What to do with your Roth IRA/ Roth 401K if you're returning to India
Most returning NRIs leave their Roth accounts alone.
The logic is simple: Roth money is tax-free in the US, so why touch it? This article walks through what our broad strategy is for a Roth IRA/ Roth 401K and why the (slightly) answer is different for a Roth IRA and a Roth 401(k).
Contents
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1. How a Roth is taxed after you move back
Okay so first up - Taxation of Roth accounts is a complex situation with no specific judicial precedents. This is based on our opinion on taxation of a Roth.
Your tax position in India depends on your residential status. For the first two or three years after returning, most people are RNOR (Resident but Not Ordinarily Resident). An RNOR is not taxed in India on foreign income that is earned and received outside India. Once you become ROR (Resident and Ordinarily Resident), India taxes your worldwide income.
Reyman Tips: We recently wrote an article on planning your Residential Status to maximize the RNOR/ NR period.
Event inside the Roth | NR / RNOR: India | ROR: India | USA |
Dividends and interest | Not taxable | Taxable | Not taxable |
Growth in value (no sale) | Not taxable | Not taxable | Not taxable |
Withdrawal before 59.5 | Not taxable | Taxable as capital gains (FTC for US tax) | Earnings taxed + 10% penalty |
Withdrawal after 59.5 (qualified) | Not taxable | Taxable as capital gains | Not taxable |
Two key points:
RNOR window is a period where nothing in the Roth is taxed in India.
An early withdrawal after you become ROR can be hit on both sides: US tax plus the 10% penalty on earnings, and Indian capital gains tax. You get a foreign tax credit (FTC) in India, but the US side usually the bigger number.
Note: a qualified Roth distribution is one made after age 59.5 and at least 5 years after your first Roth contribution.
2. Roth IRA strategy
A. Reset your cost basis during RNOR
Sell every holding inside the Roth IRA while you are NR or RNOR, then buy the same or similar funds back. There is no US tax on trades inside a Roth and India does not tax this foreign gain during RNOR. When you eventually withdraw as an ROR, India only taxes the growth after your return, not the gains you built up in the US.
Reyman Tips: This article handles tax for a Roth IRA/ 401K. We wrote a detailed article on how to reset your cost basis during the RNOR period to book tax free capital gains for US stocks/ ETFs.
B. Take out your contributions
In a Roth IRA, your contributions can come out at any time with no US tax and no penalty (at any age).
During RNOR, there is no Indian tax either.
So you pull out the full contribution amount. Invest in it in a Global ETF or in India.
Because money left in the Roth and withdrawn early later gets taxed at around 40% in the US (30% non-resident rate plus the 10% penalty). The same money invested in India grows subject only to Indian long term capital gains tax of 14.95% (12.5% plus surcharge and cess, assuming max 15% surcharge).
Example: why you should take out your contributions
Tony Stark moved back in 2026 with a Roth IRA worth $73,020. Of that, $41,202 was contributions and $31,818 was growth. We assumed 10% annual growth and a withdrawal in 20 years, before he turns 59.5.
Particulars | Scenario A: Hold for 20 years | Scenario B: Take out contributions |
Amount in the Roth today | $73,020 | $31,818 (gains only) |
Contributions taken out (invested elsewhere) | $0 | $41,202 |
Roth value in 20 years | $491,242 | $214,055 |
Tax on Roth withdrawal at 40% | $180,016 | $85,622 |
Outside investment in 20 years | $0 | $277,187 |
Indian LTCG at 14.95% on that growth | $0 | $35,280 |
In hand after 20 years | $311,226 | $370,340 |
Result: Scenario B leaves him with $59,114 more, roughly ₹56 lakh at ₹95 per dollar.
Nothing about the investments changed. Only the tax wrapper did.
Assumptions:
10% CAGR
flat 30% US rate for non-resident aliens plus the 10% early withdrawal penalty,
Indian LTCG at 14.95% for FY2026-27
Not sure what's the best strategy for you?
Feel free to reach our. Our team of experts helps returning Indians on a daily basis and will be happy to discuss your case
3. Roth IRA vs Roth 401(k): Ordering differences
The strategy above depends on one IRS rule that only applies to Roth IRAs.
Roth IRA: withdrawals follow a fixed order. Contributions come out first, then converted amounts, then earnings. Until you have taken out every dollar you put in, nothing you withdraw counts as earnings.
Roth 401(k): a non-qualified withdrawal is split pro rata. Each dollar you take out is part contribution and part earnings, in the same ratio as the whole account. You cannot pick contributions only.
Tony's situation (from the earlier example) if the $73,020 had been sitting in a Roth 401(k) instead, and he tried to take out $41,202:
Withdraw $41,202 | Roth IRA | Roth 401(k) |
Treated as contributions | $41,202 | $23,248 (56.4%) |
Treated as earnings | $0 | $17,954 (43.6%) |
US tax + penalty at 40% | $0 | $7,181 |
Difference: Withdrawing straight from the Roth 401(k) and paying $7,181 of avoidable tax.
What you should do: Roll the Roth 401(k) into a Roth IRA first.
On a direct rollover, the contribution portion of your Roth 401(k) becomes contribution basis in the Roth IRA.
From there, the Roth IRA ordering rule applies and you can withdraw that basis tax-free.
Practical step: Most plans only let you withdraw or roll over after you leave the employer. So plan accordingly
4. When this does not work
The whole benefit comes from the tax gap between a 40% US rate on early withdrawals and a 14.95% Indian rate on capital gains. It shrinks or disappears if:
You will not touch the money before 59.5. A qualified withdrawal is US tax free, so both scenarios end up paying only Indian tax and come out about even.
Indian capital gains rates rise to around 30% or more.
If none of these apply, take the contributions out during your RNOR window. It is one of the few moves where the downside is small and the upside is large.
If you're a returning NRI who needs help with any of the following, feel free to reach out. Our team of experts is always happy to help:
Tax planning for return to India
Planning RNOR status in India and NRA status in USA
Assistance with cost basis reset - Capital gains calculation and reporting requirements
Assistance with re-designation of Indian bank accounts - NRO/ NRE to resident accounts (in line with FEMA regulations)
Comprehensive evaluation of holdings/ assets from tax perspective.
Financial planning and Investing
Spending optimization, EMIs & credit cards
Insurance advisory
ITR Filing in India
Will & estate planning
Most other financial queries or challenges
You can also email us at help@reymanwealth.com
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