401(k) & IRA Guide for NRIs: Retirement Accounts, Contributions, and Tax Treatment

A 401(k) is an employer-sponsored retirement plan governed by IRC Section 401(k). If your employer offers one, you can contribute a portion of your pre-tax (Traditional) or after-tax (Roth) salary, and the money grows tax-deferred.

### Can NRIs on H-1B, L-1, or Other Work Visas Contribute?

Yes. Eligibility for a 401(k) is determined by your employment status, not your immigration status. If your employer offers a 401(k) plan and you meet the plan's eligibility requirements (typically working for the employer for a minimum period), you can contribute regardless of your visa type — H-1B, L-1, O-1, E-2, or any other work authorization.

### 2025 Contribution Limits

### Traditional vs Roth 401(k)

Most employers now offer both a Traditional and Roth option within their 401(k) plan:

NRI consideration: If you plan to return to India and will be in a lower US tax bracket in retirement (or will withdraw as a non-resident), Traditional 401(k) contributions may be more beneficial — you get the deduction now at a higher marginal rate and pay tax later at a potentially lower rate. However, DTAA treatment matters significantly here (see Section 6).

### Employer Match

Most employers match a portion of your 401(k) contributions — commonly 50% of your contributions up to 6% of salary or 100% of contributions up to 3-4% of salary. The employer match is always pre-tax (Traditional), even if you make Roth contributions.

Critical rule: Always contribute at least enough to get the full employer match. This is free money — an immediate 50-100% return on your contribution. Not doing so is the most common financial mistake NRIs make with their 401(k).

### Vesting Schedules

Employer matching contributions are often subject to a vesting schedule — you must work for the employer for a specified period before the match is fully yours. Common schedules include:

• Cliff vesting: 0% vested until 3 years of service, then 100%
• Graded vesting: 20% per year, fully vested after 6 years

Your own contributions are always 100% vested immediately.

If you leave the US before your employer match is fully vested, you forfeit the unvested portion. Factor this into your planning when considering a job change or return to India.

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An Individual Retirement Account (IRA) is opened and funded by you directly (not through your employer). There are several types, each with different rules.

### Traditional IRA

• Contribution limit (2025): $7,000 (under 50) / $8,000 (age 50+)
• Tax treatment: Contributions may be tax-deductible depending on your income and whether you have an employer retirement plan
• Withdrawals: Taxed as ordinary income
• RMDs: Required starting at age 73

Deductibility phase-outs for 2025 (if covered by an employer plan):

NRI note: Most H-1B tech professionals with employer 401(k) plans and income above $89,000 (single) cannot deduct Traditional IRA contributions. The contribution is still allowed — it is simply non-deductible. This is the basis for the backdoor Roth strategy (discussed in a separate article).

### Roth IRA

• Contribution limit (2025): $7,000 (under 50) / $8,000 (age 50+)
• Tax treatment: Contributions are after-tax (no deduction); growth and qualified withdrawals are tax-free
• Income limits: Cannot contribute directly if income exceeds the phase-out (see our Roth IRA for NRIs guide for details)
• No RMDs during the owner's lifetime

### SEP IRA

A Simplified Employee Pension (SEP) IRA is designed for self-employed individuals and small business owners:

• Contribution limit (2025): Up to 25% of net self-employment income, maximum $70,000
• Employer-funded only (no employee contributions)
• Useful for NRIs with freelance or consulting income reported on Schedule C

### SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is for small businesses with 100 or fewer employees:

• Employee contribution limit (2025): $16,500 (under 50) / $17,500 (age 50-59 or 64+) / $21,750 (age 60-63)
• Employer must either match up to 3% of compensation or contribute 2% of each eligible employee's compensation
• Less common for NRIs but relevant if you work for a small US firm

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### Maximizing Tax-Deferred Growth

If you are in the US for a limited period (a common NRI scenario — 5-15 years on H-1B before returning to India or obtaining a green card), your retirement account strategy should consider your expected timeline and future tax residency.

Strategy 1: Max out the 401(k) first. The $23,500 limit is far higher than the $7,000 IRA limit, and employer matching amplifies your savings. If you can only do one thing, contribute enough to get the full match.

Strategy 2: 401(k) + backdoor Roth IRA. If your income exceeds Roth IRA limits, you can contribute to a non-deductible Traditional IRA and immediately convert to Roth. This gives you a tax-free growth account alongside your tax-deferred 401(k). See our Roth IRA for NRIs guide for the complete backdoor Roth strategy.

Strategy 3: Mega backdoor Roth. If your 401(k) plan allows after-tax contributions and in-plan Roth conversions, you can contribute up to the total 415(c) limit ($70,000 in 2025 including employer match) and convert the after-tax portion to Roth. This is the most powerful tax-free savings strategy available, but not all plans support it.

### Roth vs Traditional Decision Framework for NRIs

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Withdrawing from a 401(k) or IRA before age 59 1/2 triggers a 10% early withdrawal penalty on top of ordinary income tax. This applies regardless of whether you are still in the US or have returned to India.

### The 10% Penalty

### Exceptions to the 10% Penalty

The IRS provides several exceptions under IRC Section 72(t):

1. Age 59 1/2 or older — no penalty
2. Substantially Equal Periodic Payments (SEPP / 72(t) distributions) — must continue for 5 years or until age 59 1/2, whichever is later
3. Separation from service after age 55 (401(k) only — the "Rule of 55")
4. Disability (permanent and total)
5. First-time home purchase — up to $10,000 from an IRA
6. Qualified birth or adoption — up to $5,000
7. Certain medical expenses exceeding 7.5% of AGI
8. Emergency personal expense distributions — up to $1,000/year (new under SECURE 2.0)

NRI warning: Leaving the US to return to India is not an exception to the 10% early withdrawal penalty. If you are under 59 1/2 and withdraw from your 401(k) after returning to India, you owe both US income tax (withheld at 30% for non-residents, unless reduced by treaty) and the 10% penalty.

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Starting at age 73 (under the SECURE 2.0 Act), you must begin taking Required Minimum Distributions from Traditional 401(k) and Traditional IRA accounts. Roth 401(k) accounts are no longer subject to RMDs (effective 2024). Roth IRAs have never been subject to RMDs during the owner's lifetime.

### RMD Calculation

Your RMD is calculated by dividing your account balance as of December 31 of the prior year by a life expectancy factor from the IRS Uniform Lifetime Table (Table III in IRS Publication 590-B).

Example: You turn 73 in 2025. Your Traditional IRA balance on December 31, 2024, was $500,000. The life expectancy factor for age 73 is 26.5. Your RMD for 2025 is $500,000 / 26.5 = $18,868.

### Penalty for Missing RMDs

The penalty for failing to take an RMD has been reduced from 50% to 25% of the shortfall under SECURE 2.0 (and further reduced to 10% if corrected within 2 years during the "correction window").

### NRI Consideration

If you have returned to India and still have a US Traditional IRA or 401(k), you must still take RMDs starting at age 73. As a non-resident alien, the distribution is subject to 30% US withholding (unless reduced by the DTAA — see Section 6). Failure to take RMDs results in penalties even if you are no longer in the US.

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This is one of the most important and misunderstood areas of cross-border tax planning for NRIs. The US-India Double Tax Avoidance Agreement (DTAA) governs how retirement distributions are taxed when you are a tax resident of India.

### Article 20 — Pensions and Annuities

Under DTAA Article 20, pensions and annuities arising in one country and paid to a resident of the other country may be taxed in both countries. However, the country of residence (India) must provide relief from double taxation by allowing a credit for the tax paid to the source country (US).

### How 401(k) and Traditional IRA Distributions Are Treated

Practical implication: When you take a Traditional 401(k) or IRA distribution as an India-resident NRI, the US withholds tax (typically 30% for non-residents, which may be reduced under the treaty). India also taxes the distribution as part of your global income. You claim a credit in India under Section 90 of the Income Tax Act for the US tax withheld.

### Filing a US Return to Claim Treaty Benefits

As a non-resident alien receiving US-source retirement income, you should file Form 1040-NR to:

1. Report the retirement distribution
2. Claim any applicable treaty benefits (potentially reducing the 30% withholding rate)
3. Claim a refund if the withholding exceeded your actual US tax liability

### Rolling Over When Leaving the US

Before returning to India, consider these options for your 401(k):

1. Leave it with your employer (if the plan allows) — simplest option; money continues to grow tax-deferred
2. Roll it over to an IRA — gives you more investment choices and consolidates accounts; no tax consequences if done as a direct trustee-to-trustee transfer
3. Roll over to a new employer's 401(k) — if you join another US employer
4. Cash out — triggers immediate income tax plus the 10% early withdrawal penalty if under 59 1/2. Almost never advisable.

Recommendation: For most NRIs returning to India, rolling the 401(k) into an IRA is the best option. It preserves tax-deferred growth, gives you flexible investment options, and keeps your US retirement savings intact until you need them.

### Roth Account DTAA Treatment

The DTAA treatment of Roth accounts is problematic for NRIs. See our dedicated Roth IRA for NRIs: Rules & DTAA Impact article for the full analysis — the short version is that India does not recognize the tax-free status of Roth withdrawals, making the Roth benefit significantly less valuable for NRIs who return to India.

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This is the question every NRI eventually asks. The answer depends on what type of account you have and what you do with it.

### You Can Keep Your US Retirement Accounts

There is no requirement to close or withdraw from your 401(k) or IRA when you leave the US. Your accounts remain intact, and your investments continue to grow. Many NRIs maintain their US retirement accounts for decades after returning to India.

### Ongoing Obligations

Even after leaving the US, you have ongoing obligations:

• RMDs starting at age 73 (Traditional accounts)
• US tax withholding on distributions (30% for non-residents, absent treaty reduction)
• US tax return filing (Form 1040-NR) in any year you receive a distribution
• India tax reporting — retirement account balances do not need to be reported as foreign assets on Indian returns (only income is reportable), but distributions received must be reported as income

### FBAR and FATCA After Return to India

Your US 401(k) and IRA accounts do not create Indian FBAR-equivalent reporting obligations (India does not have an FBAR). However, under the Indian Black Money Act and Schedule FA (Foreign Assets) of the Indian tax return, you may need to disclose foreign financial accounts. Consult with an India-based tax advisor on Schedule FA requirements for US retirement accounts.

### Investment Restrictions

Some US brokerages restrict account access for non-US residents. After you move to India, you may find that:

• You cannot open new IRA accounts
• Your existing brokerage may freeze trading activity
• You may need to transfer to a brokerage that serves international clients (e.g., Charles Schwab International, Interactive Brokers)

Plan your brokerage arrangements before departing the US.

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### Can I contribute to a 401(k) on an H-1B visa?

Yes. 401(k) eligibility depends on your employment, not your visa status. If your employer offers a 401(k) plan and you meet the plan's eligibility requirements, you can contribute the full $23,500 (2025 limit) plus catch-up contributions if applicable.

### What is the employer match, and should I always take it?

The employer match is your employer's contribution to your 401(k) based on your own contributions. Yes, you should always contribute at least enough to receive the full match. It is an immediate guaranteed return on your money. Not doing so is equivalent to declining part of your compensation.

### What happens to my 401(k) if I leave my job?

You have four options: leave it with your former employer (if the balance is over $5,000 and the plan allows), roll it over to an IRA, roll it over to a new employer's 401(k), or cash it out (not recommended due to taxes and penalties).

### Can I withdraw from my 401(k) after returning to India?

Yes, but if you are under 59 1/2, you will owe the 10% early withdrawal penalty plus income tax. As a non-resident, the US withholds 30% (potentially reduced under the DTAA). India also taxes the distribution, but you can claim a Foreign Tax Credit for US tax paid.

### Is it better to contribute to a Traditional or Roth 401(k) as an NRI?

If you expect to return to India, Traditional is often better because: (a) you get the tax deduction now at your current US marginal rate, and (b) India does not recognize Roth's tax-free status, so the Roth benefit is reduced for India-resident retirees. However, if you plan to stay in the US permanently, Roth may be superior for its tax-free growth and no-RMD benefits.

### Should I roll my 401(k) into an IRA before leaving the US?

In most cases, yes. An IRA gives you broader investment choices, lower fees, and more control. Perform a direct trustee-to-trustee rollover (no tax consequences) to a brokerage that serves international clients. Do this before you leave the US to avoid complications with opening accounts from abroad.

### Are 401(k) contributions subject to Social Security and Medicare tax?

Traditional 401(k) contributions reduce your income for income tax purposes but do not reduce your wages for FICA (Social Security and Medicare) purposes. You still pay FICA on the full amount of your salary, including the portion contributed to a Traditional 401(k).

### What are the 2025 IRA contribution limits?

$7,000 for individuals under 50 and $8,000 for individuals age 50 and older. These limits apply across all your IRA accounts combined (Traditional + Roth).

### Can I contribute to both a 401(k) and an IRA?

Yes. The 401(k) and IRA limits are separate. You can contribute $23,500 to your 401(k) and $7,000 to an IRA in the same year. However, your Traditional IRA deduction may be limited or eliminated if you are covered by an employer plan and your income exceeds the phase-out thresholds.

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