Canadian working in USA - 401(k) pretax or roth?

[wolfdale]

I've recently moved to the U.S. and am looking to structure my 401(k) contributions in a way that minimizes pain later down the line if/when I return to Canada.

I've researched this topic across several resources, including these forums, but am still lacking a bit of clarity over the most optimal approach.

Below are the two strategies that seem to minimize the tax impact upon moving back:

Strategy 1: Use Traditional / pre-tax 401(k):
-Invest into pre-tax 401(k)
-Rolled over 401K to Traditional IRA.
-Collapse IRA, Taxable event with taxes and penalty withheld by bank
-Move money into RRSP
-Claim Taxes and early withdrawal penalty as foreign tax. Accountant also claims RRSP withdrawal as liquidation of 401k so that keeps RRSP contribution room unchanged even after depositing the money in the RRSP account.


Strategy 2: Use Roth 401(k)
-invest into Roth 401(k)
-roll entire Roth 401(k) into Roth IRA before leaving USA, after leaving job
-file one-time treaty election when back in Canada, before deadline
-do not touch Roth 401(k) until retirement (or can you withdraw into an RRSP?)


I'm not clear on which is more "painless" -- both options appear as involved as each other... Does one offer more tax benefits than the other?


Also, for HSA, my understanding is that these are not recognized in Canada. I've already maxed out my 2024 contributions -- when I move back, do I just liquidate and take the 20% penalty hit? Or is there a way to convert it to a Canadian investable account where I could claim the 20% penalty as a foreign tax credit?


thanks!

[nelsona]

If you are planning to move back to Canada, use the Roth401(k) as much as possible (remember that any employer matching is put only in the pre-tax portion of your account). The tax savings you may make now with a 401(k) will be far-outweighed by the tax you will pay in Canada when you withdraw it at retirement. Before returning to Canada even look into transferring any pre-tax 401(k) you do have into a Roth (paying the US tax at that time, and never again).

I don't suggest "transferring" a 401(k)/IRA to RRSP unless absolutely forced to (or if your 401(K) is far less than 100K). No real advantage for YOU to doing this. Your Cdn broker of course would love to get their hands on that money. Don't fall for that.

Neither are you required to move your funds out of the 401(k)/Roth401(K) to a different IRA/RothIRA. If you are happy with the employer plan, simply keep it. There are pension-splitting advantages to leaving this.

Your Roth account will NEVER be taxed in either country if done correctly, so the little tax you pay now will be more than compensated by having all the contributions and growth tax-free.

Roths cannot be transferred to an RRSP. This would be considered a straight deposit of funds into RRSP, requiring contribution room.

[nelsona]

Your HSA is a recognized employee benefit account, protected from year-to-year Cdn tax by treaty. Use it over the years in Canada (or right now in US) for non-covered expenses (and there are a LOT now) and it will not be taxed in either or Canada, and will continue to grow tax-free. I do NOT suggest taking the tax and penalty hit on this great account. it is essentially a Roth but with funded with pretax monies!

[wolfdale]

[quote=nelsona post_id=531078 time=1732672714 user_id=30]
If you are planning to move back to Canada, use the Roth401(k) as much as possible (remember that any employer matching is put only in the pre-tax portion of your account). The tax savings you may make now with a 401(k) will be far-outweighed by the tax you will pay in Canada when you withdraw it at retirement. Before returning to Canada even look into transferring any pre-tax 401(k) you do have into a Roth (paying the US tax at that time, and never again).

I don't suggest "transferring" a 401(k)/IRA to RRSP unless absolutely forced to (or if your 401(K) is far less than 100K). No real advantage for YOU to doing this. Your Cdn broker of course would love to get their hands on that money. Don't fall for that.

Neither are you required to move your funds out of the 401(k)/Roth401(K) to a different IRA/RothIRA. If you are happy with the employer plan, simply keep it. There are pension-splitting advantages to leaving this.

Your Roth account will NEVER be taxed in either country if done correctly, so the little tax you pay now will be more than compensated by having all the contributions and growth tax-free.
[/quote]

Understood, thank you.
I see the advantages of the Roth 401(k) being a "set it and forget it"-type situation.
Once the contributions are made, I can just leave it in there and let it grow tax free until retirement, with no need to transfer it to Canada.
However, would I be able to make adjustments to my Roth 401(k) portfolio while in Canada?


[quote=nelsona post_id=531078 time=1732672714 user_id=30]
Roths cannot be transferred to an RRSP. This would be considered a straight deposit of funds into RRSP, requiring contribution room.
[/quote]

Regarding the transferring of a 401(k) into an RRSP, while it's not possible with a Roth 401(k), I presume it's still possible with a pre-tax 401(k) under paragraph 60(j) of the Income Tax Act? (while not affecting RRSP contribution room)

Even though it's possible to transfer the pre-tax 401(k) into an RRSP, am I correct to assume you still feel it's less of a headache to just start off with a Roth 401(k) and let it ride through to retirement?


[quote=nelsona post_id=531079 time=1732721078 user_id=30]
Your HSA is a recognized employee benefit account, protected from year-to-year Cdn tax by treaty. Use it over the years in Canada (or right now in US) for non-covered expenses (and there are a LOT now) and it will not be taxed in either or Canada, and will continue to grow tax-free. I do NOT suggest taking the tax and penalty hit on this great account. it is essentially a Roth but with funded with pretax monies!
[/quote]
While withdrawals aren't taxed by the CRA, my understanding is that the CRA does not recognize it as a tax-sheltered account. Basically, all gains would be taxed normally like any other non-registered foreign investment account, and would require the appropriate CRA reporting for compliance.

Would that mean, if I elect to keep the HSA open upon return to Canada, I'd first need to structure my HSA holdings in a way that minimizes taxable events (essentially just holding cash, which would impose and artificial limit on any further growth), and then draw down on that account sooner rather than later?

[nelsona]

Please don't use "quotes' to annotate your posts: Confuses things, and I know what I wrote.

As I just said HSAs ARE protected by treaty, and are not taxable year-by-year by CRA, to the extent that they are not taxable in US. Article XVIII(7). Use them for qualified medical expenses, and let it grow tax-free. If you have SOLID info on this (Not a phone call to a CRS telephlunkie), let us know. Don't forget many so-called experts think RRSPs are fully taxable in US (most are not).

Your Roth (as all sheltered accounts) is manageable in Canada IF the US firm allows. This is always something that should be determined BEFORE leaving US, and if the firm you are with won't allow it, you should move it elsewhere. There is rarely a need for any sheltered account to not be manageable, be it a 401(k), Roth, IRA, HSA, etc.

The 401(K) to RRSP transfer process is well-known and described in detail in many places. You know how it works. Not necessary, in my opinion. Loved by Cdn financial planners wishing to manage those funds. taking tax-free Roth money to put in a taxable RRSP doesn't make much sense.

A 401(k) is never a "headache". It is fully recognized as a Pension by CRA, and once it is with a firm that allows management, there are many, it simply becomes part of your portfolio. It is simply that if a Roth option for your 401(k) is available (like in your plan), you are paying less tax not that you will save later. IF you are in a very high tax bracket now, you may wish to make pre-tax contributions to save tax now, but realize you will likely be in a high tax bracket when you retire too, and even higher if you were in Canada. Besides, 401(k), as apposed to IRAs and RRSPs, can use the CRA pension-split -- at any age.

[wolfdale]

Apologies on the quoting! Habit from other forums that require it! Terribly sorry!

On the 401(k), understood. You've detailed the nuances well, and I'm inclined to keep it stateside based on some of the information you shared!



For the HSA - honestly, this forum is one of the only resources that suggests it is covered under the treaty, and it stands in stark contrast to guidance from other firms.

Based on your previous notes on this topic, it sounds like your rational for HSA being recognized under the treaty is because you recognize the HSA, broadly, as an employee benefit. However, I'd like to raise a few points to consider:

Broader Eligibility: HSAs aren't exclusively tied to employer-sponsored health plans. Individuals with qualifying HDHPs, even those obtained through the individual market, are eligible to open HSAs. This broader eligibility suggests that HSAs might not solely fit the definition of an "employee benefit."

Government-Provided Tax Shelter: HSAs are primarily a government-provided tax-advantaged account, with eligibility tied to having a qualifying HDHP. This characteristic might differentiate them from traditional employee benefits, which are often more directly tied to employment.

CRA's Stance: The CRA hasn't explicitly recognized HSAs as tax-advantaged accounts. Given their broader eligibility and government-backed nature, it's possible that the CRA might not consider them as employee benefits.


I'm still uncertain about the tax treatment of the HSAs by the CRA, and it doesn't help that they haven't officially ruled on this. Do the points I raise have much merit?

This feels like the confusion I had around FHSA and moving to the US 🥲

Thank you for all your time! And happy thanksgiving if you happen to be celebrating! :)

[nelsona]

All tax-sheltered employer/employee accounts are "provided" by the government, since they are all exist by IRS regulation, so that one is meaningless to me. That's wher 401(k), 403(b), etc come from: the section of IRS codes with "provided" these accounts.

CRA took twenty years to rule on Roths, and then took them to be exactly as described in XVII(7), even though Roths can be created completely separate from any employer sponsored account.

So, no, the points you mention don't sway me, and since you can't seem to point to a website or fact sheet from the "other firms" you mention, I will stick to what I've consistently said here for about 15 years.