U.S. taxes on 401k withdrawals when only other income = SS?

[JimGnitecki]

Here is the scenario for this question:

My wife and I, who were born and raised in Canada emigrated to the U.S., stayed decades, are dual Canadian and U.S. citizens, and are strongly considering moving back to Canada.

We have a reasonably sized 401k in The U.S. I assume that once my wife retires, we need to move that money into am IRA or some other non-401k pre-tax solution. But, whether we withdraw money from the 401k before or after that move to a non-401k solution, the questions center around how we can have the withdrawls taxed in both our Canadian returns and our U.S. joint return, once we are living in Canada again.

Question 1. Under U.S. tax law, I THINK Social Security is non-taxable provided that total joint income outside of Social Security is under about $30,000. Am I right about that? (Over approx $30,000 of joint non-Social-Security income , an increasing eprcentage of the TOTAL (husband and wife) Social Security benefit becomes taxable. Am I understanding the law correctly?

Under U.S. 401k withdrawl rules, The IRS forces the fund administrator to withhold up to 30% of any withdrawal to cover potentially due taxes on the withdrawal. However, the U.S. Canadian tax treaty, if properly claimed via filing Form W-8BEN, says that The IRS must not withhold more than 15%. So . . .

Question 2: If we file Form W-8BEN, The fund administrator will only withhold 15%, correct?

But, if we keep the annual withdrawals from the 401k or its successor account to under approx $30,000, there would be no U.S. income tax due since our only other "income" is all Social Security. So . . .

Question 3: Can we then simply file a U.S. return to each year to get the withholding refunded to us?

In Canada meanwhile, the 401k withdrawl is of course taxable income. But, we get to apply the U.S Canadian tax treaty, I think, to make 15% of it non-taxable. So . . .

Question 4: Is it correct that 15% of the 401k withdrawal will be excluded from taxation in Canada?

The 85% remainder of the 401k wtihdrawal is taxable in Canada at a 15% tax rate since the 401k is in my wife's name, and her Social Security benefit is going to be only $14,700 US = $18,375 CDN, and the annual withdrawals are planned to be under $5000 annually, and canadian tax law says each spouse must file separately, not jointly. So, the 15% of 85% of the withdrawn amount is only a 12.75% effective tax rate.

Question 5: Is the above correct?

Jim G

[nelsona]

1. SS is taxed where you live. If you live in Canada, it will be taxed at the 85% inclusion rate, and not taxed in US at all. By treaty. If you continue to live in US, your SS will be included in 0, 50, or 85% depending if your income is more or less than 32K or 44K. That figure included ALL other income AND part of your SS.. Slightly different that what you thought.

2. Correct. Then you will use this gross income on your CDn return and the 15% as a credit.

3. You have to file a US return for the rest of your life in any event. But if you live in Canada, your SS will only be taxed in Canada. Doesn't matter how much or how little you report on your 1040. So, another misconception.

4. No. 100% of your 401(k) will be taxable in Canada. You will get to take CREDIT for the 15% US tax. Again, not what you said. SS is what benefits from the 15% exemption.

5. Just doesn't apply.

[nelsona]

Just for #2 correction. You won't have any withholding on your 401(k), since you are US itizens, It will be upto you to remit a small amount to IRS. the 15% is for non-citizens. Your US tax on 401(K) will be about 10% if that.

[JimGnitecki]

[quote="nelsona"]Just for #2 correction. You won't have any withholding on your 401(k), since you are US itizens, It will be upto you to remit a small amount to IRS. the 15% is for non-citizens. Your US tax on 401(K) will be about 10% if that.[/quote]

Thank-you, Nelsona! I appreciate the quick replies!

Jim G