any comments on below:
http://www.r2iclubforums.com/clubvb/showpost.php?p=6481&postcount=18
copy & paste
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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 There is no penalty if the contributions for a particular year are fully withdrawn in the same year together with all corresponding earnings.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.
