What should I do with my 401(k) before I move back to Canada
Moderator: Mark T Serbinski CA CPA
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lxu20022000
- Posts: 3
- Joined: Tue Jul 08, 2008 12:49 pm
What should I do with my 401(k) before I move back to Canada
I worked in US for 10 years under TN status. Now I planed to move back to Canada. How could I do with my 401(k) to get less tax paid? how much of tax should I expect to pay?
First off, whether you leave it in the current 401(k) plan of roll it into an IRA makes no difference froma future tax point of view. The decision to switch to an IRA should be made based on investment choices or willingness of manager to keep you as a client.
Before leaving US, you have 3 choices:
1. leave as a 401(K)/IRA
2. Collapse
3. Roll into a Roth (after Jan 01, 2009).
1. Leaving as a 401(k) means that when you do withdraw the money, it will be 100% taxable in US, and 100% taxable in canada. The tax you pay in US will be used against your Cdn tax. If you take it out early (before 60), you will most likly be liable for 10% penalty which cannot be used against the Cdn tax.
You would choose this option if you intend to leave your US pension intact until you start collecting it as a pension at retirement.
2. Collapse. If you collapse it before leaving, you would simply pay US tax (the entire amount added to your income for the year) and 10% penalty. The money is now yours, unsheltered.
This would be used by someone witha a small IRA (<$30K) wanting to simplify and close all US ties.
3. Roll over to Roth. With recent changes to treaty, this may have the best merit. Canada will now recognize Roth as tax-free, but only if all contributions were done while US resident (and Cdn non-resident). A roth rollover does mean immediate taxation on the entire amount rolled over, but NO penalty would be charged.
Because there are income limits in any roth rollover, above which you cannot do the recharacterization, This can only be realistically done in 2009 when these limits will be removed. This means staying in US until 2009.
This method is not finalized, since Cdn regs have not been published yet. But this option would be for someone who generally would find Roth better than IRA, which is those who plan to withhdraw the funds while their marginal tax-rate would otherwise still be quite high, or who will not 'need' the yearly pension income from an IRA.
Before leaving US, you have 3 choices:
1. leave as a 401(K)/IRA
2. Collapse
3. Roll into a Roth (after Jan 01, 2009).
1. Leaving as a 401(k) means that when you do withdraw the money, it will be 100% taxable in US, and 100% taxable in canada. The tax you pay in US will be used against your Cdn tax. If you take it out early (before 60), you will most likly be liable for 10% penalty which cannot be used against the Cdn tax.
You would choose this option if you intend to leave your US pension intact until you start collecting it as a pension at retirement.
2. Collapse. If you collapse it before leaving, you would simply pay US tax (the entire amount added to your income for the year) and 10% penalty. The money is now yours, unsheltered.
This would be used by someone witha a small IRA (<$30K) wanting to simplify and close all US ties.
3. Roll over to Roth. With recent changes to treaty, this may have the best merit. Canada will now recognize Roth as tax-free, but only if all contributions were done while US resident (and Cdn non-resident). A roth rollover does mean immediate taxation on the entire amount rolled over, but NO penalty would be charged.
Because there are income limits in any roth rollover, above which you cannot do the recharacterization, This can only be realistically done in 2009 when these limits will be removed. This means staying in US until 2009.
This method is not finalized, since Cdn regs have not been published yet. But this option would be for someone who generally would find Roth better than IRA, which is those who plan to withhdraw the funds while their marginal tax-rate would otherwise still be quite high, or who will not 'need' the yearly pension income from an IRA.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best