401K advice considering I'll retire in Canada

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nelsona
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Post by nelsona » Thu May 21, 2015 9:24 am

Oh, and I'd be curious as to the "website" the CRA guy told you about. Sounds more like you got one telephlunkie's opinion top a question he had no clue about.
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brianbbc
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Post by brianbbc » Fri Nov 06, 2015 11:22 am

I am still planning on moving back to canada in a few years. AT present, I have 100k in my taxable at my investment bank here in the US. They will allow me to exchange that amount into Canadian currency (at a very low cost) and still keep it with them, then will allow me to invest in any mutual funds on the TSX with that Canadian dollar. At tax time, they do the exchange conversion (for dividend or capitol gain/loss)and i will get tax forms for the irs in American currency. This seems a very convenient time to convert to Canadian currency due to the drop in the loony, and i still will be able to take advantage by continuing to invest while i still live in the US. what do you think?

nelsona
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Post by nelsona » Fri Nov 06, 2015 11:56 am

Sounds great. What company are you dealing with? It is typically difficult to find.

Be aware however that evne if your firm allows you to buy Cdn mutual funds (they are not sold on the TSX) most Cdn mutial funds are not open to US resident investors in a non-sheltered account (and many are not available even in sheltered accounts).

And these mutual fund or ETF investments will open you up to PFIC reporting rules as well, so be careful.

Investing in currency never makes sense when interrests rates are so low, but certainly if you think the C$ has hit bottom, investing in C-based companies does.
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brianbbc
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Post by brianbbc » Fri Nov 06, 2015 12:28 pm

I got lucky just asking questions. Fidelity will hold the accounts in Canadian currency and provide all recording and documentation for investment and tax purposes. Essentially I can invest in any tsx listed funds, but not directly with TSX, it will still be through Fidelity. Unbelievable that I can be a US resident but hold Canadian currency and invest in it. This way I really take advantage of the drop in the dollar and when I move back the money will already be in Canadian funds. I have not check the specifics of the type of etfs, but fidelity has assured me they have a very wide range to offer, not just canadian funds. Fidelity does all pfic with my tax forms.

Also, I am sure you have heard of "Norberts gambit" or coop exchange houses that offer a low currency exchange rate, but fidelity offers a very low fee without added risk and the exchanges are done immediate without another party involved, really very safe. For example, banks would change me up to $3000 (3%) on 100k, Fidelity chargers 0.5% or $500. the rate improves the more you exchange (500k for only $1500). I hope that helps some people.

I am really doing this not so much to invest in the canaidan market, but take advantage of the present currency rate, which makes sense at this time.

Question: after moving back to Canada, establishing residency and having these accounts in Canadian currency with Fidelity, would it be best just to close the US based accounts and put the money in Canada investment firms or leave it with Fidelity? They allow that if I want although I will be doing a irs tax form each year. The issue is whether it is best to leave it there or/and take advantage of the stepped up cost basis of the investments once I cross into Canada, or simple the fact it is better off to leave it with Fidelity .

nelsona
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Post by nelsona » Fri Nov 06, 2015 1:22 pm

If you are a US citizen, it will depend on how much unrealized gains you have at the time you leave. you may want to spread the gains over time, or wait until they are long-term gains before selling. Transfers of coursewoul not trigger gains.

If you are not a US citizen or GC holder, then you would want to wait to trigger any gains until the year AFTER you leave US, so that there are no US tax considerations at all.

Canada of course will zero out all your gains at the moment you reestablish residency.

On matter of currency, I have no opinion to give other that not believing that one should sit on any currency when interst rates are so low, but rather should invest in comapnies that operate (and have assets) in the currency you want to hold.
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brianbbc
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Post by brianbbc » Wed Nov 11, 2015 11:06 am

Well, I am not a citizen or GC holder. I understand what you mean by canada zeroing all gains (ie entering canada and investment price cost basis is established the day you enter, as if it was never bought before), but does the IRS actually allow me not to pay any taxes on the sale of the funds once I enter canada? It seems they would want their money since I bought the investments while a US resident.

nelsona
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Post by nelsona » Wed Nov 11, 2015 3:13 pm

That is their rules. So hold the US winnners (sell any losers befiore leaving) and these US gains are wiped of the books. Part of the difernce between taxation a by residence and taxation by citizenship.
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brianbbc
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Post by brianbbc » Fri Nov 13, 2015 11:01 am

sounds like a favorable deal. just to clarify, say i bought 10 shares of X stock 3 years ago, and moved back to Canada aug 1 2015 and establish residency, what year would i wait to sell the US based holdings to take advantage of not paying us capitol gains? would it be 2016?

nelsona
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Post by nelsona » Fri Nov 13, 2015 4:55 pm

The key is not having to file in US. If you choose part-year dual status for US in 2015 you could sell as soon as you became foreign resident.
But more likely one files a full year 1040 when departing, this 2016 would be the earliest one should consider selling.
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brianbbc
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Post by brianbbc » Sun Nov 15, 2015 5:53 pm

doing it that way i could really have some tax savings. I have a new query: you previously stated "On matter of currency, I have no opinion to give other that not believing that one should sit on any currency when interst rates are so low, but rather should invest in comapnies that operate (and have assets) in the currency you want to hold".

AS I said, in the short term while I still have a few years to live in the US, I am going to exchange from US to Canadian currency in my taxable account, then invest the Canadian currency through US based fidelity and purchase a comfortable asset allocation of etfs on the TSX. This way I can take advantage of the drop in the loony and have the money in Canadian dollar when I finally decide to move back to Canada.

The question now is I am thinking of also doing the same with my Roth, and 401, that is exchanging the currency and re-investing it in Canadian based effs (not specifically Canadian companies but well diversified portfolio). then when I finally start to withdraw it age age 591/2, it will already be sitting in Canadian funds. Is that a good idea and what you meant with your above comment?

nelsona
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Post by nelsona » Sun Nov 15, 2015 11:24 pm

Are you currently a contributor to your 401(k)? Typically your fund manager limits what you can invest in. Doesn't yours?

As to what "currency" to invest, your decision to invest in Cdn would be based on your belief that the C$ will improve in the short or medium term.
Eventually once would have to conclude that cyclically, the US$ would then recover and return C$ to its historic values, pretty much where it is now.
A currency play doesn't work forever. Think of those holding Cdn 3 years ago.
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brianbbc
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Post by brianbbc » Tue Nov 17, 2015 9:41 pm

I no longer contribute to my 401k because by the time I retire it will be close to 900k and I do not want too high of a tax burden later in life while living in Canada, i have transferred all the funds to vanguard where i control hem all now.

And yes I do want to take advantage of the poor Canadian dollar since i will be spending all the funds in Canada eventually. at present, they can stay and grow the just in Canadian currency instead of US dollars.

My point would be that if I exchange it now I could get aroung $1.33 Canadian per $1.00 of US, compared to 3 years ago when it would be on par, I would not have wanted to exchange then . It seems a 33% increase would be smart at this time. as eventually oil prices would increase, the Canadian dollar strengthen and the exchange rate not so favorable later on when i do exchange from US currency. Am I missing something?

nelsona
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Post by nelsona » Tue Nov 17, 2015 10:44 pm

Yes, you are missing that historically the C$ is never at par, so wjhile you might want to "win back" some of the losses C$ has suffered, its historical value is exactlt where it is right now.

In any event, being invested, whether in C-funds, US-funds, or E-funds, is always better that holding cash in any denomination in the long run.

I've never heard of a firm allowing their employees to move funds out of their 401(K) while still employed. Interesting.
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nelsona
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Post by nelsona » Tue Nov 17, 2015 10:46 pm

shouldn't you be rothing at this point, if you are no longer interested in tax deductions?
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MikeRitchie
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Post by MikeRitchie » Fri Nov 20, 2015 6:10 pm

I'd like to follow up on my question from a few months ago:

Dual citizen living/working in US now
Relatively young (mid 30s)
Income near the 28%-33% tax bracket cut off
May return to Canada at some point; I'd say >50% likelihood, but not certain

Nelsona had suggested Roth 401k, but my employer doesn't offer, so I've been contributing enough to traditional 401k to max employer contributions.

I think income will be too high for Roth IRA. Any suggestions for alternatives? I have read something about a backdoor Roth IRA (where you contribute to traditional IRA, convert to 401k, then convert to Roth IRA). Thoughts on that?

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