401K advice considering I'll retire in Canada

[OttawaSenators]

Hi all,

My eventual plan is to retire in Canada. My US employer matches my 401K contributions so I don't want to miss out on that. What is your advice in this regards? Also I think I've read somewhere I'm better off not putting it in a Roth 401K if I want to retire and move back to Canada. Is this true?

[nelsona]

You are better off putting it Roth401(k) if your plan has one. The matching will be in a 401(k), nothing you can do about that.

Depending on your tax bracket and state tax, you are "saving" only 15% or 25% tax (plus state taxrate) when you fund your 401(K). You WILL be paying more than this in Canada when you take that and the gains out.

The roth will be taxfree in either country.

I'd be curious to know where you read that rOth was NOT better specifically if moving To canada.

[OttawaSenators]

I think I had got it backwards. From what I read everywhere, one should roll all 401K over to IRA when or after moving back to Canada. Do you agree with that nelsona?

Also this year I am in kind of a tax situation that I might have to go with traditional 401K to reduce my taxable income. But starting next year, I can do Roth as part of the long term plan to retire in Canada. I am assuming I can roll over the traditional 401K into some sort of IRA eventually.

[nelsona]

Rolling a 401(k) to an IRA is simply a choice of investment, it carries no tax benefit.

The decision that has to be made at some point is CONVERTING any 401(K) or IRA into a ROTH, paying the tax then, and making more of your retirement funds tax-free in future.

Think about what you said: a 401(k) obviously reduces taxable income now, but at what rate? 15%? 25%? Its not like an RRSP contribution that was saving your 35-45% tax in Canada.

You have to think about what rate you will pay on that contributed amount AND the growth later.

if you paln on retiring in US, then you try to reduce your tax level to the 15% bracket, so 401(k) makes a lot of sense. But you will never have a 15% tax bracket in Canada.

[brianbbc]

you seem to know more about this than any other poster. after working in us for 20 years, decided to move back to canada. have substantial amount in roth ira, ira, self employed 401k and sep. is it really true(honestly hard to believe when dealing with governements) that when moving back to Canada and withdrawing from roth after age 591/2, i will NEVER be taxed on on the distributions by either the us or canada no matter how much was in there when i left the us?

[nelsona]

Well, you do need to consider US expatriate and estate tax, but by treaty, Roths, since they will not be subject to income tax in US (and thereby Canada) as long as you make no contribution to them after becoming Cdn resident, and you dutifully file the yearly statement with CRA after you go back to Canada.

btw, you only pay early penalty before 59 1/2 in US on Roths if you take out more than you originally contributed. So the likelihood of this is pretty small.

[brianbbc]

so it would really be wise to convert all the iras to roth before i move back even if i pay 28% in tax now? also do you know how canada tax treats distributions from health savings (hsa) accounts that will be made as a resident in canada after age 65? i know the irs treats them as regular distributions at that point if they are not medically related.

[DonMurphyCanada]

Hello, great post. I have been looking into doing something sililar. I have 401ks in the us as my wife does and am wanting to move them up to Canada. One of the things I was looking at was converting them to Roth IRAs but I thought I read somewhere that that wasn't possible because I am living abroad. I could be wrong on that however.

Another thing that you could consider is my financial advisor provided me a document that outlines a process to essentially convert the 401ks to RRSP's (for a 10 percent penalty). Apparently you request a distpursement (your 401k fund withholds the obligatory amount plus 10%) you then reinvest that money in a RRSP. when you file your Canadiain taxes you essential get a credit back for the tax you paid and get it all back or something like that. I probably will not embark on this as I don't want to give up the 10%.

A third path I am going down is all of my funds in the US are with Fidelety. My financial advisor deals with Fidelety as well. He is going to see if there is any way to move the funds from 401k to RRSPs directly through them without paying the penalty.

Anyway probably not helpfull to you but at least your aware of this options.

Don

[nelsona]

You should not convert once you live in Canada. If you aren't in Canada hat is fine.

You pay tax on such a conversion now, but nothing later.

The 401(k) conversion to RRSP is a little more complicated, and requires that you have at least that much cdn income on top of your 401(K) -- and it has to be all of the 401(k), and you have to come up with the extra 30% that waswitheld to fund your RRSP.

I am no longer rcommending this since the rules on Roths have benn clarified.

[MikeRitchie]

Any thoughts on this situation?

Dual citizen
Just moved to US from Canada
Long time horizon until retirement, and can't say where I'll be in those years
High tax bracket today (33% in US last year; might be in the 28% bracket this year; income probably too high for IRA)

I'm thinking traditional 401(k) because of the uncertainty. I defintiely want to take advantage of employer matching.

Also, are there any limits to 401(k) contribution in year of immigration or can I do the full $18,000 this year?

[OttawaSenators]

I got a new question: we know we pay the taxes up front for Roth, so it won't get taxed when we move back to Canada. But what about the gain portion of our Roth funds? Will that be subject to capital gain taxes in Canada?

[nelsona]

Noting ion your Roth is taxable in US if withdrawn properly, and thus is not taxable in Canada, as long as no Cdn contribution is made.

[nelsona]

Mike
It would came down to age. Personally I would be doing 401(k) while in the high tax bracket, but no lower.

But if one is young, (ie 40 or less) I would Roth and get the tax-free growth.

[MikeRitchie]

Is Roth election permanent? I think I'll be in 28% bracket this year and 33% next year, so ideally I would go Roth this year, and traditional next year. I'm in my mid-30s so it really seems like a toss-up at this point.

[nelsona]

What Roth "election"?
You choose how to invest each paystub.

The problem with amassing a large 401(k) when going cack to Canada is you will at that time want to convert all of it to a Roth, and pay taxes that year on it.

Go with Roth, you too you to be building up a high tax 401(k).