Need advice ?

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
bhand11683
Posts: 11
Joined: Tue Nov 16, 2004 12:46 pm

Need advice ?

Post by bhand11683 »

I have an income of about 100K in US and my company matches 2% of my 401K and I live in Vancouver so I am still filing cdn taxes after US taxes and Foreign tax credit etc.

Just wondering is it worth it for me to join the 401K in the long run assuming I keep paying cdn taxes on my US income for next 3-4 years.



nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

2% isn't that great; what percent do you have to fund to get that.

A good 401(k) usually matched about upto 4% of the first 6% you put in.

You might consider:
(a) only putting the minimum that gets you your match. CRA allows you to (eventually) take out your contribution tax-free. You may have difficulty meshing the US tax and resulting credit when you eventually do take out the money.

(B) asking that your firm contribute to an RRSP instead; many cross-border workers have come to arrangements whereby they 'prove' that they have contributed to theor RRSP and employerr 'matches' an equivalent amount that would have been put in a 401(k).

<i>nelsona non grata</i>
sam
Posts: 2
Joined: Tue Dec 21, 2004 12:56 pm

Post by sam »

Thanks for the reply Nelson

--After one year of employment, the employer will contribute to the pension account two percent (2%) of gross income if the employee contributes four percent (4%) of his/her gross earnings to a deferred compensation plan. Payments will be made bi-weekly --

This is what the 401K plan says, so What I understand is that if I put in 4000 dollars annually, I will get 2000$ (free money) from the employer.

2 Questions

1)CRA allows you to (eventually) take out your contribution tax-free..
Can you explain this please

I thought I will pay cdn tax on 4k contribution in canada now and then pay US tax on 6K when I take out money in US later. Correct me if I am wrong.

2)Is this worth it

Thanks Nelson
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »



As you know, you are entitled to contribute $13,000 to your 401(k), none of which is tax deductible. Your company will put in $2000, regardless of how much more than $4000 you put in.<p>So if you were to put in $4000 a year, and company contributes $2,000, for say 5 years. At that point the plan would be worth, for example $50,000 (I'm an optimist).

If you were to collapse it at this point, you would be on the hook to Canada for $30,000 ($50,000 - $20,000 of your own contrbution for which you did not get a Cdn tax deduction). You would of course also have to pay IRS tax and penalty on such a withdrawal, and mesh the credit into your Cdn tax return.

When you finally withdraw it.

As I said, the $4000 to get 50% insatnt return is probably worth it. Any more than that would depend on how agressively you want to fund your retirement. CRA would reduce your RRSP limit by a fake PA (pension adjustment) for having a 401(k), so you would not be able to max out both.

<i>nelsona non grata</i>
Post Reply