r2i forum

Hi,

I have a few questions about taking a cash payment from my retirement account. Hope the experts in this forum can help.

I have around $12k in the account so the witholding (20%) is around ~$2400. I am relocating by mid Feb so I would have drawn close to 2 months of salary this year.

If I file my returns next year will I be able to include this 20% as tax paid and get a refund. I will be filing MFJ so hoping the duductions will help maximize the refund. But I am not sure if the deductions and exemptions change if filing as a non-resident.

I have read many threads about rollover IRA and saving taxes on withdrawls from the IRA during the RNOR period. In my case it might be a overkill given the small pay-out. Any help in this regard is much appreciated.

Thanks

[QUOTE]If I file my returns next year will I be able to include this 20% as tax paid and get a refund.

Yes, the 20% withheld will be treated as witholdings. In addition, you may have an additional 10% witheld for penalty (or what IRS calls additional tax) for early withdrawal from a tax deferred plan.

[QUOTE]But I am not sure if the deductions and exemptions change if filing as a non-resident.


If you meet substantial presence test, the you should be able to file as a resident even though you only stayed till sometime in February. Click on link below to understand the substantial presence test.

Substantial Presence Test

[QUOTE]
I have read many threads about rollover IRA and saving taxes on withdrawls from the IRA during the RNOR period. In my case it might be a overkill given the small pay-out. Any help in this regard is much appreciated.


I do not know how much time you will be in USA after separation from the job, but if I were you, I would roll it over in an IRA and then withdraw the money with zero witholdings and pay any taxes due at the end of the year, keeping the money in a bank in the meantime. The amount of taxes due might be zero depending upon the amount of withdrawal and amount of salary income.

As a resident, you would get 10300 in standard deduction and 3300 for each personal exemption. Thus for someone with MFJ and no children, they would get first 16900 of income tax free.

If you have RNOR status, you do not have to worry about GOI taxes, but throttling your withdrawal into next year may or may not be advisable depending upon whether you have GC/USC. You stated earlier about NRA status, which leads me to believe that you do not have GC or USC. Given that I would not postpone the withdrawal much more than 3K.

If you withdraw all in 2006 and total income amounts exceeding 16900 (MFJ, no children) will be taxed at 10% upto a limit of 15100 above and beyond 16900.

Thanks for the prompt response. If I understand it right; the retirement fund will be considered regular income and the 20% withheld can be got back as a refund if income is less than $16900 this year.

[QUOTE]"You stated earlier about NRA status, which leads me to believe that you do not have GC or USC. Given that I would not postpone the withdrawal much more than 3K."

Yes I do not have a GC or a USC. Can you explain what you mean by "I would not postpone the withdrawal much more than 3K."


Some more questions:

1. How can I determine my RNOR status? If I am how do I establish the status?

2. I have one night between my last day at work and my flight out. Can you suggest any IRA's that can be managed online.

Thanks

kasi124;4250Thanks for the prompt response. If I understand it right; the retirement fund will be considered regular income and the 20% withheld can be got back as a refund if income is less than $16900 this year.

Yes. That is true. You will have to pay 10% of the 401k amount withdrawn as penalty or what is called additional tax.

[QUOTE]Yes I do not have a GC or a USC. Can you explain what you mean by "I would not postpone the withdrawal much more than 3K."

For 2007, if you meet substantial presence test, you would be considered a resident. If your income totals say 20900 (this includes 401K distributions), then your taxable income (AGI) would be 4000 (20900 minus 16900). This is assuming no children exemptions. The 4000 will attract a tax of 10% or 400. Out of the 20900 income, say if 12000 was from 401K, then there will be an additional tax of 1200 (the 10% penalty tax) for a total bill of 400 plus 1200 equalling 1600. If your witholdings exceed this amount, you will be due a refund.

Let us assume that in order to avoid 10% tax on 4000 AGI, you choose to withdraw only 8000 from IRA and 4000 in 2008. In 2008, you will be NRA and will no longer have the 16900 exemptions available. An NRA gets only 3000 exemption and in addition, there is a possiblity of a flat 30% tax on the remaining amount.

The above is one reason to avoid postponing withdrawal. There is another reason and that has to do with your managing the 401K to IRA rollover. This will not happen easily with no GC / USC and an Indian address.

From 401K, a partial withdrawal is difficult as if you leave the balance below 5000, the company will ask for a complete withdrawal. Also, some companies after employment termination may not allow partial withdrawal regardless of balance - either full or nothing.

[QUOTE]1. How can I determine my RNOR status? If I am how do I establish the status?

Basically, if you have been out of India for 7 out of last 9 years then you would qualify for RNOR status. It requires calculating the number of days etc. In the MSN finance forum, there is RNOR calculator in the documents section and many threads on this subject.

[QUOTE]2. I have one night between my last day at work and my flight out. Can you suggest any IRA's that can be managed online.

Vanguard, Fidelity, TDAmeritrade - all will give you the facility to manage IRA online. Given that you will basically have two months salary and that the following year you will be NRA, and the balance in 401K is only 12K and your RNOR status being possibly questionable, it probably makes sense to go for full withdrawal of 401K.

Since you have only one day between your resignation and R2I, your best bet may be to familiarize with paperwork for 401K distribution now and fill the paperwork and have it ready. Second, determine if your 401K can be directly deposited in your US bank and then you can use ICICI's Money2India type of service to move your money. If they are going to mail you a check, then where would you want the check mailed? In India? If you have a friend in USA, can you submit a change of address now such that his address is on record and check goes to his address and he forwards to you or deposits for you in your account.

Does your company know about your leaving and if so, you can discuss and plan this now with your HR.

[QUOTE]Given that you will basically have two months salary and that the following year you will be NRA, and the balance in 401K is only 12K and your RNOR status being possibly questionable, it probably makes sense to go for full withdrawal of 401K.

By full withdrawl do you mean rollover to an IRA?

Thanks

By "full withdrawal", I mean taking a full and complete distribution from 401K. No IRA is involved in this case.

My company is offering traditional 401K and Roth 401K. There is a company match of 6%. If I decide to opt for Roth 401K, how will the IRS tax the company match? Will I have pay tax for company match before it goes into Roth 401K?

Company match will be in a separate pretax account. Your contributions will be in post tax 401K Roth.