TN status - contributing to 401(k)

canuck9800 · Post by **canuck9800** » Mon May 30, 2016 4:31 pm

I'm a Canadian working in the U.S. I was previously on TN status from 2011 to 2013 and left to work in a third country outside North America. This year (2016) I returned to start another TN term from 2016 to 2019. I am also weighing whether to switch over to H-1B in 2017 or 2018 so that the GC route becomes an option.

Back in 2011-2013 I didn't contribute to my 401(k). I'm now seriously considering maxing out my 401(k) contributions going forward, regardless of whether I return to Canada or think about staying in the U.S. long term. I've done some research and it looks like if I return to Canada I can either leave a tax deferred IRA account in the U.S. with a financial institution that's willing to keep an account open for a non-resident, or roll the funds over to an RRSP, so there really doesn't seem to be a downside to maxing out my 401(k) right now. (There's no employer match, so that is not a consideration.) That being said I had a few questions -

(1) Are there any downsides to maxing out my 401(k) that I haven't considered? I'm a little nervous that there's some pitfall I haven't realized but I really can't think of anything.

(2) In particular, and this is something that I haven't seen anyone talk about, but when my TN renewal comes up in 2019 (assuming I'm not on H-1B by then), which would be my third TN application, would the fact that I have a lot of money in my 401(k) pose an additional risk to my TN renewal?

(For that matter, would my 2019 renewal be my "third" TN term or my "second" TN term? I've heard that the "third" TN term is when the risk of being denied becomes serious but I'm not sure which case mine would fall under.)

nelsona · Post by **nelsona** » Mon May 30, 2016 4:40 pm

First off, let me assure you that TN to GC is entirely plausible WITHOUT H1 status. Its been done 100's of times. go to immigration.com TN forum and there is info on this. Don't think -- and especially don't let your employer think -- that you must get H1b lottery pick to get into GC. You could start perm tomorrow if they want.

1, You are, of course permitted to contribute to a 401(k), even if you live in Canada, these are now deductible in Canada. The one thing you have to realize however is that, if you live in US, your tax rate is quite low compared to Canada, and by contributing to a 401(k) you are in essence getting ga decuction at a low taxrate, and will take the money at a higher taxrate in Canad (or even in US).
So, many in your situation opt instead to fund their Roth401(K), which while not giving a tax deduction, gives LIFETIME tax-free growth in both US and Canada.

2. Of course not. Millionaires can get a TN renewal. What would make you think this?!

nelsona · Post by **nelsona** » Mon May 30, 2016 4:41 pm

... and its not quite "rollover to RRSP" when you leave. You need to have as much income in Canada for the year as you have 401(k), and you also have to have in hand the 30% they are going to withhold from your 401(k) for collapsing it.

canuck9800 · Post by **canuck9800** » Mon May 30, 2016 4:46 pm

Thanks!

For (2), the worry is that having a lot of funds in 401(k) might be taken as indicating immigrant intent,

For collapsing the 401(k), would it be 15% based on the treaty instead of 30%?

nelsona · Post by **nelsona** » Mon May 30, 2016 11:07 pm

It will be more that 15% due to the 10% early withdrawal penalty.

Some brokerage withhold 15% + 10%, some withhold 30% with or without the 10%.

The treaty doesn't really help you since the 15% treat guarantee is only for PERIODIC pension withdrawals, so you are at the mercy of the broker, since this would NOT be a periodic withdrawal. And CRA won't let you transfer periodic withdrawals, it has to be lump-sums.

At any rate, you can file a 1040NR at that point and pay graduated tax plus 10%.

The tax is not the problem, it is having sufficient Cdn income (plus 20-30%) extra cash lying around to fund the RRSP and get a full credit.

Better to just leave it.
Or, as I said, forget tax altogether and go Roth401(K)

canuck9800 · Post by **canuck9800** » Tue May 31, 2016 8:23 pm

[quote="nelsona"]It will be more that 15% due to the 10% early withdrawal penalty.

Some brokerage withhold 15% + 10%, some withhold 30% with or without the 10%.

The treaty doesn't really help you since the 15% treat guarantee is only for PERIODIC pension withdrawals, so you are at the mercy of the broker, since this would NOT be a periodic withdrawal. And CRA won't let you transfer periodic withdrawals, it has to be lump-sums.

At any rate, you can file a 1040NR at that point and pay graduated tax plus 10%.

The tax is not the problem, it is having sufficient Cdn income (plus 20-30%) extra cash lying around to fund the RRSP and get a full credit.

Better to just leave it.
Or, as I said, forget tax altogether and go Roth401(K)[/quote]

Many thanks for the heads up -- I'm definitely looking at the Roth 401(k) as an option now as well.

Also, once I've maxed out my traditional + Roth 401(k), should I also consider making after-tax 401(k) contributions? Based on what I've read it looks like I'll be able to roll those funds over to a Roth IRA before leaving the U.S. for tax-free growth in both Canada and the U.S. as well - is that correct?

So basically, before returning to Canada:

pre-tax 401(k) --> tax-deferred IRA
Roth 401(k) --> Roth IRA
after-tax 401(k) --> Roth IRA
Leave tax-deferred IRA and Roth IRA in the U.S.
Tax-deferred IRA is tax deferred in both Canada and U.S. until withdrawn
Roth IRA gives tax-free growth in both Canada and U.S.

nelsona · Post by **nelsona** » Wed Jun 01, 2016 7:44 am

Not sure what you are calling an "after-tax 401(K)". That is the Roth401(k)

Your Roth401(k) and 401(k) come from the same maximum, so you can't max out both, you choose which you want to fund or what proportion between the 2. Your employer can help you on this. Which ever you do, the company matching is always in 401(K)

Your 401(k) would go into an IRA tax-free, not Roth. Another strategy is any 401(k) or IRA you have, you rollover to a Roth before moving to Canada, pay the US tax on the conversion, and then have ONLY Roth left.

canuck9800 · Post by **canuck9800** » Wed Jun 01, 2016 10:29 am

[quote="nelsona"]Not sure what you are calling an "after-tax 401(K)". That is the Roth401(k)

Your Roth401(k) and 401(k) come from the same maximum, so you can't max out both, you choose which you want to fund or what proportion between the 2. Your employer can help you on this. Which ever you do, the company matching is always in 401(K)

Your 401(k) would go into an IRA tax-free, not Roth. Another strategy is any 401(k) or IRA you have, you rollover to a Roth before moving to Canada, pay the US tax on the conversion, and then have ONLY Roth left.[/quote]

By after-tax 401(k) I'm referring to the after-tax contributions described in these -

https://www.irs.gov/retirement-plans/ro ... ment-plans
http://news.morningstar.com/articlenet/ ... ?id=682209
http://www.rothira.com/irs-rules-after- ... -rollovers
http://www.castlebaram.com/blog/guide-a ... tributions

since the total limit for this is 53k/year, this seems to be a way of increasing Roth assets at a rate much faster than the 18k/year limit would allow.

nelsona · Post by **nelsona** » Wed Jun 01, 2016 1:45 pm

Thanks for the info (and please stop using the quote feature since it doesn't work, clutters the posts, and I already know what was said previously).

These After-tax 401(k) contributions are kinda new, and your employer must offer this. Do they?

just remember that for such aftertax 401(k) funds, only the contribution is non-taxable (and can be rolled into a Roth. The growth can only be rolled into an IRA or other pre-tax 401(k).

So, supposing you did only Roth401(k) - 18K maximum, aftertax 401(k) - 35k maximum. this is what you would have left at the end;

you would have a tax-free Roth401(k) contributions and growth that could be rolled into a tax-free Roth.
* You would have matching funds which would be rolled into an IRA.
* Had you made any pretax401(k) contribs, these and the growth associated with it could be rolled to an IRA.
You would have your aftertax401(K) contributions which could be rolled into a Roth.
* You would have the growth portion of the pretax401(K) which could be rolled into n IRA.

* - these portions would be taxable, and you would need to consider whether to convert to a Roth, paying tax at that time, and making them tax-free

And just for good measure, you can still contribute to a traditional IRA/Roth upto $5500 with varying degree of tax-deductibility or eligibility, which you could year-by-year convert into a Roth.

nelsona · Post by **nelsona** » Wed Jun 01, 2016 1:46 pm

"* You would have the growth portion of the pretax401(K) which could be rolled into n IRA. "

I meant AFTERtax401(k) growth portion.

canuck9800 · Post by **canuck9800** » Thu Jun 09, 2016 3:03 am

Thanks! yes, my employer offers the "after tax 401(k)" contribution option.

So, just to clarify, for the "after tax" portion, the contributions would be rolled into Roth IRA, while the growth would be rolled into traditional (i.e., tax deferred) IRA, is that correct?

nelsona · Post by **nelsona** » Thu Jun 09, 2016 7:43 am

Correct

canuck9800 · Post by **canuck9800** » Wed May 31, 2017 2:21 am

Just reviving this thread with an IRA / 401(k) related question...

To recap, I am a Canadian working in the U.S. on TN. I have accumulated some pretax and some Roth funds in my 401(k).

For Canadians who work in the U.S., then return to Canada and become U.S. tax non-residents, I understand that there is a 15% withholding tax on distributions from 401(k) and IRAs (this is assuming age 59 1/2 or older, with no penalty) - this is 15% instead of 30% because of the U.S.-Canada Tax Treaty.

For Roth funds in 401(k) / Roth IRAs:
* Is the 15% a tax that can't be recovered, or is it a withholding that one can get refunded for by filing a U.S. nonresident tax return for that year? I'm seeing a lot of conflicting and confusing information on the Internet ... for example, this link below seems to imply that (A) the only way to get the 15% back is by claiming a Canadian tax deduction in the same year, and (B) a U.S. tax refund is only applicable if a financial institution withholds 30% instead of 15% by mistake (in which case you can claim back the extra 15% via a U.S. tax refund, but not the first 15%)

https://www.sunnet.sunlife.com/files/ad ... o_RRSP.pdf

The fact is, if there's a good likelihood a Canadian working in the U.S. will return to Canada in the future, and if there's a 15% tax on the entire balance of the Roth IRA upon distribution, it would be much more beneficial for that person to just open a taxable brokerage account (and pay long term capital gains tax on the earnings when he leaves the U.S.) than open a Roth IRA and be hit with a 15% tax on the entire thing.

For pretax funds in 401(k) / traditional IRAs:
* Upon distribution, is the applicable tax rate 15%, or the ordinary income tax rate applicable to U.S. taxpayers? (Hopefully not both?)

nelsona · Post by **nelsona** » Wed May 31, 2017 7:22 am

I think you may have misread that document.

IF there is any withholding on a Roth (there should not be, (especially if over 59.5) then it is entirely recovered by filing a 1040 or 1040NR.

The withholding on 401(K) etc is 15% for Cdn residents.

canuck9800 · Post by **canuck9800** » Wed May 31, 2017 1:47 pm

Thanks! So let's see if I have this right -

for Roth IRA / Roth funds in 401(k), there is no (U.S. or Canadian) tax on distribution after 59 1/2, If there is any U.S. tax withheld, it can be recovered by filing a 1040 or 1040NR.

For traditional IRA / pretax funds in 401(k), if the distribution after 59 1/2 is made to a Canadian tax resident (and U.S. tax nonresident alien), the U.S. tax is 15% (which is withheld upon distribution), and the taxpayer will also owe Canadian tax at the marginal tax rate (and may be able to claim the U.S. tax as a foreign tax credit).