Canadian tax implicatino for "income" from 401K to
Moderator: Mark T Serbinski CA CPA
Canadian tax implicatino for "income" from 401K to
How is the "income" from 401K conversion to Roth IRA treated when filing Canadian tax return? I understand that if 401K is converted in 2010, "income" from the conversion can be taken 50% in 2011 and 50% in 2012. I currently do not have residency status in Canada but if in 2011 or 2012 I establish residency in Canada requiring me to file Canadian tax return, does that mean I would have to declare the 401K conversion amount as income in my Canadian tax return?
First, make sure that you absolutely do NOT nake the conversion as a Cdn resident, this braks any sheltered status of Roth in CRA eyes. The conversion MUST be dome while Cdn non-resident.
As to the tax deferral for one year, I'll follow up later.
As to the tax deferral for one year, I'll follow up later.
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
Just to explain the 2010 Roth conversion rules:
Normally, if you convert an IRA to Roth, the conversion is considered income in the year it is done. Period.
For 2010 ONLY, you can elect to have the ENTIRE conversion be treated as 1/2 in 2011 and 1/2 in 20012. None in 2010. The conversion is considered INCOME in those years.
For 2011 on, again the income is consdired has occuring in that year.
So, for you with youplans, this year seems to make most sense.
From a Cdmn point of view, there are 2 issues: (a) the timing of the Roth conversion, and (b) the inclusion of income on you Cdn return if resident of canada.
(a). No doubt that if you make the conversion before returning to canada, the Roth itself is "protected" from Cdn taxation in future. If you convert while a Cdn resident, then your Roth is taxable year over year in Canada, which is pointless. The 2010 Roth rules do not affecthis. You convert in 2010, before becoming Cdn residnt, your Roth is fine regardless of when the income from that conversion is included on your US return.
(b) Unfortunately, since the income from the conversion would be included on your 2011 US return, it would be taxable in Canada were you living there THE WHOLE YEAR, and same for 2012. Where you to arrive in canada, say, january 2nd 2011, I could see you saying that the income from the 2010 conversion was "earned" on jan 1st without problem, same for 2012. The US tax you would pay would be credited on your Cdn return.
Just a final note. You conversion will take some time: your 401(K) funds need to be realesed to you, you need to fins a broker that will accept your residency issues, and convert your 401(K) to an IRA. then you have to convert to Roth.
You also want to have in place funds to pay the tax on the conversion, as wel las to live on. If you take Roth money within 5 years of conversion you will have penalty on the withdrawal. So you maight consider only converting what you know you wn't need for 5 years and leave a portion the 401(K) or IRA as is to draw from if needed.
Normally, if you convert an IRA to Roth, the conversion is considered income in the year it is done. Period.
For 2010 ONLY, you can elect to have the ENTIRE conversion be treated as 1/2 in 2011 and 1/2 in 20012. None in 2010. The conversion is considered INCOME in those years.
For 2011 on, again the income is consdired has occuring in that year.
So, for you with youplans, this year seems to make most sense.
From a Cdmn point of view, there are 2 issues: (a) the timing of the Roth conversion, and (b) the inclusion of income on you Cdn return if resident of canada.
(a). No doubt that if you make the conversion before returning to canada, the Roth itself is "protected" from Cdn taxation in future. If you convert while a Cdn resident, then your Roth is taxable year over year in Canada, which is pointless. The 2010 Roth rules do not affecthis. You convert in 2010, before becoming Cdn residnt, your Roth is fine regardless of when the income from that conversion is included on your US return.
(b) Unfortunately, since the income from the conversion would be included on your 2011 US return, it would be taxable in Canada were you living there THE WHOLE YEAR, and same for 2012. Where you to arrive in canada, say, january 2nd 2011, I could see you saying that the income from the 2010 conversion was "earned" on jan 1st without problem, same for 2012. The US tax you would pay would be credited on your Cdn return.
Just a final note. You conversion will take some time: your 401(K) funds need to be realesed to you, you need to fins a broker that will accept your residency issues, and convert your 401(K) to an IRA. then you have to convert to Roth.
You also want to have in place funds to pay the tax on the conversion, as wel las to live on. If you take Roth money within 5 years of conversion you will have penalty on the withdrawal. So you maight consider only converting what you know you wn't need for 5 years and leave a portion the 401(K) or IRA as is to draw from if needed.
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
nelsona,
Thanks for clarifying this very confusing topic.
Several other questions if I may:
1. Regarding the comment about doing the conversion before returning to Canada, does this mean I have to physically be in the US until the conversion is complete? For example, what if I left the US to do some traveling or maybe even came back to Canada for a visit, would that be a problem? Would this make the tax shelter situation null and void in terms of CRA?
2. Even while working on TN during the past 12 years, I often visited Canada to see family. So when you talk about arriving in Canada on Jan 2, I presume you are referring to establish residency in Canada and not necessarily coming to Canada for visit. Am I correct in this assumption?
3. If I establish residency in Canada on Jan 2, 2012 and able to claim my US income as being earned on Jan 1, 2012 (and able to get US tax credit), I would still have to declare the 50% of the conversion amount as world income in my Canadian tax – correct? And by doing so I would be paying the higher Canadian tax rate. Is my understanding correct on this matter?
Again thanks.
Thanks for clarifying this very confusing topic.
Several other questions if I may:
1. Regarding the comment about doing the conversion before returning to Canada, does this mean I have to physically be in the US until the conversion is complete? For example, what if I left the US to do some traveling or maybe even came back to Canada for a visit, would that be a problem? Would this make the tax shelter situation null and void in terms of CRA?
2. Even while working on TN during the past 12 years, I often visited Canada to see family. So when you talk about arriving in Canada on Jan 2, I presume you are referring to establish residency in Canada and not necessarily coming to Canada for visit. Am I correct in this assumption?
3. If I establish residency in Canada on Jan 2, 2012 and able to claim my US income as being earned on Jan 1, 2012 (and able to get US tax credit), I would still have to declare the 50% of the conversion amount as world income in my Canadian tax – correct? And by doing so I would be paying the higher Canadian tax rate. Is my understanding correct on this matter?
Again thanks.
1. you need to be a non-resident of canada at the time of the transfer.
2. Yes, establishing residency on Jan 02, and not before. no frequent visits, , no signing lease, no preliminary bringing of belongings, no contacting province for medical coverage, drivers license etc.
3. I think you missed the point. If you established residency on jan 02, 2012, then you would not report the IRA income on your Cdn return. If you establish Cdn residency such that you do not have to report the foreign income, then of course, you don't gat any crdit for theUS tax paid on that income either -- because you don't need it.
If you establish residncy on Jan 02, 2011, while you won't report or get credit for any of the income or tax on your IRA income related to the Roth conversion for 2011, you will need to report -- in 2012 -- the income and get credit for the US tax on the second half of you deferral.
2. Yes, establishing residency on Jan 02, and not before. no frequent visits, , no signing lease, no preliminary bringing of belongings, no contacting province for medical coverage, drivers license etc.
3. I think you missed the point. If you established residency on jan 02, 2012, then you would not report the IRA income on your Cdn return. If you establish Cdn residency such that you do not have to report the foreign income, then of course, you don't gat any crdit for theUS tax paid on that income either -- because you don't need it.
If you establish residncy on Jan 02, 2011, while you won't report or get credit for any of the income or tax on your IRA income related to the Roth conversion for 2011, you will need to report -- in 2012 -- the income and get credit for the US tax on the second half of you deferral.
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
Sorry but I am still confused about #3. If I establish Canadian residency at some point in the year, do I not have to declare ALL income for the ENTIRE year irrespective of when it was earned? That is why I thought IRA income on Jan 1 would have to be declared when I file my Canadian tax at the end of the year even though it would have been earned while not a resident of Canada. Am I missing something?
Non-Cdn Income earned before Cdn residency is NEVER reported on one's Cdn arrival return. Exactly as it is NEVER reported after one's departure date on their departure return.
That is true for any type of income. For instance, if you return to canada this june, you will not report yout US wages, but you will report your severance. If you wait until after you get your severance, you will report neither. That is how Cdn tax residency works.
In this case, sicne the income is administrativel created in a given year, rather than paid out to you on a specific date, choosing jan 01 gives rise to an opportunity to establish residency after reciveing the income.
That is why my first advice when returning to canada is to make sure you collect all income before establishing residency.
That is true for any type of income. For instance, if you return to canada this june, you will not report yout US wages, but you will report your severance. If you wait until after you get your severance, you will report neither. That is how Cdn tax residency works.
In this case, sicne the income is administrativel created in a given year, rather than paid out to you on a specific date, choosing jan 01 gives rise to an opportunity to establish residency after reciveing the income.
That is why my first advice when returning to canada is to make sure you collect all income before establishing residency.
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