I'm in a situation where I MUST accept an employer contribution ( not match, just contribution ) to either a traditional 401K or ROTH IRA.
I would not be required to contribute anything personally. No possibilty of anything else. I am aware an RRSP contribution would be preferable, but it won't happen with this company. The contribution cannot even be declined.
USC resident in Canada commuting to work in USA.
With 401K - no tax in Canada or US on employer contribution and no tax on income earned within the plan. Offsetting US and Canadian tax on total plan value when funds withdrawn. Sounds good.
With ROTH IRA ? Guessing offsetting USA and Canadian tax on employer contribution , yearly Canadian tax on plan income. US tax on net plan income at withdrawl. Not offset, so bad, double tax on the plan income?
I could, optionally, make own contributions which employer would additonally match.
For a 401K this is clearly bad - loss of offset on own contributions.
For Roth IRA, I would pay tax on both my contribution and employer match to both Canada and US in same tax year, so offset?
But taxation on plan growth would not be offset, in effect doubled?
On the other hand, I receive the match amount itself, which I would not otherwise have received, with useable tax offset.
Comments?
Roth IRA vs 401K for USC, Canadian Resident, again
Moderator: Mark T Serbinski CA CPA
take a look here
nelsona already gave the answer:
http://forums.serbinski.com/viewtopic.php?t=1634
[i]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]
nelsona already gave the answer:
http://forums.serbinski.com/viewtopic.php?t=1634
[i]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]
stewak, only the contributions [u]you [/u]would make to a Roth plan would be considered true 'Roths'. Anything put into the plan by [u]your employer,[/u] be it a contribution or a matching contribution, would be considered like a PENSION fund, with no tax consequences going in (in either canada or US), and fuill taxation in US (and in Canada if still living there) when you withdraw.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
For ROTH IRA, the growth on the employer contributions, is it taxed yearly in Canada? Or deferred to withdrawl along with the contribution itself? I know the growth on own contributions would be taxed yearly in Canada.
Could be an accounting challenge to keep the growth separate in a single plan.
As for CCRA taxing employer contributions - it came up for me during CCRA review of a return. I paid at the time and immediately stopped contributing to 401K (and thus stopped getting employer match). That was some years ago and I did not know at the time that employer match was deferrable.
In fact I did not know it until this year. Even with the employer match deferrable the 401K is a bad deal in my situation as Canadian resident / US citizen, so stopping contributions was the right decision. I had only made one year of contributions and match, so it was not a lot of money, and in any case I'd eventually pay tax on it at withdrawl, so I decided to let it go. I did record it, so I will challenge CCRA attempt to tax it again at withdrawl. Once this new plan starts, and I have to accept 401K or IRA employer contributions, I won't claim them as income and will contest it if CCRA challenges. I don't expect they will though, this must have been a mistake. (Current plan offers only matches, so it;'s not an issue at present)
Could be an accounting challenge to keep the growth separate in a single plan.
As for CCRA taxing employer contributions - it came up for me during CCRA review of a return. I paid at the time and immediately stopped contributing to 401K (and thus stopped getting employer match). That was some years ago and I did not know at the time that employer match was deferrable.
In fact I did not know it until this year. Even with the employer match deferrable the 401K is a bad deal in my situation as Canadian resident / US citizen, so stopping contributions was the right decision. I had only made one year of contributions and match, so it was not a lot of money, and in any case I'd eventually pay tax on it at withdrawl, so I decided to let it go. I did record it, so I will challenge CCRA attempt to tax it again at withdrawl. Once this new plan starts, and I have to accept 401K or IRA employer contributions, I won't claim them as income and will contest it if CCRA challenges. I don't expect they will though, this must have been a mistake. (Current plan offers only matches, so it;'s not an issue at present)
I would be looking at the option that gave me the same tax treatment in US and Canada THIS YEAR first, which would appear to be the Designated Roth benefit, which would be taxable contribution in both US and canada. The principal and growth would then be tax-free in US in the future (simplifying things in US), and just the growth would be taxable in Canada.
The effect then is like any other bonus you would have gotten in canada: taxed when you got it, and its growth taxed if invested. Only difference is in canada, you could have spent your bonus, in this case you have to invest it.
These employer Roth contributions (which are in essence merely deferrals of wages) are new animals. If I were you, since you are saddled with a 401(K) right now that you may never wnat to fund, you might consider converting that into your comapny's roth if you can, paying the US tax on it now, then having only one account to deal with in future. you wouldn't have an yCdn tax to pay on this transfer (except perhaps the growth) since you paid the tax already. Then you would have just a Roth account.
The effect then is like any other bonus you would have gotten in canada: taxed when you got it, and its growth taxed if invested. Only difference is in canada, you could have spent your bonus, in this case you have to invest it.
These employer Roth contributions (which are in essence merely deferrals of wages) are new animals. If I were you, since you are saddled with a 401(K) right now that you may never wnat to fund, you might consider converting that into your comapny's roth if you can, paying the US tax on it now, then having only one account to deal with in future. you wouldn't have an yCdn tax to pay on this transfer (except perhaps the growth) since you paid the tax already. Then you would have just a Roth account.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing