UPDATED: Various investments if move back to CAN..

[Skoorb]

UPDATED: OK I've read through the seven pages and I still have a few questions

As I understand it, if I have a 401k and/or a Traditional IRA there is no major issue if I move back to Canada: I pay non-resident taxes on anything withdrawn, and these can be used as a tax credit for CAN taxes. In the meantime they can continue to grow, tax-free, and I can just leave them alone.

Nelson recommended, if there is a high chance of moving back to CAN, to contribute to an IRA over a RothIRA - even if one's income is too high for any contribution deductions - because in the former case it works as above, and in the case of a Roth, all new gains will be taxed (so if a person had a Roth I presume it may be good at that point to just cash it out, unless it can be rolled into an IRA [is it possible to roll a roth into a traditional IRA?]).

So my two remaining questions are
1) what happens to an ESA (education savings account)? The 529 in Alabama is no good, and even if it was another state I'm not sure I'd take that option anyway. By "what happens" I mean what tax implications, but also does an ESA cover Can schools? I guess no, in which case I'd probably just want to cash it out and pay penalties?
2) individual stock/mutual fund account. I'm guessing this is the same as if you had one in Canada; in this case any capital gains would be paid at non-resident US rate, and then a tax credit applied to what Canada wants.

Thanks so much

Matt Brooks

[MaggieA]

Re 529 plans, Matt please note you can sign up to any state's plan. There's no special advantage to enrolling in your own state's plan, other than that most states give a small tax break for contributions by residents. This is the last thing to consider, though. If Alabama's 529 is no good, it might be worth your while to evaluate some other states' 529 offerings.

Re returning to Canada, I think the tax implications are not beautiful. Neither Canada nor the US recognizes each other's education savings plans for special tax treatment. However, 529s typically can be used for attending Canadian universities.

[nelsona]

On Roths, I'm not sure that Roths can be rolled over into IRAs. You might want to pore over the IRS IRA Publication. There would be little advantage for a normal US ciizen/resident to do this, but for one having moved to Canada there would be the avantages I spoke earlier about.

529's are not recognized at all in Canada.

You would noy pay any US cap gains on any non-real estate investments realized after leaving US, as, since you are not a US citizen, you are only beholden for capital gains tax were you live.

THis leads to a very important departing tax strategy available to Cdns. By selling winners just AFTER leaving, tax is avoided in both US and Canada. Conversly, selling losers after leaving US makes you lose out on claiming the losses.

So sell your losers before leaving and your winners after. You shouldn't really keep any MFs or stocks n US when living in Canada.

<i>nelsona non grata</i>

[Skoorb]

Wow, so if I invest $10k and it turns into $100k in 6 months, but I move to Canada and sell it after moving I pay no tax on that $90k? That sounds incredible - I wonder how long that will last? It sounds like a Roth without any contribution limit, but the only thing is to use it you have to move to Canada...

I think the best plan is, until we know with certainty that we'll be in the US for the long haul, to just contribute to 401k/Trad.IRAs ourselves, and open up another separate MF account for our daughter. Then in a few years if I'm sure we'll stay I can look into an ESA or 529 further then.

Thanks, both.

--

A couple of non-country specific questions, if you have the time!

1) Why bother keeping my money in a 401k, if I can roll it into an IRA when I change jobs? Would it be merely to save whatever minimal charge an IRA fund sometimes charges to keep it open? It seems the tax implications are the same, and there's greater flexibility with an IRA. Further, if my employer doesn't match 401k, why contribute to that over an IRA?

2)As I understand it, selling shares for a particular stock or in an MF - if you do it within one year from purchasing those shares - you are taxed on those capital gains according to your current tax rate, but if you sell them after a year then the tax rate on those gains is much less - like half, or less. Is that the case? If it is, how is it differentiated if you buy 100 shares of an MF every year and then one year, down the line, you sell some of them. How can you say that the shares you'er selling are from an original purchase instead of a recent one, since they all enter into the mix of the same MF?

Thanks again, as always

[nelsona]

<i>It sounds like a Roth without any contribution limit, but the only thing is to use it you have to move to Canada...</i>

Yes, I have coined the term "Canadian Roth" to describe this situation.

This loop-hole is not going away. It comes out of Canada's insistence on deemed disposition on departure, and thus deemd aquisition on arrival. And, for non-US citizens, cap gains are always taxed only in the resident country (apart form real-estate and a few other exceptions).

Be careful though, losers are ignored too, so a big cap loss could be lost to you as well.

Once you leave a company, there is little advantage in keeping a 401(k) over an IRA.

<b>But funding a 401(K) is much better than IRA since you can put in $14,000 a year rather than only $4000.</b>

2. NO. as I explained, you would not be liable for capital gains in US. If any as withheld, you would need to file a 1040NR, claiming the treaty benefit to zero tax, and get refund from IRS.

Canada would not grant you a tax credit, since (a) they would not view the gain as foreign, and (b) you would likely have little or no cap gain in Canada on that transaction, thus no foreign income (even if it were considered foreign) to be credited against.

One final note: Remember that this applies to <u>NON-US citizens</u>. If your daughter is born in US, she cannot avail herself of this tax holiday, as US citizens remain taxed in US on cap gains.

<i>nelsona non grata</i>

[Skoorb]

Thanks, Nelson

Re. Trad IRA vs 401k "If you or your spouse do participate in an employer-sponsored plan, your contribution may be fully or partially dedutible depending on your income and tax-filing status" (from vanguard). My wife contributes to a 401k now, and I will be soon. Our income is just out of range of deductibility, so we'd be putting in after-tax money, then although it grows tax free, we'd have to pay taxes on it when we withdraw later in life. Given that I have access to a 401k (even if it's not matched right now), it seems that an IRA is probably not as good an idea as a normal MF account (even if I don't ever leave the US).

Easy question for it: I have $8k in my 401k. I'm gonna move it to an IRA. I presume that's totally separate from the $4k/year contribution, if I did indeed want to contribute to an IRA (so I could end this year with $12k in it).

Re: question 2 I actually meant in regards to if I stayed in the US - ie. taking any US/Canada stuff out of the equation, so really just as such an account pertains to a normal investor.

[nelsona]

Just note that a 401(k) is NOT an employee-sponsored paln. That is referring to a pension plan of some sort, not 401(k).

And everything you put into a 401(k) upto $14K is tax-deductible, without any other limitations.

If any contribution to an IRA is not deductible that amount would be withdrawable tax-free (in both US and Canada).

Looks like I completely misread Q2. I was looking at your origianl Question 2.

In US, as opposed to Canad where all like investments MUST be lumped for basis purposes, one can choose how to report the basi of shares, choosing either 'first-in first-out' (fifo) or lumped, or even cherry picking (ie. selling highest cost first). Just be consistent from sale to sale.

Rollovers do not count towards your yearly limits.

<i>nelsona non grata</i>

[Skoorb]

Thank you, Nelson. I hate to scour your brain so much, so one last clarification, if you could [:I]

<i>If any contribution to an IRA is not deductible that amount would be withdrawable tax-free (in both US and Canada).
</i>We'll say my contributions to a Trad.ira are not deductible. Thus, I'm putting in already-taxed money. It then grows tax free. When I pull it out I pay no tax on it, since I already had. If that is the case, how does an IRA that you can't deduct the contributions to differ from a Roth? Thanks so much, and this really should be it I think!

[nelsona]

<i>how does an IRA that you can't deduct the contributions to differ from a Roth?</i>

Well if you put $10K non-deductible into an IRA and it grows to $100K, only $10K will be non-taxable in US, and thus $10K non-taxable in Canada. it is not quite as you described it. Only the non-deducted contribution can be withdrawn tax-free, not the growth.

If a Roth were to grow like above, $0 would be taxable in US, and only what grew after returning to Canada would be taxable in Canada (but year by year).

So, if you are 100% sure of staying in US, Roth is better than non-deductible IRA.

But if you are going back to Canada, the deduction now is best (410(k), and regular IRA, followed by non-deductible IRA, followed by Roth.

Remember, there are situations where ne cannot Roth



<i>nelsona non grata</i>

[Skoorb]

Thanks, guys!

[nelsona]

The ability to use the "Canadian Roth" is not affected by any potential "expatiation tax", for several reasons:

1. It is not easy to meet the criterion for being presumed to be expatriating for tax purposes, particularly if one returns to their 'home' country.

2. Most importantly, using this part of the treaty does not even require one to expatraite (ie. cease paying US taxes as a Resident). It only requires that you move to canada enough to satisfy the residency tie-breakers (centre of vital interests). You could continue to file a 1040 for that full-year, and decide later to expatriate.

That is why I specified that US citizens could not do this, as that specific paragraph in the treaty (along with a limited few others) can be used by US Green Card holders, but not Citizens.




I just wanted to correct something I had said in your thread (as well as a couple of other places).

A 401(k) IS INDEED an employer-sponsored retiremenbt plan, even if the employer does not match any contributions.

So, either/both spouses contributing to a 401(k) will impact the deductibility of any IRA contribution.



<i>nelsona non grata</i>

[Skoorb]

Hey I was thinking! Let's say, simply, I have a 50% tax rate now and make $100k/year, and will in the future. No withdrawal limits or anything on various plans:

Roth IRA: I pay 50% on the 100k, leaving $50k. I dump it into the roth. In 10 years it's doubled to $100k. I withdraw $100k, tax free.

Trad IRA: I put the $100k, untaxed, in. In 10 years it's doubled to $200k. I pull it out and pay 50% tax, leaving me with $100k, same as with the Roth.

Individual mutual fund: I pay 50% on my 100k and dump $50k into a fund. In 10 years it's worth $100k. I pay 25% on the cap gains (assume I get the long-term discount to put it at that amount), leaving me with $87.5k.

Trad IRA without deductible contributions: I pay 50% on my 100k and dump $50k into the IRA. In 10 years it's worth $100k. I pull it out. The $50k I was not able to deduct originally comes out tax-free, and I then pay 50% (my normal tax bracket) on the remaining $50k. I'm left with $75k.

In this scenario IRA without deductible contributions loses to the individual investment account. The Roth grew tax free, but how did the IRA grow tax free, if indeed I'm still paying taxes on some of what I ended up making as it appreciated? Considering you don't pay taxes on cap gains until you sell (in 10 years in this case), since the taxes on them are not levied on an annual basis, how does a normal investment account not also grow tax-free?

I hate to ask, but I had to[:o)]

[nelsona]

I think it was unfortunate that you picked both a 50% taxrate and a scenario that had a doubling of your investment.

Neither is realistic, and neither is good. A 10 year doubling is only 7%/year return. And nobody I know has a 50% marginal rate, even the high rollers.

And you also have to factor in (a) the fact that you can't just load up a Roth, or IRA, you have to do so incrementally, and there is also the early withdrawl issues.

It is a subject for furthewr analysis, but not by me, here.



<i>nelsona non grata</i>

[Skoorb]

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote"><i>Originally posted by nelsona</i>

I think it was unfortunate that you picked both a 50% taxrate and a scenario that had a doubling of your investment.

Neither is realistic, and neither is good. A 10 year doubling is only 7%/year return. And nobody I know has a 50% marginal rate, even the high rollers.

And you also have to factor in (a) the fact that you can't just load up a Roth, or IRA, you have to do so incrementally, and there is also the early withdrawl issues.

It is a subject for furthewr analysis, but not by me, here.



<i>nelsona non grata</i>
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">I realize it was a bit of a mess of a question. I guess really what I wonder is what, in practical terms, is the diff between growing tax-free and tax-deferred? That's investing 101, but most sites assume people know the real answer. A roth grows tax free. You won't pay taxes on that money's gains. However, if an account suffers cap gains taxes (a tax-deferred account) you'll suffer no tax load until you sell them. Then you pay on the gains. But that sounds a lot like a traditional IRA - don't you pay taxes on a trad IRA on not just the contribution but ALSO on the gains, when you decide to pull it out?