From: Gator__92 (Original Message)Sent: 1/18/2006 7:36 AM
We R2Ied in Sept 2005 and I have been working remotely for my employer in US for the past 3 months. My job with my US employer will be completed in April 2006. Our status in India for fiscal year 2005-06 is NRI, 2006-07 is RNOR and 2007-08 is RNOR. Our company has a pension fund in which I am fully vested. The current value of the pension fund is about $8-$9K. I have two options for the pension fund when I terminate my employment in April 2006. 1. Take a lumpsum payment from the pension fund and roll it over to my 401K plan with my employer. No tax implications and no penalty in this case. 2. Take a lumpsum payment as a check from the company. With this option I will be subject to 30% tax withholding and maybe even a 10% early withdrawl penalty, not sure if this applies to pension funds.
I am leaning towards option 2, since the balance in my 401K is already more than the RRK limits for 25% tax.
Please anyone have any suggestions/advice regarding this would be much appreciated.
From a withdrawal perspectve, they both are tax deferred and will be treated essentially the same. Rolling over to 401K just moves it from one account to another.
You have to look at the total amount (401K plus pension separate or rolleve over) and determing your exit strategy. If your exit strategy says that you should withdraw some during NRI period, then you should else you should not.
The exit strategy will depend upon your tax brackets. Generally the tax brackets are lower durin RNOR periods.
Withdrawal strategy would depend on a number of things.
From
We are USC and r2ied end of Sept 2005 after 8 years in US and spouse for 14 years in US ...Since we will still have an income in US for 2006, how will this affect our limits on 401K withdrawl. We would like to withdraw from my Spouse's 401K which is now in a Rollover IRA.
Are you sure you and spouse will be non-residents of India for 2005-2006? It would depend on how many days you have been out of India in 2005-06 (the exact date that you arrived in India in Sept 05). Have you checked the definition of non-resident (per Indian IT Act)?
Are you sure you (based on 8 years outside India) are eligible for two years of RNOR status? Have you checked the definition of RNOR (per Indian IT Act)?
What is the total amount in pension fund, 401(k), and IRAs for self and spouse?
What is the US taxable income for 2006 and beyond (from non IRA and non 401(k) other sources, if any)?
Bob: Please see my responses in Blue below it appears that you and your spouse are USC. Yes, spouse and I are both USC.
Do you have children? Yes, 2 children , 4 years and 1 year old.
Are you sure you and spouse will be non-residents of India for 2005-2006? It would depend on how many days you have been out of India in 2005-06 (the exact date that you arrived in India in Sept 05). Have you checked the definition of non-resident (per Indian IT Act)? I just used the RNOR spreadsheet and as per the calculation we have 3 year RNOR for Indian fiscal years 2005, 2006 and 2007, meaning we are NRI for 2005 fiscal year. We arrived in India on Sept 29th 2005. We were also in India for a vacation for 30 days during Jun-July 2005. The time that we have been out of India for 2005 01/01/2005 - 05/24/2005 = 143 days 07/03/2005 - 09/28/2005 = 87 Number of days out of India for 2005 = 135 Number of days in India for 2005 = 230 days
Are you sure you (based on 8 years outside India) are eligible for two years of RNOR status? Have you checked the definition of RNOR (per Indian IT Act)? The RNOR determination is based on the calculation in the RNOR spreadsheet.
What is the total amount in pension fund, 401(k), and IRAs for self and spouse? Spouse 401K - $110K, Roth IRA $4K Self Pension Fund - $8 - $9 K Self 401K - $91K, Roth IRA $4K
What is the US taxable income for 2006 and beyond (from non IRA and non 401(k) other sources, if any)? US Taxable income for 2006 (3 months salary for working remotely for US company ) = Gross $21K.
We arrived in India on Sept 29th 2005. We were also in India for a vacation for 30 days during Jun-July 2005. The time that we have been out of India for 2005:01/01/2005 - 05/24/2005 = 143 days 07/03/2005 - 09/28/2005 = 87 Number of days out of India for 2005 = 135 Number of days in India for 2005 = 230 days
Indian financial year runs from April 1 to March 31 and not by calendar year. Looks like you and spouse will be India resident (per Indian IT Act) for 2005-06 (i.e. for the Indian financial year April 1 2005 to March 31, 2006).
In view of above, suggest checking RNOR eligibility too again. It pays to be 200% sure about this.
US Taxable income for 2006 (3 months salary for working remotely for US company ) = Gross $21K.
The above income should be eligible for foreign earned income exclusion (per IRS rules) that has been talked about in the thread that you started earlier. If so, it will not be part of US taxable income. Please double check.
Any investment income (dividends, interest, rent, capital gains ...) from US sources for 2006? Any investment income from Indian sources for 2006?
------------------ Here are a couple of ways to determine RNOR eligibility.
1. Use the RNOR calculator in the documents section of this forum (42K excel file posted by Sohu9 on Sept 8, 2003) or try clicking on the following links to reach there
Previous year just means financial year running from April 1 to March 31. So I have substituted previous year in the definition in the above link by financial year.
Definition
A person is said to be `not ordinarily resident' (RNOR) in India in any financial year if such person is:
(i) an individual who has been a non-resident in India in nine out of the ten financial years preceding that year
OR
(ii) has during the seven financial years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; ------------------------
Also suggest that you go thru the following thread (to get some idea about feasible - not necessarily optimal - IRA withdrawal strategies for USC, and the tax implications thereof):
Bob: You are right, we will be residents of India for 2005. The RNOR calculator spreadsheet assumes that we did not have a vacation to India during the year of R2I, but we had a vacation to India during 2005. So, it looks like we definitely qualify for RNOR status for Fiscal year 2005 and 2006. So it looks like we have time only till March 31st 2006 to withdraw from our 401K plan /Pension plans for fiscal year 2005, which is a very short time to make a determination.
Please advise.
Year of filing taxesFiscal Financial YearDays in India during FYR2I Year - 71999199828R2I Year - 6200019990R2I Year - 52001200020R2I Year - 42002200161R2I Year - 320032002R2I Year - 22004200334R2I Year - 120052004Tax Return #1 after R2I20062005222Tax Return #2 after R2I20072006365Tax Return #3 after R2I20082007365
Any investment income (dividends, interest, rent, capital gains ...) from US sources for 2006? Approx $5 - $6K in dividend and interest income. Do not anticipate any capital gains.
Any investment income from Indian sources for 2006? Approx Rs 50 K in interest income from Indian sources for 2006.
You are right that the salary in US $ will qualify for foreign income exclusion for US fiscal year 2006.
we will be residents of India for 2005. The RNOR calculator spreadsheet assumes that we did not have a vacation to India during the year of R2I, but we had a vacation to India during 2005.
Even without counting that vacation, based on Sept 29, 2005 arrival in India and stay from then on until March 31, 2006 on Indian soil, you would be resident of India for the Indian financial year 2005-2006 (April 1, 2005 to March 31, 2006), because you would have stayed in India for 184 days during the 2005-06 Indian financial year. Please check and confirm the above.
Assuming the above is correct, now if we count your India vacation period (May 25, 2005 to July 2nd, 2005 from your Post #5), we need to add 39 days to the 184 days above, making your India stay 223 for the Indian financial year 2005-2006. Yet your table says you will be in India for 222 days in Fiscal 2005 (I am assuming you mean the Indian financial year 2005-2006 when you say fiscal 2005, please confirm). It does not make a material difference, but I want to be sure nevertheless, because RNOR determination is important, as it will impact other decisions that need to be made, and do not want a situation where we proceed to make other decisions only to realize there was something wrong in the RNOR determination, and have to redo the analysis for decisions all over again.
Also the above is at variance with your statement that you were on vacation for India for 30 days in Jun-July 2005. So please let me know what to go by.
Do you or your spouse expect to be out of India for significant periods (on official or leisure trips) before March 31, 2006 or later?
So it looks like we have time only till March 31st 2006 to withdraw from our 401K plan /Pension plans for fiscal year 2005, which is a very short time to make a determination.
If you calculations are correct, you have RNOR status until March 31, 2007. It would be helpful to make IRA withdrawals in calendar year 2006 and before March 31, 2007 in calendar year 2007. But I see no tearing hurry to make the calendar year 2006 withdrawal before March 31, 2006.
Spouse 401K - $110K, Roth IRA $4K Self Pension Fund - $8 - $9 K Self 401K - $91K, Roth IRA $4K
As first order of business, suggest rolling over (direct trustee to trustee rollover so that there is no withholding tax or penalty) 401(k) and pension fund money to IRAs, preferably with Vanguard, as soon as possible.
When were (Month and Year) the Roth IRA contributions made? How much was contributed?
Also, may I reiterate that you start looking at the thread refered to at the end of Message 6. Please confirm that you have started doing so.
Bob: Thank you very much for your patience and time in responding to my query. I think there is still some confusion regarding our RNOR calculation. I agree with you that we have to first be sure of our RNOR status before we make any decisions on IRA withdrawl strategy.
As per rule :
(ii) has during the seven financial years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less;
It looks like we qualify for RNOR status for Indian FY 2005, 2006 and also 2007 . So it looks like we have till Mar 31st 2008 (last day for fiscal year 2007) to make withdrawls from 401K and not have to pay any taxes to GOI.
Please look at table below taken from RNOR calculation
--------------------------- Calendar ----Fiscal Year --------------------------------------------Visits TO -----Visits -------------# of Days -------------------------- --------------------------- Year in------(FY) of ---------- FY ------------------ FY ------------- India (7-------- OUTSIDE---------- in India ---------------------------------- Computation--- -------------------------- which to ----Tax ------------- Start --------------- End ----------- yrs before----- India --------------- during -------- Resident or -------- of 730 days ---------- ROR or -------------------------- file taxes---Return ---------- Date --------------Date ---------- R2I) -------------- (after R2I) -------the FY --------Non-Resident------ in India ------------------ RNOR ____________________________________________________________________________________________________________________________ TR #1 after R2I ----2006 --------2005 --------######## ---03/31/2006 ------143 -----------------0 -------------------223 ---------------Resident --------------143 --------------RNOR :) TR #2 after R2I ----2007 --------2006 --------######## ---03/31/2007 ------115 -----------------0 -------------------365 ---------------Resident --------------338 --------------RNOR :) TR #3 after R2I ----2008 --------2007 --------######## ---03/31/2008 ------115 -----------------0 -------------------366 ---------------Resident -------------- 703 --------------RNOR :) TR #4 after R2I ----2009 --------2008 --------######## ---03/31/2009 -------95 ------------------0 -------------------365 ---------------Resident ------------1049 ----------------ROR :(
TR = Tax Return.
As first order of business, suggest rolling over (direct trustee to trustee rollover so that there is no withholding tax or penalty) 401(k) and pension fund money to IRAs, preferably with Vanguard, as soon as possible.
My spouse's 401K is already in a Rollover IRA account with Fidelity. I cannot rollover my 401K till Mar 31st 2006 until I terminate my employment with my current US employer. Both our 401K's are with Fidelity and we want to keep them there till the time of withdrawl.
When were (Month and Year) the Roth IRA contributions made? How much was contributed?
I am not sure the exact timeframe of when the Roth IRA contributions were made. I have sent an email to Fidelity to find this information from them.
Also, may I reiterate that you start looking at the thread refered to at the end of Message 6. Please confirm that you have started doing so.
I have already started putting together a spreadsheet for 401K withdrawl strategy based on the thread and will post it once we confirm our RNOR calculation.
It is possible to get 3 Indian financial years of RNOR status.
In your case (based on #7 and #9, if the input data about number of days spent in India is correct), for Indian financial year 2007-2008 i.e. for the Indian financial year running from April 1, 2007 to March 31, 2008, clearly condition (i) of RNOR definition in Post #6 is not met, but to check if condition (ii) of RNOR definition in Post # 6 is met or not, need to add number of days spent in India for the following period ( 7 preceding financial years i.e. 7 financial years preceding the the April 1 2007 to March 31, 2008 financial year):
April 1, 2000 to March 31, 2007 ( seven financial years).
Looks like if we add the number of days in India for the 7 year period above (20 + 61 + 0 + 34 + 0 + 223 + 365 = 703 < 730), you qualify for RNOR status for the period April 1 2007 to March 31 2008. So your calculation is correct, assuming input data is correct.
Fidelity is fine.
When you are preparing the excel spreadsheet, also include the investment income (non 401(k)/IRA) of:
Any investment income (dividends, interest, rent, capital gains ...) from US sources for 2006? Approx $5 - $6K in dividend and interest income. Do not anticipate any capital gains.
Any investment income from Indian sources for 2006? Approx Rs 50 K in interest income from Indian sources for 2006.
Gator__92 (Original Message)Sent: 1/18/2006 7:36 AM