Roth IRA withdrawals remains unclear, which could create uncertainty for NRIs in the future.