401K disbursement

DonMurphyCanada · Post by **DonMurphyCanada** » Sun Mar 02, 2014 12:48 am

I am a Canadian and I married a US citizen about 25 years ago. We lived/worked in California where we both contributed for arguments sake $150000 each in 401Kâ€™s.

We moved back to Canada (I gave up my Greencard she is still a citizen) about 14 years ago and am now wondering about 401K disbursements.

Question 1 -- > If we each withdraw $20,000 a year from our 401K that looks to be about 15% federal tax and about 4% California state tax. Does that sound correct? (assuming were over 59&1/2)

Question 2 --> If we die before 59&1/2, my understanding is the 401K becomes subject to tax and paid to the estate. In this case it would be subject to 28% federal tax and 9.3% California State tax. Does that sound correct?

Thanks!

nelsona · Post by **nelsona** » Sun Mar 02, 2014 7:33 pm

1. Your tax should be 15% in US> period. There would ne no Califormia tax since you do not live in California. Her tax will be determined on her IRS tax return,. again, no Cali tax. The fact you lived in Cali means nothing. You are done with them.

I hope your spouse has only been filing IRS returns and noyt Cali returns since she left.
2. No, the 401(K) can and should be transferred to the surviving spouse. No tax would be due. that would apply in both US and Canada. Again, why are you paying attention to California?

DonMurphyCanada · Post by **DonMurphyCanada** » Sun Mar 02, 2014 9:38 pm

Thanks for the reply. I am not paying taxes now but I am in the planning stages. 15% it is. I understand the answer to question 1 (15%) but in question 2 both spouses die before 59.5. That would mean federal tax is due on $300000 which I believe is 29% isn't it?

What would the US inheritance tax be on that amount? Are there probate fees to budget as well?

Thanks in advance,

Don

[quote="nelsona"]1. Your tax should be 15% in US> period. There would ne no Califormia tax since you do not live in California. Her tax will be determined on her IRS tax return,. again, no Cali tax. The fact you lived in Cali means nothing. You are done with them.

I hope your spouse has only been filing IRS returns and noyt Cali returns since she left.
2. No, the 401(K) can and should be transferred to the surviving spouse. No tax would be due. that would apply in both US and Canada. Again, why are you paying attention to California?[/quote]

DonMurphyCanada · Post by **DonMurphyCanada** » Sun Mar 02, 2014 9:50 pm

Actually married filing separately show 39.5 % tax is owing (2013)http://en.wikipedia.org/wiki/Income_tax ... ted_States

nelsona · Post by **nelsona** » Mon Mar 03, 2014 9:49 am

You missing the point. Cdn residents are taxed a flat 15% by IRS on pension income. Doesn't matter how much.
And if the pension is transferred to spouse at death, it is not taxable in US or Canada at that point. If it is transferred to another, then they will pay tax when they take it, not the decedant.

Death taxes don't work the same in US as Canada.

DonMurphyCanada · Post by **DonMurphyCanada** » Mon Mar 03, 2014 11:07 am

Ahh ok I was not aware of that.

What I am really trying to figure out is what is the tax I will have to pay on the 401K's if I die before 59.5 If US taxes at 15% wouldn't Canada consider that income as that in where I resede. So on the 401K of $150,000 wouldn't I pay:

15% US federal tax to the US government AND

(29% of taxable income over $136,270) + (16.8% on the amount over $150,000 for BC provincial tax ) - (15% US federal tax to the US government)

http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html

nelsona · Post by **nelsona** » Mon Mar 03, 2014 3:30 pm

YEs, you will always pay Cdn tax on any 401(k) disbursement IF it is taxable in US. transfers at death are not taxable in US, so you or your estae will not pay tax at death; your inheritors will, when they take it out.

Are you looking for a particular "angle" on this, because you don't have much option other than to transfer it on death, or sell it to the estate. Selling it to the estate triggers automatic tax in Canada, transfer does not.

Its the Cdn tax you want to delay, so I would be transferring it, first to your spouse, and then to your descendants.

DonMurphyCanada · Post by **DonMurphyCanada** » Fri Mar 07, 2014 2:56 pm

Given the same situation above, is there a way for me to transfer the total amount of 401K to a RRSP? Is this covered in a tax treaty? Would it be subject to 10% penalty? US taxes?

Thanks

nelsona · Post by **nelsona** » Fri Mar 07, 2014 4:04 pm

You can, but why would you want to do that. That means paying all that tax in US now, just for the privilege of putting it into an RRSP and pay tax later in Canada as well.

Yes, it would be subject to 10% penalty.

Just leave it be, let it grow and start withdrawing as a pension at 60.

nelsona · Post by **nelsona** » Fri Mar 07, 2014 4:06 pm

Think of what you are saying: "I'm worried about the taxes that will be incurred on my 401(K) when I die, so I'm going to pretend to die right now (in IRS eyes) and pay all those taxes right now.

DonMurphyCanada · Post by **DonMurphyCanada** » Fri Mar 07, 2014 7:39 pm

The reason why I was asking is because I thought there was some agreement in place to cash the 401K's in in the US and roll them over to a Canadian RRSP with little or no penalty. You've made it pretty clear that that is not the case. Thanks.