After-tax 401(k) (not pre-tax or roth)

[Sthornington]

Hi all,

Here's the situation:

36, Canadian, living in the US now for the last two years, intend to stay here for another two at least, possibly another five.
100k in RRSP, 36k in a pre-tax regular 401(k)

I just heard about "after-tax 401(k)" contributions, where I could contribute an additional 50k - (17k contribution + 7750 matching) = 25k to my 401(k). It would be after-tax, and it wouldn't be a deduction, and it would get taxed on retirement, but it would grow tax-free in the mean time, much like how I understand TFSAs operate.

Are there any particular tax implications for this as a Canadian, or can I, if my employer allows, stuff this thing to the gills while I am here? If my employer does not allow it, what are my other options vis a vis IRAs?

Thanks,

Simon.

[Sthornington]

Also, I assume this but haven't checked -- I opened a TFSA in Canada as soon as they were created. I presume this has been growing in "potential contribution room" but I haven't actually funded it.

a) I should not fund it now, while I am a US tax resident?
b) will it have been growing in potentiality while I am here?
c) as soon as I return to Canada, can/should I max it out?

[nelsona]

First on your TFSa: you need to close it for 2 reasons: 1. the growth in it while in US is NOT tax-free you need to report the income. 2. It is considered a trust, and all the items in it areconsidered foreign investments, which has ALL KINDS of reporting issues, on top of the income tax.

Close it. You will be allowed to put back the sameammount you take out if you ever go back to Canada.

Contribution room however is NOT growing while in US. Obnly Cdn residents get the new room every tax year.

Now, to your Roth401(k). Your employer allows you to contribute the annual limit to your 401(k) or Roth401(k) or a combination, but not more than the yearly max. The company matching (which is quite generous for your company -- you may have over estimated it) always goes into the regular 401(k) portion.

Your 401(k) will be taxable in US, and in canada if you withdraw it while there, while your Roth401(k) will never be taxable in either country.

So the question becomes: do I forego the tax break now, for the benefit of no taxation later. If your intention is to go to canada, then the answer is probably 'yes'. Which means you should (a) be funding the max to your Roth401(k), and (b), just after leaving, (and before you go back to canada), move all your 401(K) to the Roth as well, paying US tax then, and having it tax-free forever thereafter.


My determining factor would also include my current marginal taxrate. If you are married and can lower your marginal rate to the 15% mark, then anything above this should be Rothed.


You can also, if your income is low enough, fund a $5000/year Roth on the side.

I trust you are in compliance with your RRSP reporting to IRS.

[Sthornington]

I'm single and in quite a high tax bracket, relatively. I would have to check, but I think it's around 45% for federal + state + nyc.

I still think before returning to Canada, it would be worth rolling everything into a Roth IRA -- if I have some flexibility over when I move, would it be possible to make this the only taxable action I take in a year (ie: somehow quit my job in December, move to Canada at the end of January, rollover in January) so that my taxable income for 2016 say is only the income for the traditional 401(k) withdrawal?

Re: TFSA, there's nothing in it, no cash, no nothing -- I opened it, but never used it.

Simon.

[nelsona]

Then I would at least look at using the regular 401(K) to bring you to the next lower tax bracket (if you are close to it), and then Roth the rest.

Your analysis of doing the final conversion in January is bang-on.

Close the TFSA, Even an empty foreign trust needs to be reported to IRS -- headache.