As a TN holder, i am wondering which one to choose between making Roth401(K) and 401(K).
How shall I pay tax if i contribute 401K and return to canada years later?
Thank you very much!
Roth401 vs 401
Moderator: Mark T Serbinski CA CPA
Anyone deciding on 401(k) vs./ Roth401(K) -- whether they are inteding to move to canada ro not -- dopes so on the basis of whether they think the "sacrificing" of a tax deduction now is worth the fully tax-free income later.
For most younger workers it is a no-brainer. You are in a low tax bracket, and have 40 years of growth that will come out tax-free, so Roth is the best option -- and that ids for US residents. if you add to the mix the possibility of returning to Canada, which is almost certainly always going to have a higher tax-rate, and where you face the situation of having some US income and some Cdn income, which usually leads to higher tax, then Roth is the way to go even more.
If you are older, and in a highertax bracket, the initial deduction becomes more attractive, since you will not have as much future growth, and you can more accurately estimate your future income and taxation. Even then a blended approach that lowers your income just to the threshhold of the next lower tax bracket would be a good approach.
Remember that whetehr to roth401(K0 or 401(K), your company match always goes to the 401(k), so you will always have a taxable portion left.
For most younger workers it is a no-brainer. You are in a low tax bracket, and have 40 years of growth that will come out tax-free, so Roth is the best option -- and that ids for US residents. if you add to the mix the possibility of returning to Canada, which is almost certainly always going to have a higher tax-rate, and where you face the situation of having some US income and some Cdn income, which usually leads to higher tax, then Roth is the way to go even more.
If you are older, and in a highertax bracket, the initial deduction becomes more attractive, since you will not have as much future growth, and you can more accurately estimate your future income and taxation. Even then a blended approach that lowers your income just to the threshhold of the next lower tax bracket would be a good approach.
Remember that whetehr to roth401(K0 or 401(K), your company match always goes to the 401(k), so you will always have a taxable portion left.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Similar situation as this old post. Canadian citizen and resident in a border town and commute to work in the US. 28 year old professional with annual income of $116,000 USD and foresee this amount being the same or higher for the next 30 years. Place of employment offers an option of 401K or Roth 401K and will match $1 for $1 up to 4% of salary. Is there any reason a Canadian resident in this situation would not take advantage of this “free†money from their employer? What option would be best?
From what I have read on this forum, as of 2009 401K contributions are now deductible on both sides of the border and taxable on both sides upon withdrawal. Roth 401K’s are never taxable in the US, and only the growth is taxable in Canada; but not until it’s withdrawn (provided you complete the annual election to defer the tax on the growth with your T1 General). Does this sound right?
From what I have read on this forum, as of 2009 401K contributions are now deductible on both sides of the border and taxable on both sides upon withdrawal. Roth 401K’s are never taxable in the US, and only the growth is taxable in Canada; but not until it’s withdrawn (provided you complete the annual election to defer the tax on the growth with your T1 General). Does this sound right?
As a Cdn resident, you would NEVER contribute to a Roth or Roth401(k), since it loses its non-taxable state, so that is out. You don't get to shelter even the growth year by year.
A 401(k) on the other hand is deductible in both countries and will be taxed only on withdrawal, as you said, so that would be the way I would go.
A 401(k) on the other hand is deductible in both countries and will be taxed only on withdrawal, as you said, so that would be the way I would go.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Ok thanks Nelsona, 401K it is then.
Based on many of your other posts, I thought you were a big supporter of converting your 401K into a Roth IRA? And what about this article?
http://www.jamiegolombek.com/articledet ... cle_id=815
If they lose their non-taxable status, why would you consider converting to a Roth? I’m guessing I’m misunderstanding something…. My best guess is this only works for contributions that were made BEFORE becoming a Canadian resident?
Based on many of your other posts, I thought you were a big supporter of converting your 401K into a Roth IRA? And what about this article?
http://www.jamiegolombek.com/articledet ... cle_id=815
If they lose their non-taxable status, why would you consider converting to a Roth? I’m guessing I’m misunderstanding something…. My best guess is this only works for contributions that were made BEFORE becoming a Canadian resident?
jamie's article is ANCIENT, long before the 2009 protocol clarified treatment of Roths (his interpretation turned out to be wrong).
I have only encouraged the conversion to Roths BEFORE moving back to Canada, never while living in Canada like you are.
I have only encouraged the conversion to Roths BEFORE moving back to Canada, never while living in Canada like you are.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Ok thanks so much for clarifying. Just to confirm one more thing - if I lived in the US when I made the contributions to a ROTH IRA or ROTH 401K BEFORE moving to Canada, does the account still lose it's non-taxable status in Canada after the move? In other words, would I have to start paying the tax on all future growth annually on the T1 General or can the tax be deferred as per the election Jamie was referring to? Also, if I do have to start paying annual tax, are the original contributions made while living in the US ever taxable in Canada when I withdraw them, or just the annual growth?
I ask because there is a chance I might move to the US for a period of time and then move back to Canada down the road.
I ask because there is a chance I might move to the US for a period of time and then move back to Canada down the road.
Thanks for pointing me in the right direct. I found this archived on CRA's website:
"This means that individuals are exempt from taxation on accrued income and distributions from a Roth IRA, provided that a valid Election is filed, a Canadian Contribution is not made, and distributions would not be taxable in the U.S. if the individual were resident there."
So if I understand this correctly, as long as you file the proper election in the year you arrive to Canada, you will never pay any tax on this account at all, provided you do not make any contributions to the plan after living in Canada. Wow, I assumed you would at least have to pay tax on the growth when you eventually start making withdrawals, but I guess not...
Does that sound right?
"This means that individuals are exempt from taxation on accrued income and distributions from a Roth IRA, provided that a valid Election is filed, a Canadian Contribution is not made, and distributions would not be taxable in the U.S. if the individual were resident there."
So if I understand this correctly, as long as you file the proper election in the year you arrive to Canada, you will never pay any tax on this account at all, provided you do not make any contributions to the plan after living in Canada. Wow, I assumed you would at least have to pay tax on the growth when you eventually start making withdrawals, but I guess not...
Does that sound right?
Ok thanks for confirming.
Currently in Canada and don't have either a 401K or ROTH 401K. US Employer just gave the option of which one I want, so I'm really glad I checked here first. Was only asking about the ROTH 401K because there is a possibility that I will move to the US at some point and then back to Canada down the road.
Based on your advice, I will take the 4% employer match for the 401K as long as I live in Canada. Then if I decide to move to the US, I suppose I could always switch to a ROTH 401K at that point. Then if I move back to Canada I will make sure I file the election in the year I move back.
Tremendous information, thanks so much!!
Currently in Canada and don't have either a 401K or ROTH 401K. US Employer just gave the option of which one I want, so I'm really glad I checked here first. Was only asking about the ROTH 401K because there is a possibility that I will move to the US at some point and then back to Canada down the road.
Based on your advice, I will take the 4% employer match for the 401K as long as I live in Canada. Then if I decide to move to the US, I suppose I could always switch to a ROTH 401K at that point. Then if I move back to Canada I will make sure I file the election in the year I move back.
Tremendous information, thanks so much!!
Yes, I missed that you said "if" you had lived in US previously.
Btw, there is a form that you must fill out with CRA when you declare your 401(k) contributions, in order that your RRSP limit is correctly ascertained. You cannot max out your 401(k) and also max out your RRSP, one reduces the other.
Btw, there is a form that you must fill out with CRA when you declare your 401(k) contributions, in order that your RRSP limit is correctly ascertained. You cannot max out your 401(k) and also max out your RRSP, one reduces the other.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Ok thanks again, I will be mindful of this form when I file.
Now that I'm thinking about this some more, it likely doesn't make sense to make any RRSP contributions while living in Canada and working in the US does it? I assume I wouldn't be able to deduct them on the US side and would have the foreign tax credit for the employment income on the Canadian side, so I wouldn't really need the deduction correct?
I currently rent and will be purchasing a home shortly. I was thinking about contributing $25K to my RRSP and doing the first time home buyers plan to withdraw it all tax free. However, now that I'm thinking this through, I wouldn't really get the benefit of the deduction, would have to pay it back within the 15 years and eventually pay tax on it when I ultimately withdraw the funds in retirement. So would this rally make sense?
I've read that US tax rates are in general less than Canada's, so I suppose the only small benefit of an RRSP contribution on the Canadian side would be the elimination of the higher tax on the differential??
Does this sound about right, or does it make sense to make RRSP contributions in certain situations?
Now that I'm thinking about this some more, it likely doesn't make sense to make any RRSP contributions while living in Canada and working in the US does it? I assume I wouldn't be able to deduct them on the US side and would have the foreign tax credit for the employment income on the Canadian side, so I wouldn't really need the deduction correct?
I currently rent and will be purchasing a home shortly. I was thinking about contributing $25K to my RRSP and doing the first time home buyers plan to withdraw it all tax free. However, now that I'm thinking this through, I wouldn't really get the benefit of the deduction, would have to pay it back within the 15 years and eventually pay tax on it when I ultimately withdraw the funds in retirement. So would this rally make sense?
I've read that US tax rates are in general less than Canada's, so I suppose the only small benefit of an RRSP contribution on the Canadian side would be the elimination of the higher tax on the differential??
Does this sound about right, or does it make sense to make RRSP contributions in certain situations?
You will have to determine whether to top up your RRSP on a year by year basis, after you prepare your tax returns.
Be careful about making a contribution just to HBP, since, as you correctly conclude, you may not get the full benefit of this deduction because of your US tax obligations.
Also, if you ever decide to move across the border, the entire HBP balnce becomes immediately due.
Be careful about making a contribution just to HBP, since, as you correctly conclude, you may not get the full benefit of this deduction because of your US tax obligations.
Also, if you ever decide to move across the border, the entire HBP balnce becomes immediately due.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing