401K advice considering I'll retire in Canada

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

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nelsona
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Post by nelsona »

The backdoor Roth doesn't involve your 401k. You simply contribute to a traditional IRA and them immediately convert it to a Roth. Since the IRA contribution was likely non-deductible, the only tax you would owe is on the miniscule growth youy might have accrued from the time you deposited the IRA funds until you put them in the Roth.

This works best if yoy have no other IRA accounts (including rolower IRAs from previous jobs. this is where your current 401(K0 would come in. Any IRAs you rolled over would then have to be put in your current 401k.
The reason for thisis that while the IRA that you used to convert to Roth may have no taxable amount in it, the conversion process looks at all your IRAs and pro-rates there taxable amount into your conversion.
See:
https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
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Post by brianbbc »

well i did miss something extremely important that has made me decide not to invest this way. If I do the exchange and buy etfs on the tsx, I am subject to (all dividends and capitol gains)a 15% tax from Canada and also be taxed as regular income from the irs (now for me 25%).. furthermore the irs will not let me claim it a a foreign tax credit to recup the 15%. the reason is that if you buy the security outside of the US (such as on the tsx), the irs now considers it a pfic (passive form investment company). In doing so they remove all tax benefits usually given to a US resident/citizen. The real nightmare is needing to file form 8621 which most tax professionals are having a hard time even figuring it out due to its complexity and length. this could be a real issue for all US citizens outside of the US who invest locally. Luckily once I leave to canada, I will be a non-resident, non-citizen of the US and it won't affect me, I do have to eventually watch my children's tax implications once they are older as they hold dual citizenship , but maybe by then the rules will change again.

that said, i will keep all the funds in US currency and securities for now, wait until after the final US residency tax year then take advantage of the stepped up capital gains once becoming Canadian resident. that's the best i can do.
nelsona
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Post by nelsona »

Cdn stocks held in US retirement funds are supposed to be exempt of Cdn tax withholding (and vice versa).

The RRSP industry fixed this on the Cdn side years ago, but I suspect US hasn't worked much on this.

Also, outside your retirement accounts, if you are buying this through a US broker, they will issue the proper form so that you simply claim the foreign tax without needing 1116.

The PFIC issue is a problem... many Cdn instruments however are becoming PFIC compliant, and you can still buy stocks. And US citizens living in Canada have become pretty adept at the 8621, so filing is not as big a problem as you might think. the tax as you go is.

Since you are not a USC, you should be looking more at using the fact that you will not be taxed on cap gains accrued while in US but triggered after you leave US as a more reliable strategy.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
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Post by brianbbc »

I agree with everything you said. the retirement accounts are exempt from taxes here, but fidelity will NOT let me exchange into Canadian currency and buy off the tsx in the sheltered accounts after all, probable because of the pfic which is the real issue.

i will just keep the strategy of not triggering cp after all.

Glad to here about the 8621. do these US citizens/CDN residents get any tax tax credits from canada if the irs taxes them on cp or dividends? will never apply to me and my wife but my kids need to be aware of it.
nelsona
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Post by nelsona »

Not surprised about any US broker balking at this.

CRA does not give credit for foreign taxes on Cdn-sourced income.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
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Post by brianbbc »

i am surprised individuals can fill out the 8621. I looked at it and it seems complicated. from what I heard accountants are charging up to $300 per filing form. that cost and considering the taxes, it is investing in pcif as a us resident or even a usc in Canada worth it?
brianbbc
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Post by brianbbc »

what is the tax consequences (as a US resident), for holding a Canadian savings account that collects interest from a GIC? the bank is in manitoba and interest would be <10k>50k. I know i would have to do a fbar with the irs, but who gets the tax money? will the cra require me to pay any taxes in the interest if i am not a Canadian resident?
nelsona
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Post by nelsona »

Canada doesn't tax NR's on bank interest. If it did, the bank would withhold 10% from every payment as your final Cdn tax.

The tax is all reportable in US. Remember that in US you can choose the cash method for reporting interest, and only report the interest in the year the GIC matures.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
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Post by brianbbc »

Am I correct in assuming that you would want to report the interest in the year the gic matures to defer taxes?
nelsona
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Post by nelsona »

Yes, this is the cash method, which was lost as an option in Canada years ago.
Why pay tax on money you don't have yet?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
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Post by brianbbc »

what if you have a significant amount of interest a year, like 5K, would it be wiser to pay yearly to avoid a jump in the higher tax bracket the final year the gic matures?
nelsona
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Post by nelsona »

Really? You do realize that the tax brackets are not that close together, right?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
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Post by brianbbc »

To clarify, when the GIC matures and I perform the cash method on all the interest, as long as my taxable interest for that year does not go past 129600 (for 2015 year) and boost me up into the 28% bracket, this is the smarter way to go? If it did jump me from 25 to 28%, paying yearly would be wiser?
nelsona
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Post by nelsona »

Does it really need clarification?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
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Post by brianbbc »

OK. what about form 8938, when I report the interest, do I do the currency conversion the day I receive the the cash or Dec. 31 of that year?
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