401k Pension income splitting

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sjantzi
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401k Pension income splitting

Post by sjantzi » Wed Jun 15, 2016 2:52 pm

While a resident of Canada, are withdraws from a 401k plan considered eligible pension income for income splitting purposes?

nelsona
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Post by nelsona » Wed Jun 15, 2016 3:09 pm

Surprisingly, yes, it is eligible (IRA income is not).

HOWEVER be aware that the US tax that YOU pay in the US cannot be used by your spouse as a credit on their Cdn return, so beware that you are not creating a situation where you are paying tax in US and neither of you are getting credit fot it in Canada, which would certainly defeat the purpose of splitting.

If you are nota USC, I would stick to splitting Cdn pensions. If you are a USC ans spouse is not, because of the same tax mismatch for Cdn source pensions , I would avoid splitting altogether.
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nelsona
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Post by nelsona » Wed Jun 15, 2016 3:17 pm

Just a note of caution: IRA's are specifically mentioned as ineligible, while 401(k)'s are not mentioned, and *could* be considered as the same by CRA -- or not.

CRA does distinguish between 401(k) and IRA's in other respects (most notably the tax deductibility of contributions -- 401(k) are deductible but IRA are not). So it is a pretty safe bet that 401(k) income can be split.

But, for the reasons I mentioned above, you might not want to do this.
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sjantzi
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Post by sjantzi » Wed Jun 15, 2016 3:28 pm

Thank you for the reply! We are both Canadian citizens. Do you know if the 401k is considered a defined contribution pension? I'm curious if I'd have to wait until 65 to take advantage of splitting

nelsona
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Post by nelsona » Wed Jun 15, 2016 3:49 pm

CRA has no age-based conditions for foreign pension splitting. Income that is eligible, is eligible regardless of your age.

Even US social security (the 85% of it which is taxable in canada) is eligible for splitting.

just be aware that the US tax on your 401(k) (which will be the bulk of your overall tax on this income) cannot be split.
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sjantzi
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Post by sjantzi » Wed Jun 15, 2016 3:55 pm

Thank you for the info!

My intention is so balance the amount from the 401k and my and my wifes RRSP so that US taxes would be no more than my Canadian tax. Just need to do the math. Thanks again.

nelsona
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Post by nelsona » Wed Jun 15, 2016 5:05 pm

Not sure how you will be doing that.

You are the only one with US income, you can only include 15% of the 401(k) income YOU report as tax credit (assuming no penalty), the 15% tax on the income your wife reports will not be credited anywhere. That is a big chunk of tax to throw away. You will really need to be careful with the math on this one, unless your two income are otherwise really imbalanced.



RRSP income is not splitable before 65.
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sjantzi
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Post by sjantzi » Thu Mar 02, 2017 2:36 pm

Sorry to revive this, just wanted to make sure I understand. So if i had a $20k disbursement from my 401k I'd pay 15% to the USA ($3k). I then split it with my wife at $10k each. Are you saying I could only use 15% of $10K ($1.5k) and not what I actually paid to the USA ($3k) for the foreign tax credit?

nelsona
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Post by nelsona » Thu Mar 02, 2017 3:14 pm

No. I'm saying that ONLY YOU could use the FULL 15% ($3K) towards your $10K portion, but your wife could NOT USE ANY towards her ($10K portion.

Yes, that is a little different than what I posted last time, I misspoke at that time. Earlier in this thread I had correctly stated that "the US tax on your 401(k) ... cannot be split." Only you get to claim it, but you do get to claim all of it. It then depends if you can use it all. it could result in your US tax being "wasted", if you only report $10K of pension, since it is unlikely that your effective tax rate is 30%.

You might have to run this both ways, but just remember that she can't claim any US tax credit on her return on any of this US pension, because YOU, not her, paid all the tax to IRS.

You might look into scenarios, as you said, where you claim just enough of the pension so that you get to use up all the US tax. And don't forget to check both FTC lines on your Cdn return, the federal one and the one for your province.
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sjantzi
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Post by sjantzi » Thu Mar 02, 2017 3:46 pm

I could still file a USA tax return and claim back any over payment if I owed less than 15% correct?

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Post by nelsona » Thu Mar 02, 2017 3:53 pm

Yes, if it is less than 15% you probably should (but are not required to by CRA). But reduce the US tax you use on your Cdn return accordingly. You do that now, not after you hear from IRS.
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sjantzi
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Post by sjantzi » Thu Mar 02, 2017 3:57 pm

Thank you for the info!

I can start a new thread if necessary but I was wondering if your dealing with ITIN renewals?

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Post by nelsona » Thu Mar 02, 2017 5:58 pm

I don't but there are other people on this forum. That would be a separate thread
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nelsona
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Re: 401k Pension income splitting

Post by nelsona » Thu Feb 07, 2019 1:31 pm

NOTE: Recent experience indicates that CRA does indeed allow the foreign tax to be split when one splits their eligible US pensions). Apparently the tax split does not have to mirror the percentages of pension that ere split, allowing for some flexibility when, even after splitting, the income disparity is large.
Nelsona Non grata. Non pro. Search previous posts. Taking period between now and June off. Will only answer sporadically.

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