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Lev
Lev , Tax Advisor
Category: Tax
Satisfied Customers: 28081
Experience:  Taxes, Immigration, Labor Relations
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Federal/State tax for withdrawal from 401k by a non resident

Resolved Question:

I am non resident and planning to withdraw from 401k. What will be my federal, state tax & any penalty. Is penalty not payable in certain situations.
I have USD 48,500 in 401k. I left USA end of last year for Thailand. In 2011, I have only withdrawn USD 5000 from my wife's IRA.
What I really want to know is costs/taxes/penalties associated with withdrawing from my 401k fully or partially.
I am Indian with my wife & daughter as dependents.
I stay in India & Thailand both.

Submitted: 4 years ago.
Category: Tax
Expert:  Lev replied 4 years ago.

LEV :

Hi and welcome to Just Answer!
If you are a nonresident alien - you will be taxed only on income from US sources.
The distribution from your 401k will be considered as from US sources. To avoid large taxable income - you may spread distributions over several years.
Another option - to transfer distributions into IRA account - and use it as tax deferred investment account.
If you decide to take a distribution and you are below 59 1/2 - generally it will be a subject of additional 10% penalty. The following six exceptions apply to distributions from any qualified retirement plan:

  • Distributions made to your beneficiary or estate on or after your death
  • Distributions made because you are totally and permanently disabled
  • Distributions made as part of a series of substantially equal periodic payments over your life expectancy or the life expectancies of you and your designated beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply
  • Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception.
  • Distributions made due to an IRS levy of the plan
  • Distributions to qualified reservists.

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

  1. Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55, or distributions from qualified governmental defined benefit plans if you were a qualified public safety employee (State or local government) who separated from service on or after you reached age 50,
  2. Distributions made to an alternate payee under a qualified domestic relations order, and
  3. Distributions of dividends from employee stock ownership plans.
JACUSTOMER-jxh23ows- :

Hi, I am 31 yrs, old.

Is there any way I can avoid a penalty of 10%

I have medical bills in India and Thailand where I stay and travel between.

LEV :

Only exceptions are available that I listed above. You need to verify if any may be used in your situation.

JACUSTOMER-jxh23ows- :

Ok. Do you know the process of avoiding penalty..

Do I need to fill a form..etc.

Is there a form?

I am trying to optimize 2 parameters - on one hand early withdrawal and lumpsum..will be high on tax..but on other hand..

I will get a good exchange rate and since fixed deposit rates are 10% in Indian banks..

So I need to understand..if I withdraw..

LEV :

The 10% additional tax is reported on the appropriate line of Form 1040 . You must also file Form 5329 , Additional Taxes on Qualified Plans (Including IRA's) and other Tax-Favored Accounts.
If you claim an exception -
Enter the appropriate exception number on line 2.

JACUSTOMER-jxh23ows- :

48500 USD now, what is my tax?

LEV :

For exception codes - see instructions - page 3 - http://www.irs.gov/pub/irs-pdf/i5329.pdf

JACUSTOMER-jxh23ows- :

What if I withdraw..

I need a simulation like..

Yr/Withdrawal/Assume 10% penalty/Tax

What are my exemptions

Tax credits if any..

2 dependents..

What is tax rate and variable

Withdrawal amountTax rateTax Amount
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
22000
24000
26000
28000
30000
32000
34000
36000
38000
40000
42000
44000
46000
48000
LEV :

If you take a full distribution $48,000 - and file joint tax return as married filing jointly, and you are nonresident aliens - your estimated income tax liability would be $5340 plus 10% penalty of no exception could be used.

JACUSTOMER-jxh23ows- :

Only 5340$?

LEV :

Tax rate is based on your total taxable income - see last page in this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf

JACUSTOMER-jxh23ows- :

I am seeing 6366 USD in your file.

LEV :

As nonresident aliens - you will be able to only claim personal exemption $7300. You may not claim dependents who are neither US citizens nor residents of the US.

JACUSTOMER-jxh23ows- :

Also, I have heard non residents have fixed tax rate

LEV :

Tax rates for residents and nonresidents are same - and based on total taxable income.
You will file tax return 1040-NR - www.irs.gov/pub/irs-pdf/f1040nr.pdf and calculate your tax liability.

JACUSTOMER-jxh23ows- :

My daughter is USA citizen

Can I claim her as dependent?

She lives in India.

LEV :

Yes - you may claim your US citizen daughter as a dependent.

JACUSTOMER-jxh23ows- :

Ok

From what I understand.. we withdrew 5000 USD from my wife's IRA account..

She can file separately and pay no tax.

Kindly confirm if correct?

LEV :

That is not correct.

JACUSTOMER-jxh23ows- :

Then I can file with my daughter as dependent.

Then will I be filing jointly..

LEV :

You may not file separately and jointly in the same tax year.

JACUSTOMER-jxh23ows- :

Ok, so for 2011, when I file next year..what will I be doing..

LEV :

If you file a joint return with one dependent - you may take distribution tax free up to $11,000, but still may be liable for 10% penalty.

JACUSTOMER-jxh23ows- :

What is distribution tax ..

Ok..

You mean 401k distribution..

LEV :

Yes distribution from 401k account.

JACUSTOMER-jxh23ows- :

So, assume I have two scenarios for simplicity..

Second - 5000 USD from wife + 21000 USD from 401k in 2011, 27500 USD from 401k withdrawn on Jan 1, 2012

So, assume I have two scenarios for simplicity..

First - 5000 USD from wife + 48500 USD from 401k in 2011

What will be my tax & exemption, taxable amount...

LEV :

If you will take distributions 5000 USD from wife + 48500 USD from 401k in 2011
I am working on calculations - please stay with me...

JACUSTOMER-jxh23ows- :

Ok

LEV :

If you will take distributions 5000 USD from wife + 48500 USD from 401k in 2011
if you file joint tax return with your spouse as nonresidents with one dependent;
your estimated income tax liability would be $5545 plus 10% penalty if applicable.

Please be aware that is a very raw estimate - when you file your tax return - you might itemize and get this amount a little lower.

JACUSTOMER-jxh23ows- :

Ok, but let me know on how you got to 5545$

LEV :

5000+48500-$11000(personal exemption) - then go to tax tables.

I am using tax software for estimations.

JACUSTOMER-jxh23ows- :

You have been of great help

LEV :

Please post any clarification questions you have.

JACUSTOMER-jxh23ows- :

Partly in 2011 and 2012..

Pls let me know scenario 2..partly in 2011 and 2012..

And how you calculated tax amount..

LEV :

If we leave 10% penalty as a separate issue:
You will be able to distribute income tax free up to $11,000 per year without income tax liability.
The amount above will be taxed as a regular income based on tax tables which may be found in this publication - www.irs.gov/pub/irs-pdf/i1040tt.pdf
I am using this tax calculator - http://hrblock.com/free-tax-tips-calculators/tax-estimator.html?fil_st=&wages=&tpage= - but there are many others available online.

If your total distribution 5000+48500=53500 will be equally spread over two years - providing gross income $26750 each year - your estimated income tax liability for each year would be $1580.
For calculations - $26750 - deduct $11,000 personal exemptions - and determine tax liability using tax tables.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28081
Experience: Taxes, Immigration, Labor Relations
Lev and other Tax Specialists are ready to help you

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