OT: 401k/IRA transfer to another country retirement plan

AGC4ME said:
Oh you can also reverse the question. Why is it that you want to leave it in US ? Do you think this is the only economy that will survive in the next 30 years ?
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Because removing it from the US means immediate taxes and penalties, and reduced access to the US stock market. If another country offers a compelling advantage in the future, I can move the money there at that time. But apart from countries with no capital gains tax (and even the lack of CG tax may not be enough if the financial institutions in that country do not offer access to a thriving investment market), I see no such advantage right now.
 
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401K is to defer taxes on your earnings. If you can get this money without taxes in US and just the 10% penalty will you do it now or not ? When you leave USA, you are accomplishing the same.

Let us say you have 100k in your 401k and you will not be taxed by the country of residence for 2 years after you settle down there. You can withdraw 50k each in those 2 years and pay 5k in penalty and taxes on that 50k. Which would probably around 3k or so. For people like me who have less in 401k the income tax would be practically nothing. The 10% penalty is more than offset by company matching and the growth in the funds.
 
AGC4ME said:
401K is to defer taxes on your earnings. If you can get this money without taxes in US and just the 10% penalty will you do it now or not ? When you leave USA, you are accomplishing the same.

Let us say you have 100k in your 401k and you will not be taxed by the country of residence for 2 years after you settle down there. You can withdraw 50k each in those 2 years and pay 5k in penalty and taxes on that 50k. Which would probably around 3k or so. For people like me who have less in 401k the income tax would be practically nothing. The 10% penalty is more than offset by company matching and the growth in the funds.
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Unless I wanted to spend the money before 59.5, I'd still leave it in the US.

Suppose I pay just the 10% penalty and then take it to another country. When I take out the money at retirement, I'll pay capital gains or income tax on the gains. And I would have lost the growth from the 10% I paid when I transferred the money from the US, so I end up with less money in the long run.

Let's work a more concrete example. Assume both country's tax rates are 25%. You have $10K in your account. Pay 10% penalty, so you have $9K (assume that due to other deductions you pay no income tax the year you take it out, so the 10% is the only loss at the time). The market in that country makes it grow tenfold by retirement time, so it becomes $90K. Take it out, pay 25% tax on the $81K gain, now you have $69.75K.

Suppose you left it in the US instead. Your $10K grows tenfold to $100K. You take it out at retirement age, pay US taxes of $25K (negate the US tax against your local tax so you pay no more taxes) and you have $75K. So you end up with more because you left it in the US.

Note that this is an "all else being equal" analysis. Things tilt the other way if the tax rate on investments in the other country is lower than the US, or the market in the other country grows faster than the US, or there is no treaty to prevent double taxation.
 
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Jackolantern said:
Unless I wanted to spend the money before 59.5, I'd still leave it in the US.

Suppose I pay just the 10% penalty and then take it to another country. When I take out the money at retirement, I'll pay capital gains or income tax on the gains. And I would have lost the growth from the 10% I paid when I transferred the money from the US, so I end up with less money in the long run.

Let's work a more concrete example. Assume both country's tax rates are 25%. You have $10K in your account. Pay 10% penalty, so you have $9K (assume that due to other deductions you pay no income tax the year you take it out, so the 10% is the only loss at the time). The market in that country makes it grow tenfold by retirement time, so it becomes $90K. Take it out, pay 25% tax on the $81K gain, now you have $69.75K.

Suppose you left it in the US instead. Your $10K grows tenfold to $100K. You take it out at retirement age, pay US taxes of $25K (negate the US tax against your local tax so you pay no more taxes) and you have $75K. So you end up with more because you left it in the US.

Note that this is an "all else being equal" analysis. Things tilt the other way if the tax rate on investments in the other country is lower than the US, or the market in the other country grows faster than the US, or there is no treaty to prevent double taxation.
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This hypothetical situation sounds good but the problem is seldom do the tax rates match. Also when u leave the money in USA till you are 59.5 and then take it out, you will not pay taxes to uncle sam. You will pay taxes to your country (think of W2-BEN type of situation) at foreign earnings rate. Worst case you might be double taxed. Best case you will have to pay tax to the country of residence not to the country of earning. So if US tax rate is less than your home country's tax rate (which is true for India) then you are better off paying the 25% tax in US and getting the money out now rather than letting the money grow here and then paying 30% tax on it as foreign earnings.. 401K will not be considered as pension payments in many countries. 401K is a deferred tax plan.
 
I was interested in taking the money out because in india inflation is very high........so is the return on investment.....

i think govt insured....retirement savings (its called as provident fund ) has a interest rate of 9%...

and since india has pegged its currency to usa.....the inflation in india will not reflect in currency differences......which means.....we will be earning a low rate in usa............while we will be paying dearly living in india....


assume that my 100k in usa is invested in CDs offering 5% average return...

on another hand if i take it out....lets say i get 90k (i doubt it though that we will be able to negate the taxes completely...) but i get a interest of 9% on 90k..

after 25 years....you know which one will be better....

market of usa is open market....i am sure you can invest being anywhere in the world........as long as you can deal with foreign exchange accounts...


coming back to the idea of avoiding taxes on the withdrawel amount.......someone had suggested that it is possible by withdrawing when you leave usa.....before you are subject to tax in your home country....

lets say i have 40k in 401k.....

i leave usa in August 2007 (no withdrawel in 2007)

i withdraw 20k in 2008
and another 20k in 2009

do we will have to file Non Resident tax returns to get the refund?

but dont we have to add our international wages while filing returns in usa??
(i think international wages are only applicable to residents though??)
 
AGC4ME said:
This hypothetical situation sounds good but the problem is seldom do the tax rates match. Also when u leave the money in USA till you are 59.5 and then take it out, you will not pay taxes to uncle sam.
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No, you will pay US taxes because the money was earned while you are a US resident and you didn't pay taxes on it before. They will not let you get away without paying taxes on that US-earned money.

If you expect lower tax rates or higher investment returns outside the US, go ahead and take it out. But many people wanting to take it out are doing so out of an emotional motivation to keep the money "close to home", not because of a thorough analysis of the various tax laws and markets. As long as you have access to the Internet you can manage the account from any country, so "close to home" should not be the main motivation.
 
Jackolantern said:
Note that this is an "all else being equal" analysis. Things tilt the other way if the tax rate on investments in the other country is lower than the US, or the market in the other country grows faster than the US, or there is no treaty to prevent double taxation.
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Now, this is one of the most informative discussions in this forum. Useful talk instead of the depressing green card situation.

To add to Jack's point above:
1) It is hard to predict tax rates either in India or the US 30 years from now
2) It is projected that India will grow at a higher rate than US over the next 30 years
3) I can hopefully assume that there will not be double taxation at that time

We could take advantage of the fact that when we go back to India, for 2 years we can repatriate without taxes. For folks like me with 30K in 401k accounts, if I take it in 2 chunks over the next 2 years, then while I loose 10% but will pay no further taxes since my taxable income is only 15k USD for that year.

So, that's 27K for me in India tax-free to invest in the market and I heard that we do not have to pay tax on dividends.

Or am I missing something?
 
pkpkpkpk said:
We could take advantage of the fact that when we go back to India, for 2 years we can repatriate without taxes. For folks like me with 30K in 401k accounts, if I take it in 2 chunks over the next 2 years, then while I loose 10% but will pay no further taxes since my taxable income is only 15k USD for that year.

So, that's 27K for me in India tax-free to invest in the market and I heard that we do not have to pay tax on dividends.

Or am I missing something?
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but what if we are in a high paying job when we go back....dont we have to report both incomes??
 
techy2468 said:
but what if we are in a high paying job when we go back....dont we have to report both incomes??
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So, the question is:
Should US non-residents declare non-US income as well when filing returns?

Now, this is not one for this forums but am hoping someone would clarify this for me and Techy
My belief is that they should not.

I have rental income in India but I did not declare them in my tax returns last year. Am I breaking the law here? I pay taxes in India. Why would I pay taxes here? The rental property was bought with income that was taxed in the US and repatriated through proper channels.
 
pkpkpkpk said:
So, the question is:
Should US non-residents declare non-US income as well when filing returns?
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I don't think so.

I have rental income in India but I did not declare them in my tax returns last year. Am I breaking the law here? I pay taxes in India. Why would I pay taxes here? The rental property was bought with income that was taxed in the US and repatriated through proper channels.
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When you are classified as a US resident for tax purposes, you're supposed to pay taxes to the US on worldwide income. That includes your rental properties overseas. However, because you can get tax credits for the taxes paid to the non-US governments, and you can also make deductions for expenses related to the rental property such as insurance and repairs, the net result may be that you would pay no tax to the US. See IRS publication 519.
 
Jackolantern said:
I don't think so.

When you are classified as a US resident for tax purposes, you're supposed to pay taxes to the US on worldwide income. That includes your rental properties overseas. However, because you can get tax credits for the taxes paid to the non-US governments, and you can also make deductions for expenses related to the rental property such as insurance and repairs, the net result may be that you would pay no tax to the US. See IRS publication 519.
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Thanks for the info. I did'nt know this.
Not that the IRS accepts "ignorance" as a factor :(

I need to work on transferring the property to my relatives out there. Any Indians have experience in this exact scenario?
* Have rental property in India
* Apply for tax credits for the taxes paid to the non-US (Indian) governments
* deduct expenses & file 519
 
It gets quite complicated. You have to apply the foreign income tax credit calculations (it isn't as simple as a dollar-for-dollar offset), and you have to go thru the rules for taxation and deductibility of rental property. You also have to deal with figuring out which exchange rate to apply for each of your rental payments.

Get a professional to handle it at least the first time, otherwise it could cost you in different ways ... pay too little tax, the IRS may audit you or penalize you, pay too much and you've lost that money. There are firms that specialize in cross-border taxation. To save money on their fees, you can apply for an automatic extension in April, then do the filing in the summer when the tax firms are less busy and are more willing to negotiate a discount.
 
pkpkpkpk said:
Thanks for the info. I did'nt know this.
Not that the IRS accepts "ignorance" as a factor :(

I need to work on transferring the property to my relatives out there. Any Indians have experience in this exact scenario?
* Have rental property in India
* Apply for tax credits for the taxes paid to the non-US (Indian) governments
* deduct expenses & file 519
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If I was you....i will rather pay the taxes on those property in usa....and claim tax credits...

tranferring to relatives is much expensive and cumbersome in india if you go through all the paperwok....(15% stamp papers??)

unless of course your property earns more than $10k/year....
 
techy2468 said:
If I was you....i will rather pay the taxes on those property in usa....and claim tax credits...

tranferring to relatives is much expensive and cumbersome in india if you go through all the paperwok....(15% stamp papers??)

unless of course your property earns more than $10k/year....
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Income is roughly $2500 USD/year. I would have thought twice about it if I knew about the US tax hassles...
 
any comments on below:

http://www.r2iclubforums.com/clubvb/showpost.php?p=6481&postcount=18

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Suba,

I had frankly forgotten this. Thanks for reminding.

OK, Here is what I think you need to do.

1. When you R2I, plan to get a REP for yout GC (Re entry permit)

2. Plan such that prior to your leaving USA, you accomplish a direct trustee to trustee (or it is also called custodian to custodian) rollover of your 401K to IRA. For this you need to familiarize yurself with paper work before hand. You may even open an IRA before hand for $1000 with say someone like Vanguard in a say star fund. This way your IRA account is opened and all set.

Next get the paperwork ready to accomplish a rollover of 401K to money market fund in Vanguard. Prior to leaving get this accomplished. Vanguard representatives (call their toll free number) will help you with accomplishing this rollover. Go thru the forms of your company 401K plan too to understand what they need to accomplish this rollover.

Typically you will fill a form with your company closing 401K and requesting a check to be mailed to Vanguard. Vanguard will provide you with the address where your company should mail it and they will provide you with information as to whose name the check should be drawn to. Typically it is "vanguard FBO Suba IRA account" (but check with them or their website. This is called a direct rollover.

If possible, leave a US address (perhaps a friend's) with Vanguard as your mailing address, but log on to website and change your profile to request all communications via electronic means.

Establish a US bank account that can be accessed electronically. Link this account to ICICI Money2India or other such money transfer service.

On Vanguard website, set up such that this account is linked to your Vanguard account. This would mean logging in to your Vanguard account and entering details of your bank account and requesting that the accounts be linked for electronic transfers.

After a rollover is accomplished and fully completed, call up vanguard and tell them you would like to withdraw all ot the earnings and contribution of of the 2007 tax year in the star fund (where you had deposited the $1000). This way you avoid the 10% penalty on this $1000. There is no penalty if the contributions for a particular year are fully withdrawn in the same year together with all corresponding earnings. So withdraw everything in 2007 from the star account.

In January of 2008, request a distribution from your IRA of 50% of the amount in the money market fund. Request no tax witholding. Request an electronic distribution using the website and request that money be transferred to your bank account electronically linked to Vanguard. Once this transfer is complete, transfer money to your indian bank account or get a demand draft whatever you wish using the ICICI or money transfer website.

This money will be taxable for USA during 2008 tax year. Since your earned income in 2008 tax year will be subject to exclusion rules, your only passive income such as bank interest, cap gains etc will be subject to US taxes. Considering that you, your spouse, children on tax return, your taxes will be zero and will just have to pay 10% penalty on the early IRA distribution. You will have to send that check in to IRS.

There should be no Indian taxes on this since you will be RNOR during this period.

Repeat the process in Jan 2009, however this time, you may want Vanguard to withold the penalty amount. In 2008 you will escape the penalty for not having enough witholdings, but in 2009 you will not be able to escape them so during Jan 2009 closing of the account with Vanguard, request that the penalty amount be witheld.

You will note that I have suggested money market for the rolloever IRA money because this is short term money. You may choose short term corporate bond if you like instead of money market.

There is a another approach which involves using checks from vanguad, but I think the approach I have described above should work just fine. This way you will also escape all of North Carolina taxes.
 
Jackolantern said:
No, you will pay US taxes because the money was earned while you are a US resident and you didn't pay taxes on it before. They will not let you get away without paying taxes on that US-earned money.

If you expect lower tax rates or higher investment returns outside the US, go ahead and take it out. But many people wanting to take it out are doing so out of an emotional motivation to keep the money "close to home", not because of a thorough analysis of the various tax laws and markets. As long as you have access to the Internet you can manage the account from any country, so "close to home" should not be the main motivation.
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hmmm..... I don't know then how it will work if u leave the funds in USA and you are not a resident of USA when u withdraw it after 59.5. Will USA and ur home country tax ur withdrawal ? or will US tax only your contribution and your home country tax your earnings ?
 
AGC4ME said:
hmmm..... I don't know then how it will work if u leave the funds in USA and you are not a resident of USA when u withdraw it after 59.5. Will USA and ur home country tax ur withdrawal ? or will US tax only your contribution and your home country tax your earnings ?
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With a 401(k) or rollover IRA or traditional IRA (with few exceptions), everything is considered earnings because you weren't taxed on the contributions. With a Roth IRA the US won't tax any of it, but your home country may want to tax the earnings.

Ultimately it all depends on the tax laws of whatever country you find yourself in at retirement. Some countries don't tax foreign income; in which case you'd only pay US tax. Others (I think most) have taxation treaties that will allow you to offset one country's tax against the other, to avoid double taxation. A few are vicious and will double tax you. Others have no income tax at all; everything is VAT or sales tax.
 
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