In today’s global economy, it’s becoming more common for family ties to stretch around the world. You should have no problem naming your nephew as your beneficiary, but accessing the money from India after your death is more complicated.
When naming a nonresident alien as a retirement plan beneficiary, make sure to include more information than the typical name, relationship, and date of birth. The issue here is that the plan sponsor, in your human resources department, will be expected to contact and verify your beneficiary. They may begin to lose patience if the process turns into “Where in the World is Carmen San Diego?”
The beneficiary forms we use states, “It is inadvisable to name a beneficiary who is a permanent resident of a foreign country. If you name a person who is a permanent resident of a foreign country, please furnish full address and email.”
Money that has been accumulated pretax will need to be taxed by Uncle Sam before being mailed to your nephew in India. This means that on top of submitting a death certificate, your nephew will have to request a U.S. tax identification number and pay taxes as a nonresident alien.
At that time, he will likely want to either distribute the entire account outright or, if the 401(k) plan allows, roll this money into an inherited IRA and take required distributions based on the single life expectancy table. If he desires, he can take out more than this minimal amount but not less.
Tax withholding for nonresident aliens can be as high as 30%. However, India is among a long list of countries that has signed a tax treaty with the United States that may offer some additional tax benefits.
After reviewing this issue with several tax authorities, I can strongly recommend that your nephew work with a CPA experienced in the nuances of nonresident alien tax law. The rules for withholding and tax filing are very complex and you should count these costs before naming a foreign beneficiary.
After your nephew works out U.S. tax issues, he will need to assess whether any tax is due in India. Because India and the United States have an agreement in the Treaty for the Prevention of Double Taxation, this should not be an issue. However, based on my readings of several message boards written by Indian residents, India shares one thing in common with the United States: when it comes to taxes, nothing is simple as it should be.