401k owner heading back to Canada

moi · Post by **moi** » Sun Nov 20, 2011 1:50 pm

1. Is there an advantage to leaving the 401k here? You did advise to roll it into a rsp. But, I was wondering about a Roth? Would I then be done with the tax end of it in the US? If I did that, does Canada then, ding me again in taxes on that money?
This is too much for me, is there a book out there. HOw does one get all the information they need to make an informed decision?
I tried the financial advisor at my bank, but I think I knew more than she did, and that's not much!!
Thank you.

nelsona · Post by **nelsona** » Sun Nov 20, 2011 3:01 pm

It is NOT advisable to roll into RRSP, as this will be a big tax and penalty hit to you.

The besy is to roll into a Roth IRA, pay the US tax now, and have it free of tax forever forward.

moi · Post by **moi** » Fri Dec 02, 2011 11:09 pm

OK, I've taken 401k out of company my x worked for, and I'm just waiting for it to show up.
Once I roll in into a roth, I pay the tax penality and then I'm done with the US government?
When you say tax free forever, when I am living in Canada, won't I have to report it as income?
Am I understanding it correctly, that after 5 years I can use that money if necessary?
Thank you.

JGCA · Post by **JGCA** » Sat Dec 03, 2011 10:22 am

No once you have fully funded the Roth WHILE A RESIDENT IN THE US and that is the final US liability for teh ROTH.

Then when you come to Canada your Roth is now capitalized for this value which will remain tax free in Canada. Under Art XV111 of teh Canada US treaty as ratified Sept 2007 the ROTH is recognized as an FRA so that you will not be taxed on teh capital once you withdraw it in Canada. The earnings however will be subject to tax in Canada but an election can be made to defer the tax on the earnings until tehy are actually withdrawn from the plan.

nelsona · Post by **nelsona** » Sat Dec 03, 2011 5:08 pm

If you take the money out of 401(k), you pay BOTH tax and penalty. the money is yours of course at that point. This should be done before leaving US, or you have to also report income in Canada.

If you take the 401(k) and ROLl it all into a Roth BEFORE leaving US, you only pay US tax, no penallty, and then the money os forever sheltered from US and Cdn tax.

the earning inside the Roth will NOT be subject to Cdn tax.

JGCA · Post by **JGCA** » Sat Dec 03, 2011 5:27 pm

Basically what I have said , but keep in mind you have to make the election which will protect you from being taxed in Canada on any growth in tthe Roth. It is due by April 30th.

nelsona · Post by **nelsona** » Sat Dec 03, 2011 5:41 pm

Not quite what you said, let's review:

"The earnings however will be subject to tax in Canada but an election can be made to defer the tax on the earnings until tehy are actually withdrawn from the plan."

The election does not "defer' taxation on earnings. it eliminates the altogether.

No back-tracking, eh?

JGCA · Post by **JGCA** » Sun Dec 04, 2011 10:54 am

THe election one has to make one time for all future years is to be filed in letter form attached to ther T-1 ( and I would also send in a copy under seperate cover) saying in part I elect to defer tax on my Roth, the word defer means that as per Art XV111 (7) of the Canada Us treaty to be derfered forever which is the same as non taxable subject to the treaty even when withdrawn from the plan same as US treatment.

Many law firms and CA fims are using the word defer in their standard elections as per the treaty definition, I also use it, it means it will never be taxed .

All I want to do is to point out that the election a one time thing, no longer an annual filing, has to be made on time or you are not going to benefit from this ruling, I felt since you should have addressed this important aspect also, no election by April 30th means no tax savings.

moi · Post by **moi** » Sun Dec 04, 2011 1:26 pm

Thank you so much for the information.
I think I will go set up a meeting, I'll probably be back with more questions.

moi · Post by **moi** » Sun Dec 04, 2011 1:35 pm

I was wondering, is there a limit to how much of the 401k I can roll into a Roth?

nelsona · Post by **nelsona** » Sun Dec 04, 2011 3:01 pm

No. there used to be, but no longer.

JGCA · Post by **JGCA** » Sun Dec 04, 2011 4:10 pm

Nelsona is right, since 2010 there is no restrction on the amount to transfer, the AGI retrictions have been lifted. Do not forget you have a 60 day window to place the 401(k) into your Roth if you are not doing it immediately.

nelsona · Post by **nelsona** » Sun Dec 04, 2011 10:46 pm

You want to make the 401(k) to roth conversion DIRECTLY, so as to avoid any withholding. You would of course get the withholding back at tax taime, but this requires you to come up with the withheld money to fully fund the Roth.

Example: you have $200K 401(K), and you take it out, you will only get $140K (60K will be witheld), you would need to come up with the $60K by other means, becaause if you only deposit $140K in the Roth, you now have penalty for the $60K you did not roll over.

JGCA · Post by **JGCA** » Mon Dec 05, 2011 11:03 am

Nelsona you say that if $200K is taken out of a 401(k) is not trf directly into a Roth then 60K or 30% witholding applies, are you basing this on 20% tax plus 10% early withdraw penalty. If its done trustee to trustee you say no witholding applies does that also mean no penalty applies in a direct conversion vs if its done indirectly the 10% penalty applies. I would imagine if a penalty applies it applies in both cases unless of course the exemptions apply such as over 59.5 yr old and the 5 yr rule. I would like your take on this, thank you.

nelsona · Post by **nelsona** » Mon Dec 05, 2011 12:45 pm

If you do a trustee to trustee transfer from 401(k) to Roth, NO taxes are withheld (any taxes would be the responsibility of the taxpayer). Thus, no penalty will be collected either. This is how IRA to Roth conversins are done all the time.

If you do not do direct transfer, the trustee MUST assume that you are withdrawing the funds, thus will withhold 20% and the 10% penalty.