401k gains taxable in Canada?

telly1 · Post by **telly1** » Tue Sep 19, 2006 4:12 pm

I know that 401k deposits (by employee) are taxed as income the year of the deposit but are 401k gains taxable in Canada or are they deferred? How about company matches?

nelsona · Post by **nelsona** » Tue Sep 19, 2006 5:31 pm

If you are a Cdn resident making 401(k) contributions, the contributions are not deductible in canada, but the gains and company matches are sheltered until withdrawal (no paperwork required to defer taxation).

Upon withdrawal, all but the initial contributions -- for which you've already paid Cdn tax -- is taxable in canada. All the withdrawal is taxable in US.

The company match will reduce your RRSP contribution room.

stewak2 · Post by **stewak2** » Wed Sep 20, 2006 1:01 pm

Company match deferred?
Is this new?
I am Canadian resident commuting to work in USA. Before I stopped contributing to a 401K, CCRA reviewed my return and required that I claim the company match as income. (2002 I believe).

nelsona · Post by **nelsona** » Wed Sep 20, 2006 5:23 pm

The company match should not have been considered income.

If it was, this is easily remedied by lumping in with your contributions that were taxed (as the portion that is non-taxable in Canada) when it comes time to withdraw these.

stewak2 · Post by **stewak2** » Wed Sep 20, 2006 10:45 pm

Thanks.
As a matter of interest, did the CCRA change it's position about taxing only the employer match and growth? I seem to recall that at one point CCRA taxed the entire withdrawl, leading to an obvious double taxation situation.
Maybe I need to reconsider contributing to a 401K. The IRS will tax the entire amount at withdrawl (at age 59 1/2 or whatevr) , can I apply a portion of this tax as FTC against the CCRA tax owing on the employer match and growth? Assuming I can the major downside to contributing to a 401K would be reduced RRSP contribution room?
Is that dollar for dollar on employee match or is this considered a pension and the usual 10% of gross salary rule apply?

nelsona · Post by **nelsona** » Thu Sep 21, 2006 6:52 am

The tax-free withdrawal of taxed contributions is not new -- but it only applies to to contributions that were taxed by CRA, not those made while non-resident.

It improves the position of 401(K)'s but still not enough to make them a good bet for Cdn residnts (otherthan the minimum needed to get the match). You still face the prospect of being taxed going in by CRA aand taxed coming out by IRS.

Your PA wil be flat 10% of your salary unless you prove otherwise -- there is a reecent thread by someone on this.

dvornik · Post by **dvornik** » Thu Jan 18, 2007 12:58 pm

could the 401k ROTH be a good option for accepting companies matches and bonuses? Contributions to the Roth 401(k) are made post-tax.

nelsona · Post by **nelsona** » Thu Jan 18, 2007 1:54 pm

If you are ever contemplating returning to Canada, Roth (whether 401() Roths, or regular Roths) are not a good idea.

Canada does not recognize Roth, so you would be required to pay tax on any income that the Roth is generating every year. This removes much of the advantage of a Roth,

No, you are better off, contributing to regular 401(k)'s and IRAs, and getting your tax deduction up-front.

nelsona · Post by **nelsona** » Thu Jan 18, 2007 1:58 pm

... and if you are living in Canada, 401(k) Roth's are not viable, because the matching is still considered 'traditional' 401(K) money, so would remain taxable in US upon withdrawal.

dvornik · Post by **dvornik** » Thu Jan 18, 2007 2:50 pm

Thank you!
Yes, you're right here.
Employer matches will still be made with pretax dollars, and the match will accumulate in a separate account that will be taxed as ordinary income at withdrawal.
I live in Canada and commute to US daily for work. My employee have good matching on 401k contribution plus they put yearly bonuses into 401k. What I was thinking that company contributions will be taxed as well, and I will not need to pay CASH for Canadian taxes.

nelsona · Post by **nelsona** » Thu Jan 18, 2007 3:19 pm

Neither thge company match, nor the 'bonuses' that are put into your regular 401(K) should be taxed in US or Canada, in the year they are made.

I was unanawre that comapnies could fund 401(K) with bonuses. This may be a viable idea, since you are not being taxed going in.

The problem with IRA/401(k) contributions (the one's that you make), is that they are taxed in Canadad goiing in, and taxed in US (and Canada if you were non-resident at time of contribution) coming out. This is not the case with employer matches and 'bonuses', if that is what they are.

You would want to keep meticulaous records of any contributions that you made that CRA taxed.

dvornik · Post by **dvornik** » Thu Jan 18, 2007 9:59 pm

Nelsona, do you have any references to Canadian gov publications that company matches are not taxable in the year they are made? What I can see there are two opinions: one you have to pay tax on all contributions to 401k, and another - you don't.

nelsona · Post by **nelsona** » Fri Jan 19, 2007 8:39 am

I can only point to your W-2, which does not include employer contributions, and the general tax guide, which explicitly states that YOUR 401(k) contributions are to be added to your W-2 wages.

The poster who brought up taxation of his employer match must have passed on some incorrect information to CRA, which ran with it.

dvornik · Post by **dvornik** » Mon Jan 29, 2007 11:19 am

Do you know if filing the Canadian taxes do you have to report 401k account balances every year or not?

nelsona · Post by **nelsona** » Mon Jan 29, 2007 11:37 am

No you do not. I'm unclear as to why IRS wnats to know so many details about RRSPs, but CRA -- to its credit -- does not care about these unimportant details.

YOU, of course, would want to keeep meticulous records of all contributions made by you that were included in your Cdn income, for future use.