I've seen a couple of forums dealing with cashing out 401k's and tax penalties to be paid, bad I know. But what if your company is matching your contributions. My situation is such that we are a young Canadian family living in an expensive US city (San Francisco). So all extra cash is critical at this point, and the future earnings for us look good (sure you never know).
To the point my company will match up to 5% of my salary in contribution plus 1% more even if I don't put in a dime. From my perspective this is about $2700/yr from the company into the 401k if I go all in.
Now I may be missing something major here about whether I can even do this as a Canadian, as well as the tax savings from even contibuting at all. Assuming I'm even partially right I'll be taxed on my contribution if I didn't buy into the 401k (~$2300) already, then if I cash out get taxed on the companies $2700, in addition to penalties (10-20%?). The way I see I would still come out ahead unless my math is way off, sure not as well as if I left it in. If you could set me straight that would be appreciated. I'm a scientist by trade and get a little lost in in's and out's of taxes and finance having had little money until recently. So a simplistic explaination would be helpful.
Benifits of cashing out company matched 401k
Moderator: Mark T Serbinski CA CPA
No one here has ever said that one shouldn't contribute to ones 401(k) AT LEAST up to the matching limit. This is free money. One should join their 401(K) as soon as possible. There is no reason that you can't.
It is the cashing out early, if one is returning to Canada, that is up for debate, if one does not immediately need the money.
But simply cashing out early, even with matching doesn't make much sense.
Using your example: You put in $2000 firm gives you $2400. You save, say $700 in taxes (you live in california). If you then turn around and take it out, you pay back the $700, pay $840 in tax on the company's portion, and then $440 in early withdrawal penalty.
So you do make $900 on your $2000 investment.
But some things to consider: you have now lost the ability to shelter not only that money, but also the other $13,000 that you could have put into your 401(k) for that year.
Since these are to be retirement funds, the one-time $900 you made (which was infact $2400 if you had just left the matching alone) will be dwarfed by the compounding that a more healty yearly contribution could have made.
<i>nelsona non grata... and non pro</i>
It is the cashing out early, if one is returning to Canada, that is up for debate, if one does not immediately need the money.
But simply cashing out early, even with matching doesn't make much sense.
Using your example: You put in $2000 firm gives you $2400. You save, say $700 in taxes (you live in california). If you then turn around and take it out, you pay back the $700, pay $840 in tax on the company's portion, and then $440 in early withdrawal penalty.
So you do make $900 on your $2000 investment.
But some things to consider: you have now lost the ability to shelter not only that money, but also the other $13,000 that you could have put into your 401(k) for that year.
Since these are to be retirement funds, the one-time $900 you made (which was infact $2400 if you had just left the matching alone) will be dwarfed by the compounding that a more healty yearly contribution could have made.
<i>nelsona non grata... and non pro</i>
Thanks Nelson,
I totally see where you are going with this. This year with starting here and all it's not realistic financially to put any money away for retirement. So rather than loss even the $750 on taxes for the $2000 it seems like a nive little way to make a little more on top.
Another question for you,
My wife is still a student in Canada, but is finishing her PhD down here. I assume that makes us connected to Canada for tax purposes this year even though she is on a TD visa. Next year she starts a postdoc in the US (likely by May), but could be funded through a Canadian granting agency (they will give fellowships to pursue research in the US). Will we also be stuck paying Canadian taxes if that occurs even though she'll be on some form of student visa?
Last question, this one on moving rightoffs,
After looking at the Canadian Revenue site it's not clear to me if I qualify for declaring moving expenses since we moved to the US and I am not a student. Confusion over deemed resident and some other reference to residencey status.
Thanks again
I totally see where you are going with this. This year with starting here and all it's not realistic financially to put any money away for retirement. So rather than loss even the $750 on taxes for the $2000 it seems like a nive little way to make a little more on top.
Another question for you,
My wife is still a student in Canada, but is finishing her PhD down here. I assume that makes us connected to Canada for tax purposes this year even though she is on a TD visa. Next year she starts a postdoc in the US (likely by May), but could be funded through a Canadian granting agency (they will give fellowships to pursue research in the US). Will we also be stuck paying Canadian taxes if that occurs even though she'll be on some form of student visa?
Last question, this one on moving rightoffs,
After looking at the Canadian Revenue site it's not clear to me if I qualify for declaring moving expenses since we moved to the US and I am not a student. Confusion over deemed resident and some other reference to residencey status.
Thanks again
Hold on a minute! I f you are taxable in Canada, the above analysis doesn't work at all since you effectively get NO deduction for your 401(k) contribution, since it is not deductible in Canada. You will actaully lose money doing what you propose, because of the Cdn tax.
But, on to your new revelations:
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">My wife is still a student in Canada, but is finishing her PhD down here. I assume that makes us connected to Canada for tax purposes this year even though she is on a TD visa<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
No. You live in US, and have no proimary residential ties in Canada.
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">Will we also be stuck paying Canadian taxes if that occurs even though she'll be on some form of student visa?<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
It is true, that generally, those on student visas don't lose their Cdn tax residency, BUT, if you break the tax residentcy (like you have done now) merely subsequently chganging to a student visa does NOT re-establish tax residency.
On moving expense: Your moviung expenses are deductible in US only, against your US wages.
Trying to make them deductible in Canada will only make ALL your income taxable in Canada, which in your case, is something to avoid.
You both ceased to be Cdn tax residents the day you both moved here. Period. You will file a departure return for Canada next spring, using the "Emigrants" guide.
You will be taxed on any future Cdn-source income like a non-resident. Neither of you is a deemed resident of Canada, which is a very narrowly-defined term.
<i>nelsona non grata... and non pro</i>
But, on to your new revelations:
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">My wife is still a student in Canada, but is finishing her PhD down here. I assume that makes us connected to Canada for tax purposes this year even though she is on a TD visa<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
No. You live in US, and have no proimary residential ties in Canada.
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">Will we also be stuck paying Canadian taxes if that occurs even though she'll be on some form of student visa?<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
It is true, that generally, those on student visas don't lose their Cdn tax residency, BUT, if you break the tax residentcy (like you have done now) merely subsequently chganging to a student visa does NOT re-establish tax residency.
On moving expense: Your moviung expenses are deductible in US only, against your US wages.
Trying to make them deductible in Canada will only make ALL your income taxable in Canada, which in your case, is something to avoid.
You both ceased to be Cdn tax residents the day you both moved here. Period. You will file a departure return for Canada next spring, using the "Emigrants" guide.
You will be taxed on any future Cdn-source income like a non-resident. Neither of you is a deemed resident of Canada, which is a very narrowly-defined term.
<i>nelsona non grata... and non pro</i>