I'm planning on leaving the US in the next few months and don't know what to do with my 401K. Should I leave it here (it's been getting a pretty decent return over the last few years), cash it out and dump it into another US investment, cash it out and reinvest in Canada, or ??? Not sure which would have the best outcome (i.e. least taxes, fees, etc). or what the tax implications are for leaving it alone (will I need to pay Canadian income tax on any interest now, and get taxed by the US later when I finally cash it in?)
I'm 31 and have a while until retirement, if that makes any difference.
Thanks.
Leaving US.. what should I do with 401k?
Moderator: Mark T Serbinski CA CPA
Let's entertain this topic.
You have 5 traditioanl options, PLUS a 6th one courtesy the new protocol:
1. Leave as is, and treat as a pension
2. Roll into IRA, and treat as a pension
3. Collapse before leaving.
4. 1 or 2 but start taking income early
5. Collapse after leaving, putting as much as possible into RRSP
the new twist:
6. roll into a Roth.
You have 5 traditioanl options, PLUS a 6th one courtesy the new protocol:
1. Leave as is, and treat as a pension
2. Roll into IRA, and treat as a pension
3. Collapse before leaving.
4. 1 or 2 but start taking income early
5. Collapse after leaving, putting as much as possible into RRSP
the new twist:
6. roll into a Roth.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
1 and 2. If you decide to leave it alone in US, and treat it like a pension that you will draw on when you stop working (after 60). then IRA or 401(K) is really about comfort with the choices and fees you pay now in 401(K) vs. more choices with IRA.
Yje growth will remain tax shelter in both US and Canada until you start taking it out, with a 30% flat tax in US (or less when you file a 1040NR), and the entire amount of the withdrawl included -- and the full US tax eligible for credit -- on your Cdn return.
Yje growth will remain tax shelter in both US and Canada until you start taking it out, with a 30% flat tax in US (or less when you file a 1040NR), and the entire amount of the withdrawl included -- and the full US tax eligible for credit -- on your Cdn return.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
3. If you collapse before leaving, you will report the entire amount on your US return (and state) and pay tax, PLUS 10% penalty.
There will of course be no Cdn consequences, other than the fact that after you move to cabada, any income this money genrates will be subject to Cdn tax
There will of course be no Cdn consequences, other than the fact that after you move to cabada, any income this money genrates will be subject to Cdn tax
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
4. Starting to take the income before 60 subjects you to the 10% penalty in US, and that penalty is not creditable on you Cdn tax. You would report the income on a 1040NR to reduce the US tax, and pay the penalty.
There are some expenses that can reduce or eliminate the tax, like education. medical, and possibly first home, depending on how much you take, and whether it is an IRA or 401(K).
There are some expenses that can reduce or eliminate the tax, like education. medical, and possibly first home, depending on how much you take, and whether it is an IRA or 401(K).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
5. I've discussed this option at length elsewhere.
It works best when over 60 (to avoid penalty) and if you have at least as much income in canada as IRA withdrawal in the year you collapse it.
There is absolutely NO tax saving in this method. It is done to simplify only.
It works best when over 60 (to avoid penalty) and if you have at least as much income in canada as IRA withdrawal in the year you collapse it.
There is absolutely NO tax saving in this method. It is done to simplify only.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
If I chose 1 and left it alone, is it going to be a hassle to maintain the tax free status (i.e. lots of confusing paperwork)?
Although I would prefer to just leave it alone (it's really the only savings I have), I can see myself possibly wanting to pull it out in the next couple of years and use towards buying a house in Canada. In that event, if I understand correctly, I'd be stuck with the 30% withholding in the US and likely additional taxation in Canada, correct?
So to summarize and to make sure I understand correctly... if I'm absolutely positive I won't touch it until age 60, I'm fine with leaving it alone (won't get taxed in Canada or US until withdrawn). When I do withdraw at age 60, I'll pay non-resident taxes in the US, use that tax as a credit on my Canadian return, and pay any extra taxes to Canada.
If there's a chance I would want to use it before then, I should probably pull it out before leaving the US to avoid extra taxation in Canada, then reinvest in Canada or in some other traditional investment (a.k.a. term deposit or something) in the US.
Although I would prefer to just leave it alone (it's really the only savings I have), I can see myself possibly wanting to pull it out in the next couple of years and use towards buying a house in Canada. In that event, if I understand correctly, I'd be stuck with the 30% withholding in the US and likely additional taxation in Canada, correct?
So to summarize and to make sure I understand correctly... if I'm absolutely positive I won't touch it until age 60, I'm fine with leaving it alone (won't get taxed in Canada or US until withdrawn). When I do withdraw at age 60, I'll pay non-resident taxes in the US, use that tax as a credit on my Canadian return, and pay any extra taxes to Canada.
If there's a chance I would want to use it before then, I should probably pull it out before leaving the US to avoid extra taxation in Canada, then reinvest in Canada or in some other traditional investment (a.k.a. term deposit or something) in the US.
before answering your question, let me finish wioth option 6.
6. Roth have the characteristics of being funded with undeducted contributions, grew tax-sheltered and eventually the funds, principal and growth are removed tax-free. Until the new protois in effect. This was not of any use to Cdns returning to Canada, since CRA refused to accept the sheltering provision of the ROTH.
Now they will. Thus the following strategy becomes VERY viable.
Provision has always existed for one to transfer IRA funds to a Roth. This is called a "recharacterization" and -- subjectt osome income limits, allows one to move IRA funds to a Roth, by including the transfer in income in the year it is done. In effect, you pay the tax on the Roth now, and then the Roth becomes tax-free.
So, before leaving US, one could recharacrterize their IRA into Roith and pay tax on the transfer, and one now has a fully recognized Roth, sheltered from tax in both countries, and which will eventaully be withdrawn tax-free.
The advantage over option (3), is that, since this is a recognized transfer, there is no penalty. You simply pay the income tax. The advantage over
option 1 or 2, is that it never gets taxed by Canada -- and is never considered income by canada.
Another advantage is that even if you do withdraw funds from it 'early' before age 60, only a portion of it would be penalized (ie the growth portion) in US (none in Canada), and only after the origianl contribution is removed first.
I see great potential for this option -- as sson as the Cdn rukles are ironed out.
6. Roth have the characteristics of being funded with undeducted contributions, grew tax-sheltered and eventually the funds, principal and growth are removed tax-free. Until the new protois in effect. This was not of any use to Cdns returning to Canada, since CRA refused to accept the sheltering provision of the ROTH.
Now they will. Thus the following strategy becomes VERY viable.
Provision has always existed for one to transfer IRA funds to a Roth. This is called a "recharacterization" and -- subjectt osome income limits, allows one to move IRA funds to a Roth, by including the transfer in income in the year it is done. In effect, you pay the tax on the Roth now, and then the Roth becomes tax-free.
So, before leaving US, one could recharacrterize their IRA into Roith and pay tax on the transfer, and one now has a fully recognized Roth, sheltered from tax in both countries, and which will eventaully be withdrawn tax-free.
The advantage over option (3), is that, since this is a recognized transfer, there is no penalty. You simply pay the income tax. The advantage over
option 1 or 2, is that it never gets taxed by Canada -- and is never considered income by canada.
Another advantage is that even if you do withdraw funds from it 'early' before age 60, only a portion of it would be penalized (ie the growth portion) in US (none in Canada), and only after the origianl contribution is removed first.
I see great potential for this option -- as sson as the Cdn rukles are ironed out.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
To answer your specific question, once in canada there is no special paperwork to defer taxation of the 401(k)/IRA -- there is no equivalent to 8891 etc. You simply report nothing when you take no money, and report the entire withdrawal when you do.
The rest of your post is accurate. I would not, however, be leaving money in a term dedposit for any lenngth of time. This is a guarntee for losing monry over time.
The rest of your post is accurate. I would not, however, be leaving money in a term dedposit for any lenngth of time. This is a guarntee for losing monry over time.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Further to my previous post, here is the source that led me to my understanding that Roth income in Canada will only be deferred.
See page #4, first paragraph under the "Roth IRA" heading:
http://www.ey.com/Global/assets.nsf/Can ... 07No14.pdf
See page #4, first paragraph under the "Roth IRA" heading:
http://www.ey.com/Global/assets.nsf/Can ... 07No14.pdf
eortlund,
Dubious strategy assuming you moved to Canada. This conversion, while perhaps triggering no US tax (must have been a small IRA), was to be reported as income in canada in the year of the conversion, and the Roth income is not sheltered, now or later.
cfn2007,
As the article pointed out, the datils will come. Howevder, since Roth will be recognized as a pension, it should be taxed the same as in US (which is ZERO), except where indicated in the new treaty, whicc is wehn funded after becomeing resident of canada (like eortlund did).
To benefit from Roth, one would need to convert BEFORE leaving.
Dubious strategy assuming you moved to Canada. This conversion, while perhaps triggering no US tax (must have been a small IRA), was to be reported as income in canada in the year of the conversion, and the Roth income is not sheltered, now or later.
cfn2007,
As the article pointed out, the datils will come. Howevder, since Roth will be recognized as a pension, it should be taxed the same as in US (which is ZERO), except where indicated in the new treaty, whicc is wehn funded after becomeing resident of canada (like eortlund did).
To benefit from Roth, one would need to convert BEFORE leaving.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing