401k vs Roth 401k

[iristopher]

I'm a Canadian citizen and will move to WA, US and become a non-resident this summer. Employer has a small match for 401k contributions and I can choose either 401k vs Roth 401k for my contributions. If I were to return to Canada before I become 59.5, what would be the better option?

I read that I will be able to convert 401k->IRA->RRSP tax free, but since RRSP withdrawal will be taxed at Canadian rate, which isn't going to be any lower than the current tax rate in WA (~20%), I am leaning towards Roth 401k. Does this sounds like a good plan?

This is what I might do with company matched 401k when it's time to move back to Canada, please let me know if this will work:
convert to IRA before I move, then convert to RRSP after I move. This will incur 15% withholding tax and 10% penalty in the US, but I should be able to use foreign tax credit to recoup that amount on my Canadian tax return.

What will be a good tax efficient way to withdraw from Roth 401k if I were to choose that option?

Thanks!

[nelsona]

Forget the 401(k) to RRSP route, unless you only have a small 5-figure 401(k). This is only "tax-free" transfer if you have the equivalent Cdn income, so any bigger than that becomes problematic, as you have to account for the US tax you will pay getting the money out of US. And as you point out, you will be fully taxed eventually when taking your RRSP.

Another option you have, before going back to Canada, is to take any IRA/401(k) that you have amassed (be aware that any matching you receive will ALWAYS be 401(k), even if you contribute only Roth401(k). You would have one big tax bill before leaving US, and then have the entire amount sitting I na tax-free Roth account.


So, to your question. This issue comes to how much tax will you save now by funding 401(k) compared to how much you will save later, funding Roth401(k).
Even for US taxpayers, this decision is easier the younger you are: Roth all the way. But considering that you will potentially move back to Canada, where the taxrate will be higher, then Roth becomes even more attractive, since the rules are now clear that Roth are also tax-free in Canada forever. So unless you are in a very high tax bracket in Us (35% plus), or you are nearing retirement, Roth is the way to go.