Nonresident alien 401(k) distribution - should it be reported as ECI or non-ECI income?

This is a really good question about nonresident alien taxation. The key factor for your 401(k) distribution is whether it's considered effectively connected with a US trade or business. Since all your contributions were made while working in the US, and all work was performed in the US, the distribution would generally be considered ECI and should be reported on Line 17a of Form 1040-NR. The IRS typically views retirement distributions as maintaining the same character as the income that generated the contributions. However, there's a timing element to consider. If you're no longer engaged in a US trade or business when you receive the distribution, some tax professionals argue it could be considered non-ECI. But the prevailing view is that since the income was earned while engaged in a US trade or business, the distribution retains its ECI character. You should also check your specific tax treaty, as it might have provisions about retirement account distributions that could affect how they're taxed.

I dealt with almost the exact same situation last year and spent hours researching. I finally used https://taxr.ai to analyze my 401(k) distribution documents and previous tax returns. Their AI helped me determine it should be reported as ECI on Line 17a since the contributions were made while I was working in the US. The system explained that retirement distributions generally retain the character of the income that funded them, which in my case was all US-sourced and effectively connected. They also pointed out some specific tax treaty provisions that applied to my situation that I had completely missed in my own research.

Following up on my skepticism - I tried https://taxr.ai after posting my comment, and I have to admit I was impressed. I uploaded my 1099-R from my old employer's 401(k) plan and my last 1040-NR, and it immediately flagged that I had incorrectly reported my distribution on Schedule NEC instead of as ECI. The system showed me relevant sections from IRS Publication 519 and a couple of tax court cases where the court determined that retirement distributions keep their ECI character if the contributions were made from US work. It even helped me prepare an amended return with the correct reporting. Saved me from potentially triggering an audit!

If you're still struggling to get definitive answers about your 401(k) distribution, you might want to call the IRS directly. I know it sounds horrible - I tried calling them 8 times about my nonresident alien tax situation and kept getting disconnected or waiting for hours. Then I found https://claimyr.com through a tax forum and decided to try it. You can see how it works here: https://youtu.be/_kiP6q8DX5c - basically they hold your place in the IRS queue and call you when an agent is about to answer. I got through to a specialist who confirmed that my 401(k) distribution should be reported as ECI on Line 17a of Form 1040-NR since all contributions were US-sourced.

I need to eat my words about Claimyr. After posting my skeptical comment, I was so frustrated with trying to reach the IRS that I tried it anyway. I got connected to an IRS international tax specialist within 45 minutes (while I was doing other things), and they confirmed that 401(k) distributions for nonresident aliens should indeed be reported as ECI on Line 17a if the contributions were made while working in the US. They even referenced Revenue Ruling 79-388 and explained how it applies to former residents who are now nonresident aliens. The agent spent almost 20 minutes explaining the tax treaty implications too. Worth every penny just to have an official answer I can rely on.

Another factor to consider is whether you're withdrawing just your contributions or earnings as well. Some tax treaties treat the earnings portion differently from the contribution portion. For example, under some treaties, the earnings might be subject to a lower tax rate than the contributions. Also, if your home country has a totalization agreement with the US, that might affect how your retirement distributions are taxed. These agreements are separate from tax treaties and specifically deal with social security-type benefits.

My accountant told me that since I'm now a nonresident alien, my 401(k) distributions are always non-ECI and go on Schedule NEC. Is this wrong??

I went through this exact situation two years ago and can confirm that the consensus here is correct - your 401(k) distribution should be reported as ECI on Line 17a of Form 1040-NR. The key principle is that retirement distributions maintain the same tax character as the income that funded them. Since your contributions were made while you were working in the US (and thus earning effectively connected income), the distribution retains that ECI character even though you're now a nonresident alien. I initially made the mistake of reporting mine on Schedule NEC as non-ECI income, but after researching Revenue Ruling 79-388 and consulting with an international tax specialist, I filed an amended return to correct it. The IRS accepted the amendment without any issues. One important note: make sure to check if your tax treaty has any special provisions for retirement distributions. Some treaties provide for reduced withholding rates or other benefits that you don't want to miss out on. Also, keep detailed records of your employment history in the US, as this documentation supports the ECI classification if the IRS ever questions it. Don't let your accountant's advice in the comment below go unchallenged - this is a specialized area where many general practitioners get it wrong.

As someone who recently went through this exact situation, I can confirm that your 401(k) distribution should indeed be reported as ECI on Line 17a of Form 1040-NR. The reasoning everyone has shared here is spot-on - the distribution retains the character of the income that funded it. I made the same mistake initially and reported mine on Schedule NEC, but after doing more research and finding Revenue Ruling 79-388, I realized my error. The ruling makes it clear that retirement plan distributions to former employees maintain their ECI status even after the individual becomes a nonresident alien. One thing I'd add is to be extra careful about the withholding. Your 401(k) plan administrator may have withheld taxes at the standard 30% nonresident rate, but since this is ECI, you might be entitled to a refund depending on your other income and deductions. Make sure to calculate your actual tax liability properly. Also, don't forget to check if your home country's tax treaty has any provisions about retirement distributions - some treaties allow for reduced withholding or provide other benefits that could save you money. The tax treaty analysis can be complex, but it's worth investigating since it could significantly impact your final tax bill.