Canadian Living+Working in U.S - Contribute to ROTH 401(k) ?

[enos_feedler]

In October I will move to the U.S and work for an employer there under TN visa for roughly 2 or 3 years. The employer offers both 401k and roth version of it. I have been doing some reading on 401k versus roth 401k and I think the roth 401k is better for me. The trouble is I am not sure this is the case when I take into consideration the fact that I will be moving back to Canada (for sure within 10 years) and possibly staying here on a perm basis.

I know there was recent additions (Fifth Protocol) to the US/Canada Tax Treaty which recognizes Roth IRAs as pensions now. Does this mean it is safe for me to sign up for Roth 401k and make contributions while living and working in the US with the expectation that my gains from this capital and the full retirement withdrawal will all remain tax free, even after I go back to Canada? I guess I would be rolling over the roth 401k to a roth IRA before leaving the US and coming back to Canada.

Any advice/feedback would be appreciated. Thanks!

Jeff

[nelsona]

That is my understanding. As long as you only contribute to a Roth while a resident of US, the proceeds will not be taxable as income in either US or Canada (while meeting all other requirements)

This is regardless if you roll it into a Roth IRA or not. A Roth 401(K) is perfectly equivalent. Your decision to roll it over should be made on other factors (investment choices, etc).

[enos_feedler]

Alright, thanks for confirming my thinking. Since we both think this I will take it to be true for now. I guess this leaves me to figure out whether I can be a US resident for tax purposes from october to december this year, or if I will still be a canadian resident for tax purposes and only next year will my US resident status kick in. If my US resident status kicks in this year, my tax bracket will be lower (since I am not making any income in canada right now) and my Roth 401k contribution will be a big win this year.

[nelsona]

If you live and work in US, you are resident there by treaty, which is what matters. You will be filing a departure return for 2008 with a departure date of October.

This will be sufficient, even if you file a 1040NR for 2008.

One problem you might fade is not being able to join the Roth plan fast enough after hiring. Depending on the firm, it can take several weeks to enroll, especially if you have trouble getting your SSN.

The way I decire roth/401(k) is whether your federal marginal tax-rate hits the 25% mark or stays at 15% (ie. ~65K after all deductions). Above this it is probably better to use the deductible 401(k), below this, use roth. So, yes, in a year when you will be making litlle money, royh is slam-dunk choice.

[enos_feedler]

For the sake of correcting this thread, I will clarify some things that are incorrect.

"If you live and work in the US, you are resident there by treaty"

This is not true based on what I have read. I only become a resident there based on a test:

at least 31 days in the current year and over 183 days within the current year and the previous 2 years. At the end of this year I will not pass this test, therefore I am not a resident for tax purposes in the US.

In Canada, the rule is I become a non-resident on the later date of either when I break ties from Canada *or* I become a resident of another country (the US in this case) under the tax treaty.

So based on this, it looks like I will still be a Canadian resident for tax purposes for this entire year, and starting Jan 1 2009 I will be a US resident for tax purposes. For 2008, I will file a Canadian return with world income (and also report the day I left, just for the record). I will file special in the US as a non-resident, reporting only the US income. I will get foreign tax credits in Canada.

Sound about right?

Jeff

[nelsona]

Sorry, but if you have neither house nor spouse in canada, you are resident by treaty the instant you establish a residence in US.

To further correct you -- sorry, clarify for you -- as long as you have sprted canada before making Roth deposits, you won't be taxable in canada on the witdrawals.

to file in Canada as a departing resident, and still report world income after you leave would be wrong, both in prractice and by regulation .


The 'test' which you allude to is also overriden by treaty. This apllies to non-treaty nationals. Besides, one can choose to be treated as US resident with as little as 31 days in one year ... and meeting the test in the next year.

So, you will file as a departing emigrant in canada, and will choose one of three methods of filing in US, as suits your circumstances.

[calicanuck]

All,

Thanks for this new enlightening info! I have always been upset with this past rule about ROTHS as a Canadian in the US thinking about moving back at some point to Canada. Does this new rule only apply to ROTH 401ks (i.e. it is not taxable at all in Canada even when withdrawn if contributed/characterized as a ROTH while in the US before moving back to Canada), or does it also apply to ROTH IRAs? Where can I find more info about this rule change? I did not know until I came across this site.

Also, how are non-deductible IRAs treated when moving back to Canada. i.e. I was not eligible for deductible contribution to IRA (nor a ROTH IRA) in US due to income limits; however, I could still make post-tax contributions to traditional IRAs. At retirement, withdrawls would be taxable on this IRA but only on the earnings since taxes were already paid on the contribution. How will this be considered by Canada if I keep it in the IRA when I move back? Will the contribution (where I already paid US tax) be taxed in Canada when withdrawn? Obviously, if the above rule change applies to ROTH IRA and I could somehow recharacterize this non-deductible traditional IRA, then that sounds like the best situation.

Any thoughts? I love this site!

[nelsona]

The new rules on Roths -- when the take effect -- will apply to both Roth IRAs and Roth 401(k)s.

As to the non-deductible portion of your IRA, this is handled already in the treaty: They are reported as income in canada to the extent they are in US. So, if you have 20K of non-deductible contributions, that amount is not reported in US and not reported in Canada.

Your better solution would be to convert these to Roths next year when the limits on Roths go away.

[calicanuck]

nelsona, thanks for quick reply. Is there a goverenment site or other page where I can find out more detailed info about the 2 changes mentioned:

1) Canada's new treatment rules for us ROTH IRA/401k ROTH
2) New ROTH regulations that will allow for easier conversion from traditional retirement to roth retirement product.

I'd like to read up more detail on (1) and (2) and keep up to date on the changes. Do you have a link to good site on the items above (besides the serbinski site)?

THanks

[nelsona]

The Roth rules have not been drawn up, but the treaty is being amended to treat Roths as pensions, which would bring them under the Pension Article (which means Cdn treatment = US Treatment).

http://www.treas.gov/press/releases/rep ... nada08.pdf


Roth rules will change AFTER 2009, removing the income limits on conversions:

http://www.rothira-advisor.com/roth_ira ... ax_cut.htm