Implications of Canadian Contribution in Roth 401k

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johnnyappleseed
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Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed » Fri Sep 04, 2020 10:38 pm

I recently began working in the United States on OPT as a Canadian expat. This being my fifth year on an F1 visa, I am still considered a Canadian resident for tax purposes, but will become a US tax resident starting January 2021. When I began my employment, I initially set up a Roth 401k contribution amount but changed it within a week upon seeing that Canada takes a pretty hardline stance on so-called "Canadian contributions", where the Roth 401k ceases to become a pension as soon as any contributions are made while a Canadian resident (see: https://www.canada.ca/en/revenue-agency ... no-43.html). This document makes it sound like all future contributions, accruals, and earnings on my Roth 401k plan will be taxed in Canada once I move back regardless of whether I make them as a US resident or not, since I cannot file the election to defer taxation once a Canadian contribution has been made. Unfortunately, I learned that my contribution rate change would only reflect after 1-2 pay periods, so it happened that 20% of my end of August pay check went into the Roth 401k (note: another 20% went into the traditional 401k, but it seems that this account will be exempt from taxation).

Per the document, it seems like there is nothing I can do to avoid being taxed on all future contributions and earnings except if I opt to become a US resident for this tax year (which I would rather not to do as it would be cost me a few thousand dollars). Are there any workarounds here aside from becoming a US tax resident? Is immediately withdrawing the contribution enough to say I did not make a contribution for all intents and purposes? Is there some sort of form I can file with the IRS to remove the contribution (though I didn't find any on the website)? Can I just avoid mentioning this one-off contribution when I file the election upon returning to Canada and say my first real contribution began in January 2021? Can I rollover the funds to a Roth IRA prior to becoming a resident of Canada and thus avoid having made a Canadian Contribution in my Roth IRA? Should I just avoid any contributions to the Roth 401k and only use the traditional 401k? Note that I hope to stay in the US for several years before returning to Canada.

nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona » Sat Sep 05, 2020 7:19 am

IRS doesn't get involved in funding or withdrawing these accounts. If you wish to redirect those deposits to your 401(k), you will need to do this through the plan admin, if it is even possible.

Just to review the tax situation for Canada for these accounts:
Your 401(k) contribution is deductible in Canada, you will need to file a form with your Cdn tax return.
Your 401(k) withdrawals, made when you are a Cdn resident, will be fully taxable in US and Canada, with canada giving you credit for US taxes paid.
Your Roth401(K) will be treated like an ordinary account in canada, gains, dividends etc being taxed each year, uless you can reverse this initail contribution.

I would be exploring the notion of declaring Cdn non-residency when you started working, assuming you have no residential ties in canada. Not sure what your situation would be that would cost you more now than if you declare for Jan 2021. If you remain Cdn tax resident, you will need to report and pay tax in Canada on your wages, so you might want to avoid this. This would not impact your tax status in US.
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nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona » Sat Sep 05, 2020 7:20 am

btw, transferring the funds to another Roth later would not remove the stigma of a Cdn contribution.
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johnnyappleseed
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Re: Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed » Sat Sep 05, 2020 2:57 pm

The reason it would cost me more to declare US residency is because I would have to pay FICA tax. In Canada, though, I have tax credits that can be used to offset the extra tax burden. If I intend to stay in the US a lot longer, I figured it would make sense to use those tax credits sooner rather than later to avoid depreciation from inflation. On top of that, I just liquidated my TFSA this year, but I imagine I would now be taxed on any capital gains in the US. And on the Canadian side, I would have to pay a 1% tax for each month a 2020 contribution remained in my account.

Unfortunately, it seems like the Roth 401k contribution is irreversible, even though I had never intended for it be made. If you have further guidance on this I would greatly appreciate it.

johnnyappleseed
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Re: Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed » Sat Sep 05, 2020 4:06 pm

Another issue is that I would not be able to claim my 2020 tuition amount on my Canadian tax return for future carryover if I am not a Canadian resident (though I am not entirely sure about this, perhaps CESB disbursements count as Canadian-sourced income); in the United States, I would not be eligible to claim this tuition amount regardless.

nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona » Sat Sep 05, 2020 9:49 pm

As i said, becoming Cdn non-ressisnt would not immediately impact your US immigration status, so that is not a worry. Besides, you would get back more SS when you retire, so beginning to contribute in 2020 is beneficial to you. But, again, making your residncy end date in canda has no impact on US status or filing.

As to using tuition credits, since you are now earning wages in US, your US tax credit in Canada supersedes your tuition credits, so you can't use these anymore on any event.

Your best bet is to make your work-starting date your departure date, assuming again, that you don't have residential ties in Canada. Ypu don't have to srat non-residncy on Jan 1 or dec 31, your work date makes more sense, as you stopped being a student.
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nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona » Sat Sep 05, 2020 9:50 pm

What's the point of keeping Cdn residsncy just to use tuition tax credits, when you can avoid tax altogether by being non-resident.
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johnnyappleseed
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Re: Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed » Mon Sep 07, 2020 4:27 pm

Reading more into it it seems that I would be forced to use all the tuition tax credit before being able to use foreign tax credit, the latter of which I would not be able to carryover. So it would definitely make sense to classify myself as a US tax-resident to avoid losing this amount in credit. However, I actually don't think I am able to qualify as a US tax resident as I cannot count exempt days from my F-1 visa to satisfy the requirements of the first-year choice election as noted in pub. 519.

nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona » Mon Sep 07, 2020 6:31 pm

Again, if you do not have Cdn residential ties, you can declare yourself non-resident of canada. Period. It has nothing to do with US tax status, particularly since you are now working, not a student.

Your F1 (OPT) status prevents you from counting days, yes. Good! it means you can file 1040NR for one more year, and avoid FICA. Good!

But declaring CDn non-residency doesn't change any of this.

So, what are your ties in Canada, after five years abroad? There is a huge gray area on the foreign residential ties required for F1 status, and the ties required to maintain Cdn tax residency. Most in your situation declare Cdn non-residency after a couple of years on F1, unless they are in US as part of a Cdn study program.
If you were splitting your time between US and Canada, then, I would agree that the fact that you are not yet considered US rax resident would make a difference. But if you are 100% in US, and have no ties in canada, you are a CDn tax non-resident, by any definition, as long as you ACT that way, which means giving up any GST/CCTB etc, which you can easily do based on work starting date.

And just to add another wrinkle: ALL CDns, whether they set foot in US or not are allowed to file a 1040 instead of a 1040NR, if it is tyo their advantage, by treaty. As long as you fulfill all the filing requirements of 1040, reporting world income for the entire year.
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nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona » Mon Sep 07, 2020 6:42 pm

See
https://www.canada.ca/en/revenue-agency ... anada.html
which certainly allows for Cdn students abroad to become non-resident. Do not file NR73 unless asked by CRA.
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johnnyappleseed
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Re: Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed » Mon Sep 07, 2020 6:42 pm

I see, that's great! For some I was under the impression that I was not allowed to be a non-resident of the two countries simultaneously. Thanks for your help.

nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona » Mon Sep 07, 2020 7:33 pm

You are in transition.
A person leaving canada in, say, August, files as departing in August from canada, but still files a 1040NR for the same year, since he has not met SPT. He *can* file 1040 if it is beneficial, but, technically for the period Aug-Dec, he files as non-resident of both countries.
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