Convert 401k to a ROTH IRA

dowager · Post by **dowager** » Fri Jun 18, 2010 1:02 pm

Hi Nelsona,

I am leaving US in August, and as advised think it is probably best to convert my 401k to a Roth IRA. I read on this forum that we can defer the tax to 50% in 2011 and 50% in 2012.... My question is this, as a NR in 2011 and 2012, what tax rate would be applied to the income (it will be my only income in the US in those years). As a NR, I think I get a 3700 personal exemption as well? Are NR allowed to make this deferment?
I will have to file MFS since my spouse is a NR?

I think I have to include this as worldwide income in 2011 and 2012 with Canada, and take a foreign tax credit?

Thanks so much for the help.

nelsona · Post by **nelsona** » Fri Jun 18, 2010 5:20 pm

If you do the conversion before leaving US, none of it is reportable in canada. You MUST make the conersion before leaving.

For 2011, and or 2012, you will include 1/2 the income on a return. You will be able to choose, as all Cdns can, whether to file a 1040NR on this income only, or a 1040 reporting world income, which ever gives you a better rate on that conversion income. Since the 1040NR would be a flat 20%, I'm sure it will be worthwhile to use 1040 MFJ (ie as if you were a US citizen living in Canada) and use all the credits and deductions available to you.

You will not have to report the deferred income in canada. This deferral is a purely IRS rule which does not make the income reportable in canada. It would have been triggered while US resident.

I don;t think it makes much difference, but what amount are we talking here.

dowager · Post by **dowager** » Fri Jun 18, 2010 9:41 pm

We are talking about 401k of $25K. And my income this year in US is high, about $150K before this 401k amount. And of course, another 35K income in Canada. Not sure if it is better for me to file it all in this year as a resident? or file as NR in 2011 and 2012.

In addition, how come I am allowed to file as resident in 2011 and 2012 when I am no longer living in the US? Thanks.

dowager · Post by **dowager** » Fri Jun 18, 2010 9:42 pm

Oh, I forgot to mention that I am not a US citizen. I am a Canadian citizen moving back to Canada in 2010.

nelsona · Post by **nelsona** » Sat Jun 19, 2010 7:10 am

All Cdns, by treaty, can file the same as a US citizen would.

i know you are not a usc, that is why as said you could file "as if" you were a resident.

dowager · Post by **dowager** » Sat Jun 19, 2010 10:17 pm

Okay, let me get this straight. I can file as resident in US for 2011 although I am not in the country at all for the entire year? I can also file as Canadian resident for the entire 2011. Can you be a resident in both countries?

Is it better to pay the tax as resident in 2010, or to pay NR in 2011 and 2012. Thanks.

nelsona · Post by **nelsona** » Sun Jun 20, 2010 10:29 am

Yes. You are going to be a Cdn resident. but as a Cdn resident, you are allowed to file a 1040 like a US citizen. US citizens in canada file exactly that way.

I'm pretty sure that your roth concervion tax will be lower in the next 2 years, especially as this will be the only income you will pay US tax on -- on a 1040. You said you were already high income for 2010, which is all taxable in US.

Its the perfect situation for you.