401k owner heading back to Canada

nelsona · Post by **nelsona** » Mon Dec 05, 2011 12:47 pm

There is no penalty for 401(k) to Roth transfer. The penalty would come if the Roth was later withdrawn agianst the special rules for Roths funded by 401(K) rather than by contributions

JGCA · Post by **JGCA** » Mon Dec 05, 2011 1:37 pm

If its done trustee to trustee directly, there are no witholdings the taxpayer pays tax at year end filing, when you say tax does this mean only tax or is there also a penalty unless one qualifies for exemption.

nelsona · Post by **nelsona** » Mon Dec 05, 2011 2:07 pm

There is only tax at year-end on a 401(K) to Roth conversion. 401(K) to Roth has NO PENALTY. It does not require an exemption.

The only possible penalty is if you take the money from the Roth, within the next 5 years. Then you need one of the exemptions to avoid penalty.

http://www.irs.gov/taxtopics/tc557.html

"Distributions that you roll over or transfer to another IRA or qualified retirement plan are not subject to this 10% additional tax."

JGCA · Post by **JGCA** » Mon Dec 05, 2011 2:21 pm

I see, this is an avenue for prolonging the 10% penalty especially if you are not exempt and are willing to wait 5 years.

For a person leaving the US for Canada when they convert directly before immigrating to Canada and start taking out money from the Roth which is tax free in US and Canada and assuming 5 yrs have not passed then they too are subject to this 10% penalty or does the treaty overide to have no tax or penalty apply?

nelsona · Post by **nelsona** » Mon Dec 05, 2011 2:32 pm

The Roth continues to be tax-free in both US and canada.

BUT BUT the 10% early withdrawal penalty is still in force for the five years after conversion, just like it is for those living in Canada who withdraw any 401(K) or IRA before 59.5.

Early witdrawal penalties are determined separately from tax determination, especially for Roth.

nelsona · Post by **nelsona** » Mon Dec 05, 2011 2:58 pm

Before 2007 protocol, the only way Cdn had to avoid Full Cdn taxation of their 401(k) when returning to Canada, was to take the money out before leaving, pay the tax and penalty.

Now, since the Roth rules have been cleared up for canada AND the income limits on Roth conversions have been removed, the better alternative is to roll the 401(K) into a Roth, pay the US income tax (no penalty), and then have this Roth available completely tax and penalty free forever.

JGCA · Post by **JGCA** » Mon Dec 05, 2011 3:04 pm

Okay I see the plan works as long as you wait the 5 yrs, thanks Nelsona

moi · Post by **moi** » Wed Dec 07, 2011 12:13 am

Thank you so much for sharing your knowledge.
I am doing trustee to trustee. I'm wondering why they boohoo'd my mention of rolling it into a roth though.

How is the amount of tax I owe with the rollover determined?

JGCA · Post by **JGCA** » Wed Dec 07, 2011 12:35 am

you do the trustee to trustee direct rollover no tax no penalty taken off.

When you file your 1040 next April or before the tax will be determined on your tax return since this amount is going to be income and will go on your return of 2011.

nelsona · Post by **nelsona** » Wed Dec 07, 2011 7:04 am

2 things to realize:

You cannot do the rollover until you quit your job. Your 401(K) is locked while still working for the employer.

You would want to do the rollover in a year when your other US income is low, BUT also before you leave for Canada. So you need to time your quitting, departure and rollover carefully.

You would not want to quit in november and do the rollover, for example, this month, as the rollover incoem would be added to the wagse you made all year. In this case you would wait to do the rollover in january, and then move to Canada.

nelsona · Post by **nelsona** » Wed Dec 07, 2011 10:02 am

.. and if theuy poo-poo the idea of rollowver due to the tax you will now have to pay, remind them that you re moving to canada and will be facing a 40% tax bracket in Canada -- forever.

moi · Post by **moi** » Fri Dec 09, 2011 8:18 pm

Hahaha...yes so true.

moi · Post by **moi** » Tue Dec 20, 2011 7:28 pm

Ok, had my meeting, and they have proposed that I do a split between a traditional and roth iras.
1. If I roll some of the 401k into a Roth, am I able to take it out, without penaltly before 59.5 ? Just want to clear up tax free vs penalty free.
2. When I'm 59.5 and I start to make withdraws on the traditional ira, is it treated like a withdrawal on a rrsp in Canada when I do my tax return ?
3. Or, am I able while living in Canada to file a US return on monies taken out of the IRA?
Thanks.

nelsona · Post by **nelsona** » Tue Dec 20, 2011 9:13 pm

1. Yes. It will be both tax and penalty free as long as you wait 5 years.
2. Yes. It will be taxed 15% in US, and then some more in canada.
3. You can, but there is no point, any tax saved will simply add to the tax you owe in canada.

Did they say why they only want you to only partially fund a Roth?

nelsona · Post by **nelsona** » Tue Dec 20, 2011 11:54 pm

Do make sure you don't d oany of this until AFTER Jan 01, but before you leave to live in Canada.