401K advice considering I'll retire in Canada

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

brianbbc
Posts: 87
Joined: Fri Apr 25, 2014 9:17 pm

Post by brianbbc »

I have just 401k, iras and roth ira, no roth 401k.

I live in texas, no state taxes but i agree i would be taxed 25% on converting the ira's to roth account depending on how much i convert in any given year.

thats the big question: should i stop contributing to my 401k and just do the ira conversions to roth accounts and contribute to the roth ira's while I still work in the US.

at present I am being taxed 25% (if I were to convert to a roth ira). Later, when I retire in canada, take distributions am I being taxed greater than 25%??

According to my estimates, being at retirement age and living in manitoba, AND receiving 50k each (100k total me and wife which is plenty)in distributions from the non-roth 401 each year, my Canadian tax responsibility would be $11,000 or 22%. Does this make sense and if so, the non-roth 401k would be the way to go right now as i would get the 25% deduction and pay 22% later.

Of course if i loved in the us at time of retirement i would be paying only 17% taxes.
brianbbc
Posts: 87
Joined: Fri Apr 25, 2014 9:17 pm

Post by brianbbc »

I have just 401k, iras and roth ira, no roth 401k.

I live in texas, no state taxes but i agree i would be taxed 25% on converting the ira's to roth account depending on how much i convert in any given year.

thats the big question: should i stop contributing to my 401k and just do the ira conversions to roth accounts and contribute to the roth ira's while I still work in the US.

at present I am being taxed 25% (if I were to convert to a roth ira). Later, when I retire in canada, take distributions am I being taxed greater than 25%??

According to my estimates, being at retirement age and living in manitoba, AND receiving 50k each (100k total me and wife which is plenty)in distributions from the non-roth 401 each year, my Canadian tax responsibility would be $11,000 or 22%. Does this make sense and if so, the non-roth 401k would be the way to go right now as i would get the 25% deduction and pay 22% later.

Of course if i loved in the us at time of retirement i would be paying only 17% taxes.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

the problem is that you can contribute 24,000 to your 401(k) (or Roth401(K) if you had one), but you can only contribute $6-7K to a Roth. So i s=don;t view this as an either/or scenario.

If you're older (~55) and already firmly in the 25% bracket (ie couple both working), then I wouldn't be doing Roth401(k) anyways, since you are getting good bang for your 401(k) contribution, and your taxrate will drop soon anyways. Roth only makes sense once you drop to the 15% bracket.

For Cdn taxes, are you including the clawback of your OAS? I don't believe Roth money would count towards your income for that purpose, while 401(k)/IRA withdrawals definitely would. You would just need to be more careful in your withdrawls not to be hit with clawback.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
Posts: 87
Joined: Fri Apr 25, 2014 9:17 pm

Post by brianbbc »

luckily my wife can contribute $18500 to her 401k and I can around $40K because it is a self employed 401k.

your response helps clarify that I should not be performing a roth conversion or contributing to the roth accounts any longer while I still live in texas. apparently with the 401k I am saving 25% now but may only pay 22% in canada when I withdraw it

I agree that roth is not subject to OAS clawback but I think a significant distribution amount (>$71,000) will be for the 401k/ira. I probably won't be taking out that much in any given year but i will watch for it later on when it becomes an issue.

Whats your thought on transferring a 401k into an rrsp once I am in Canada? I know that I will have to pay 15% to the US that year, then add the another 15% to the rrsp. then later I still have to pay taxes when I withdraw it anyways. Assuming that I have the discretionary income to pull it off, is it really worth it? It seems to me that there would be no tax benefit yet some people are recommending it. .
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

I'm not in favour of it. Remember, for this to work you need to have AT LEAST as much taxable Cdn-source income as the 401(k)/IRA that you are bringing up, and that you cannot bring "some" of that particular account. it has to be the whiole thing.

So, if you have a $200K 401(k) that you want to bring, you first need an extra 40-60K lying aroung to cover the withholding, and you must have $150K in Cdn-source income in that year. All for the "privilege" of loading up a taxable account.

The process is only for those who work 3-5 years in US and then are coming back to canada while still working.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
Posts: 87
Joined: Fri Apr 25, 2014 9:17 pm

Post by brianbbc »

thats what I thought.

Here's one last one to pick your brain with that I cannot find any answer for:

I also have a US based health savings account (hsa) worth 50K. My plan is also to leave it and let it grow tax deferred like my 401k. The bank it is in will let me do that as a Canadian resident. At age 65 I will start taking regular distributions that will not be penalized by the irs (ie. early withdrawal for non-medical) .

I know I will have to pay the irs on the distributions similar to the way a 401k distribution works. Since I will be a Canadian resident at the time, can a claim a foreign tax credit like I do with the 401k?

Also, my other concern is I will be getting dividends and capital gains on a yearly basis in that account since it is invested in mutual funds. From the irs, this is not a taxable event as I have not received any distributions and no tax forms will be given to me. How does the CRA view it and should I be concerned about paying them the capitol gains/dividends yearly even though I never really received them a taxable income yet since they are still in the hsa account?

If I do have to claim them and pay yearly for them on the Canadian side, then when I withdrawal amounts after 65 I am effectively getting double taxed on the capitol gains/dividend portion.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

An HSA is NOT an account set up primarily for retirement, so I don't see how CRA would be obligated to accept this as a sheltered account if you lived in canada.

So, it would be only taxable in canada when you don't take withdrawals (gains, interest and dividends) and only taxable in the US when you do take withdrawals, with very little chance that the US tax would be usable as a credit on your Cdn return.

With all this disposable income, I think you would have been far better putting it in low taxable investmenbts, like you home, like tax-managed accounts, to take advantage of the deemed acquisition rules when you went back to canada.

and when you do the compares, remember that you need to look at the MARGINAL rate, not just he overall rate. You might be taxed 22% in manitoba, but on your last dollars -- the US-sourced income -- your marginal tax will be much higher. You should always be looking to take back a pot of untaxable income rather than taxable income.

And even 22% of a pot that is 3 times the size of your contribution, is more than 25% on the original contribution.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
Posts: 87
Joined: Fri Apr 25, 2014 9:17 pm

Post by brianbbc »

I have been fortunate to have this amount of disposable income but if I did not defer it into the retirement accounts, I know my marginal tax rate would have been higher.

I f need further clarification if you don't mind. you said for the hsa "it would be only taxable in canada when you don't take withdrawals (gains, interest and dividends)". what does that exactly mean? I don't see how they can tax you if you do not take any withdrawals.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Higher tna 25%, then you should be doing just enough to get down to the 25 % thresshold, no lower. cap gains are not taxed very high as you know.

HSA: As i said, this is NOT a sheltered account in canada.
So any income your HSA genarates when you live in canada is taxable year by year in canada.

When you being withdrawing it, hardly any of it is taxable in canada (because you've been paying the tax as you go), but it is in US, so you will pay tax in US. So there will be no credit given on your Cdn return.

It is essentially what those who live in califormia face with there RRSP (whre RRSP is not sheltred) . they pay cali tax every year but no Cdn tax. And then when they withdraw RRSP, they pay Cdn tax, but no Cali tax. they are usually encouraged to collapse the RRSP as soon as possible 9and that is witha much lower taxrate than 25 or 22%.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

By the way, there is no reason why you can't have a self-employed Roth 401(k).

the ya re called Solo roth 401(k) an have the same limits as solo 401(K). you could put 18K of your 401(k) in that.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
Posts: 87
Joined: Fri Apr 25, 2014 9:17 pm

Post by brianbbc »

I get what your saying but I've talked to the CRA. They said because it does not generate reported tax information to the irs (and the hsa will not generate any reported forms to the IRS unless some sort of distribution is given to the account holder ie.form 1099-sa) and they do not report any dividends or capital gains ever from that account to the IRS even though it occurs yearly, the cra will not tax a Canadian resident on the yearly income since there is no reporting being done. According to the CRA it is not labeled a tax sheltered account but seems to act like one to me.

for some reason they also said i could qualify for the foreign tax credit on the distributions when i take a larger sum later on.

either situation does no seem to be too bad in the way of handling the hsa and i will keep contributing to it while i am still able as i never paid any taxes on it yet to begin with .
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Wow, that is prety generous of CRA. i hope you have that in writing.

So they will tax it fully at withdrawal, so it is in every aspaect, going to be treated like an IRA. that will be the only way that youwill be allowed foreign tax credit.

Its still just more IRA that you have to deal with later, which is the third beast type of holdings for going back to canada after Roth and unsheltered investments.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
brianbbc
Posts: 87
Joined: Fri Apr 25, 2014 9:17 pm

Post by brianbbc »

believe it or not that what they told me because they treat it like the way the irs treats it. i spent 45 minutes on the phone with the international tax agent who examined the tax treaty. since the irs treats it as "ordinary" income only when i get a distribution (similar to a salary) it qualifies under the tax treat this way and I do get the foreign tax credit up to a certain amount!

They gave me the web site to check and i will look closely later. if it is true , then that is pretty generous.

Thanks for all the help today.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

I guess when I say "generous" I really mean convenient. You will still end up paying hign Cdn tax on an account that should enter Canada tax-free
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

anymore thought to setting up solo Roth 401(k). You live in a no tax state, so this is the time to forego tax deductions now.

If I were advising you on your holdings, knowing you are going back to canada, I would say that you are overinvested in taxable retirement accounts.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Post Reply