Has anyone tried living off of 401k after returning to India? Age - in 40's

[Mahesh]

I get the fact that there will be early penalty and will be taxed on the withdrawal, but even then it makes sense for FIRE. Any thoughts?

Say $20k withdrawn every year, we end up paying taxes as per US tax slabs (for individual):

12% tax on $9k = 1080 (anything above 11k up to 20k)

10% tax on $11k = 1100 (zero to 11k)

Penalty of 10% on $20k = 2000 (penalty for early withdrawal)

Total taxes paid in US = $4.180 (around 21% total tax).

Effectively we get $15,820 in hand in India, on which India wouldn't tax (due to double tax avoidance treaty). This results in 12.65 Lacs in India per year, which is not bad for FIRE. Once can calculate for their own number (say $40k instead of 20), that's besides the point.

Real question is - has anyone actually tried this strategy?

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Edit - Forgot to mention, I am assuming there is decent amount in 401k say 500k for $20k withdrawal per annum)

[Samar]

After you return to India, you will be taxed at non-resident tax rate which is flat 30% plus 10% penalty for early withdrawal.

[Esha]

SEPP https://www.investopedia.com/terms/s/sepp.asp
may be used to avoid early withdrawal penalty. Haven't tried it but intend to in next few months.

[Mohit]

You can setup a Roth ladder while in RNOR status within first 1.5-2.5 years of moving to India to avoid any taxes on withdrawing from 401k. You would need to wait for 5 years for the roth conversions to age before you can withdraw them but the ladder would reset cost basis and you would withdraw the principal tax free and be able to withdraw gains after 59.5 at NRI tax rate on dividends (can't remember what that is)

Check up on Roth ladder setup, no need to pay early penalties as long as you can cover the 5 year gap in expenses.

[Kishore]

If you're not having income or under the limit, Can the tax and penalties be refunded when filing income tax in US?

[Lokesh]

Note that with DTAA, you end up paying the highest tax of either countries. In your example if India tax is more than what you paid to US, you need to pay the balance (claiming FTC for the US taxes paid).

[Sanjay]

don't you get to take the standard deduction if you are filing taxes in the US?

meaning 12k if you are single and 25k if you are married can deducted before any tax starts to apply. does that not apply in this situation?

[Lokesh]

OP, what is your US immigration status? If you are US citizen or green card holder, you will be taxed in US on world wide income and thus can use standard deduction.

[Lakshmi]

It's rare for any India returner to live off of 401k. Mostly everyone uses their savings for expenses and leave the 401k as it is to take that headache post age 60.

In case you want to use 401k income from the beginning of your RE journey, can you at least time the India return? If yes, try to use that opportunity and return in Feb or March at max. By this way, you'll still be resident for tax purposes for that year and have opportunity to withdraw more funds from 401K at lower tax rates. The 10% penalty can be avoided if you convert it to roth IRA and withdraw the principal after 5 years.

For the subsequent year, you'll be charged flat 30% for any withdrawals from 401k as you will be non-resident. You can still save the 10% additional penalty by converting Roth IRA and wait for 5 years before withdrawals. It's not required to create a ladder by doing this every year because of the flat 30% tax for non-residents. You can still go for the ladder option if the market is ascending. That will put you more money into principal so effectively you can withdraw more from roth IRA later without taxes on capital gain/interest earned on your principal.
In my opinion, Roth IRA option would be more efficient than paying flat 40% taxes every year on full income withdrawals from 401k.

The only catch is Indian tax laws. Once you are over with your RNOR status, your earnings from outside the country will be taxed. It's still unclear that money from Roth IRA will be considered earnings or not. Logically it's not, because you are withdrawing something for which you have already paid the taxes in US in earlier years. But explaining this to IT dept of India will be challenging in case of queries until we have specific tax rules drafted around it. Check with your tax consultant and please let us know as well.

[Imran]

While contributing, consider contributing to ROTH IRA and ROTH 401k. Distribution does not involve taxes on the gain for ROTH. It's best, to have reserves in all buckets. If you do, 40+ credits of SS, IRA/401k, and ROTH,  you can do tax efficient withdrawal plan with a CPA. First live off of regular savings, then ROTH, then 401k, then SS.

[Usha]

So much hassle. Probably makes sense to use them when in higher tax bracket/high state tax/fica and if withdrawing in small chunks.