Friday, September 11, 2009

R2I - 401(k) closure FAQs

Have you thought through all the options regarding "What to do with your 401(k) account" during your return to India? Have you decided to close your 401(k) account? Do you have questions lingering in your mind regarding 401(k) account closure? Hopefully, you'll find an answer to your question here.

1) When can I close the 401(k) account ?

You should be out of job to close the 401(k) account. Typically, you'll get the 'participant distribution' application to fill during your last working day. You can fill the application and submit it to your HR or 401(k) Benefits Provider.

2) What is the process involved to close the 401(k) account?

You'll receive the 401(k) 'participant distribution' application (from your HR) during your last working day. You need to just fill-it and hand it over to the HR or 401 (k) Benefits provider.

3) What are the options that I'll have when deciding to close the 401(k) account?

Read "R2I - What to do with the 401(k) account" post which describes this in detail.

4) Will my tax be withheld at the source when I close the 401K account?

A flat 20% Federal tax will be withheld at the source when you close the 401K account. In addition, there is a 10% penalty for early withdrawal.

5) What would be the with holdings done at source by the 401K Benefit Provider, when I close the account ?

There will be a flat 20% federal tax withheld when you close your 401k account.

You can settle the remaining tax when you file your tax returns, next year. (If you fall in a lower tax bracket, you'll get the excess money back from the government. If you fall on a higher tax bracket, you may have to pay the money that you owe to the government).

6)  When would I have to pay the penalty?

You'll have to pay a 10% penalty for early withdrawal. The penalty will have to be paid when you pay your taxes.

7) How long does the 'closure' process take?

In a couple of days, your 'participant distribution' form will reach the 401(k) Benefits provider. Your 401(k) Benefits Provider will take care of the formalities in a week.
You may expedite the process by contacting 401(k) Benefits provider upon your last day. Tell them that you'll have to R2I & hence the urgency.

8) How long does it take to get the 401K money after I close the account?

The check takes about 15 business days and the wire about a week.

9) Can I still maintain my 401K account after moving to India?

Some 401(k) Benefit Provider will let you to manage your account online. Talk to your 401(k) Benefit Provider or transfer your 401(k) account to someone who'll provide you online management.

10) Do I have to pay additional tax when I file the Income Tax returns, next year?

It depends. Depending upon your tax bracket, you may have to pay additional taxes. Look at the tax bracket into which you'll fall when you file the tax returns.

You'll have to pay the 10% penalty for early withdrawal, when you file your tax returns.

11) Can the 401(k) Benefit Provider 'direct deposit' the proceeds of closure to my bank account?

Yes. The 401K provider can wire the proceeds of the 401k closure to your bank account. You need to work it out with them when you fill the 'participant distribution' form on your last working day.

Related posts:

What to do with the 401(k) account?
10 things to know if you are thinking of Returning to India
How can I get my Social Security benefits/money? 


  1. Saro,

    Have a quick question on 401k, that while closing the account, is it flat 20% fed tax regardless of your income for that year or else based on the regular income tax ?

  2. Hi Vinoth,

    It is a flat 20% fed tax regardless of your income. When you file your tax returns next year, you should make the appropriate adjustments.

    - Saro

  3. Hello Saro,
    I am planning to move back to india later this year. I have around 50K in my 401K account. I am currently on H1B visa. Can you please let me know if my below plan for my 401K withdrawal makes sense? Do you have any suggestions/advice?
    1) When I quit my job later this year, move my money to an IRA account.
    2) Next year (2011) withdraw 25K.
    3) Year after next (2012) withdraw 25K.

  4. Yes. Your plan sounds good.

    Just curious... Why do you want to move the money to IRA? You can leave it in your 401k account itself. Also, make sure that you have an online interface to the portal to make transactions from India.

  5. Thanks Saro for your answer.
    1) From all the forums I am reading, everyone is advising to close 401k and move money to IRA when I quit my job. I am not sure why and what is the benifit. Any idea?
    2) So per my plan I will withdraw 25K in 2011. When I file for my US taxes in 2012, do i need to file as a NRA and get just the $3700 personal exemption? Is there any other way where I can claim standard deduction and persoanl exemptions for me, my wife and my son(US citizen)?
    3) Is there any way to avoid the 10% penalty? I am reading some stuff on rule 72(t) but dont quiet understand it.
    4) If you were in my situation, what strategy would you follow towards 401K money when planning to move to India? :)

  6. 1) I don't think IRA provides any significant tax advantage over 401k. You may need to check with a financial adviser too

    2) Yes. Your tax bracket will be less in 2011(assuming that you won't have any other income) & you can get personal exemption.

    3) Nope ;) I believe there is a clause which allows you to close the 401k account earlier due to personal disability (without the 10% penalty). It won't be applicable to us.

    4) If you can manage your 401k account online, just reallocate your funds on less risky investments. You can do the selling online and withdraw in increments, over a period of 2 years. You don't have to move the funds to IRA.

  7. Thanks Saro! Appreciate your time and help!

  8. Hello Saro.
    Thanks for this awesome blog. I plan to move back to India for good during the first week of dec '10 and I will be off my US payroll around Jan 10th 2011. I will also transfer my 401K money next year. When I file taxes in 2012, then what status I should file my taxes? NRA and get only personal exemption or as a resident alien and get exemption for me, my wife and my son? I am currently on H1B visa.

  9. You'll get 'resident' status only if you stay in the country for at least 180 days in a calendar year. You'll be treated as a NRA.

    1. Hello Saro:

      I came back to India early last year. I am in process of filing my US returns for 2011. Can you please let me know, electronically where I can file my tax as a NRA status?

  10. You can file it using Turbotax or Taxcut software, online.


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