Retirement Accounts – options and cross country recognition for 401 / Roth / etc.
I am a Canadian working in the USA under temporary visas. I have options to contribute to Traditional and Roth 401K plans with my current job.
Questions:
- I understand that when I withdraw from the Tradition 401, I pay taxes on the amount – in whatever country I am in when I redeem them, (either USA or Canada – even though the exemption on purchase helped me avoid USA taxes). Correct?
- What about a ROTH – if I am Canadian for tax purposes when I redeem, does Canada recognize USA Roth income as tax free, (as the USA does)?
- My one thought is that a Roth is better, as long as recognized in Canada as tax free, as I am better off paying low USA taxes now, rather than higher Canadian ones later when I return. A traditional 401 might not even be worth it – as my taxes are lower now. Does this logic make sense?
Thank you very much for your answer, as well as all the accounting help over the last 4 years!
Regards - Jonathan
Retirement Accounts – options and cross country recognitio
Moderator: Mark T Serbinski CA CPA
If you are a Cdn resident when you withdraw IRA and 401(K), the entire withdrawal is taxable in both US (first) and Canada (which will give credit for the US tax).
Roths are treated the same way in both canada and US (since Jan 2009), but ONLY IF all contributions and transfers are made as a US tax resident.
Until 2009, when the rules on Roth treatment in canada were formalized, it was not a good idea to have Roth. But now, especially if you plan to return to Canada, Roth would seem the way to go.
In fact, an important strategy before returning to canad is to ensure that all your retirement funds are rolled into Roths (ie. pre-pay the tax now) and then they will be forever tax-free.
Roths are treated the same way in both canada and US (since Jan 2009), but ONLY IF all contributions and transfers are made as a US tax resident.
Until 2009, when the rules on Roth treatment in canada were formalized, it was not a good idea to have Roth. But now, especially if you plan to return to Canada, Roth would seem the way to go.
In fact, an important strategy before returning to canad is to ensure that all your retirement funds are rolled into Roths (ie. pre-pay the tax now) and then they will be forever tax-free.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Your tax bracket may be lower now, but I don't think that necessarily means it's better to pay tax now rather than defer it.
The majority of people are probably around the 25% tax bracket in the US. Let's say you were around 35% tax in Canada. It might be more worthwhile to wait 20 years and pay 35% tax rather than pay 25% now.
Yes, you may have 10% lower tax right now, but another thing to consider is that if you wait until retirement to withdraw the funds, you might be in a much lower bracket.
Plus, if you wait and take regular payments in retirement, you could potentially get the tax rate down to 15%.
So, perhaps it would still be worthwhile to use a 401k even though your tax rate is lower. Are there any holes in my logic? Anything I missed?
The majority of people are probably around the 25% tax bracket in the US. Let's say you were around 35% tax in Canada. It might be more worthwhile to wait 20 years and pay 35% tax rather than pay 25% now.
Yes, you may have 10% lower tax right now, but another thing to consider is that if you wait until retirement to withdraw the funds, you might be in a much lower bracket.
Plus, if you wait and take regular payments in retirement, you could potentially get the tax rate down to 15%.
So, perhaps it would still be worthwhile to use a 401k even though your tax rate is lower. Are there any holes in my logic? Anything I missed?
Yeah, you may have a lower tax bracket (unlikely), but you will have much more income to report as well. All the Roth/401(k) analyses show that if rate is higher later Roth is better. There is no way that Cdn trax rtae will ever be loer that US rate is today.
Even if you take periodic payments, your tax rate is the same, only the US tax will be less and the Cdn more.
Before, the question was always either take the money and pay tax and penalties, or leave it. Even then, it was a 50-50 decision. Now with Roth, it is clearly tipped in that direction.
And there is planning opportunity, especially for non US citizens or GC's, to make the transfer in a new year. before returning to canada to further reduce tax rate.
Of course it would be better to use the strategy that pre-retirees do, by moving their 401(K) to roth just as they retire, when their bracket lowers (and they move to a no state tax state). But that luxury of timing is not available to those who leave US for Canada.
Even if you take periodic payments, your tax rate is the same, only the US tax will be less and the Cdn more.
Before, the question was always either take the money and pay tax and penalties, or leave it. Even then, it was a 50-50 decision. Now with Roth, it is clearly tipped in that direction.
And there is planning opportunity, especially for non US citizens or GC's, to make the transfer in a new year. before returning to canada to further reduce tax rate.
Of course it would be better to use the strategy that pre-retirees do, by moving their 401(K) to roth just as they retire, when their bracket lowers (and they move to a no state tax state). But that luxury of timing is not available to those who leave US for Canada.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Nelsona - You're making the conventional assumption that the typical retiree leaves work around the typical 65 years and withdraws an amount similar to what they were making while working.
I am aware of a couple people that made really healthy wages while working (>$100k) but retired in their 50's with taxable income in the $30k range (partially from SEPP withdrawals from their IRAs and partially from Canadian dividends and capital gains). When they combine lower marginal rates and Cdn dividend tax credits, they are much better off withdrawing retirement accounts now vs. converting to a Roth while working.
Just throwing this out as an example of the type of person that would not benefit from a Roth conversion before moving to Canada.
I am aware of a couple people that made really healthy wages while working (>$100k) but retired in their 50's with taxable income in the $30k range (partially from SEPP withdrawals from their IRAs and partially from Canadian dividends and capital gains). When they combine lower marginal rates and Cdn dividend tax credits, they are much better off withdrawing retirement accounts now vs. converting to a Roth while working.
Just throwing this out as an example of the type of person that would not benefit from a Roth conversion before moving to Canada.
"they are much better off withdrawing retirement accounts now vs. converting to a Roth while working."
Well, one thing to remember is your friends really had no option as to what to do. Roth was not an option for them.
And SEPP is not really helping them, as their marginal is still higher. Witha Roth, one need not worry about SEPP.
Well, one thing to remember is your friends really had no option as to what to do. Roth was not an option for them.
And SEPP is not really helping them, as their marginal is still higher. Witha Roth, one need not worry about SEPP.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
" There is no way that Cdn trax rtae will ever be loer that US rate is today. "
... unless perhaps you live in California? :)
My tax rate here is 37.3% ... in Canada I was in a lower tax bracket
(of course, my income increased quite a bit moving to California)
But the point is that if I move back to Canada, I will most likely be in a lower tax bracket, which means I think it makes sense for me to keep my money in a 401k.
If someone disagrees with that, please do explain why! :)
... unless perhaps you live in California? :)
My tax rate here is 37.3% ... in Canada I was in a lower tax bracket
(of course, my income increased quite a bit moving to California)
But the point is that if I move back to Canada, I will most likely be in a lower tax bracket, which means I think it makes sense for me to keep my money in a 401k.
If someone disagrees with that, please do explain why! :)
As I said, one would typically want to do this from a state with low/no taxes.
Even so, I'm sure, in the year you leave early, and are not making full salary, some 401(K) money could be moved to Roth -- your taxrate would be nowhere near 37% on say the first 100K.
And, even with high Cali tax rates, I'm quite sure many cali residents still fund a Roth/Roth401(K) rather than IRA/401(k), It's just a more difficult decision.
Remember that here are other advantges of Roths too, such as never requiring disbursements and not counting as income
Even so, I'm sure, in the year you leave early, and are not making full salary, some 401(K) money could be moved to Roth -- your taxrate would be nowhere near 37% on say the first 100K.
And, even with high Cali tax rates, I'm quite sure many cali residents still fund a Roth/Roth401(K) rather than IRA/401(k), It's just a more difficult decision.
Remember that here are other advantges of Roths too, such as never requiring disbursements and not counting as income
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
"Well, one thing to remember is your friends really had no option as to what to do. Roth was not an option for them. And SEPP is not really helping them, as their marginal is still higher. Witha Roth, one need not worry about SEPP."
Hmmm.... Well, yes it's true that the Roth was not an option for them while they were working but I can see many of today's workers (where it is an option) being better off going the 401k/IRA route (at high marginal rates) and withdrawing at lower marginal rates. I think they said much of their tax-deferred savings was at a 31% marginal US federal rate (plus ~5% state tax) and now their marginal rate on SEPP withdrawals is at 25% Canadian/Alberta. So that's an 11% difference!!
Hmmm.... Well, yes it's true that the Roth was not an option for them while they were working but I can see many of today's workers (where it is an option) being better off going the 401k/IRA route (at high marginal rates) and withdrawing at lower marginal rates. I think they said much of their tax-deferred savings was at a 31% marginal US federal rate (plus ~5% state tax) and now their marginal rate on SEPP withdrawals is at 25% Canadian/Alberta. So that's an 11% difference!!
Even high earners (who btw were not allowed Roths anyways) are encourgaed, once they retire, to roll their 401(k) systematically into Roths.
But, yes, all contemporary analyses show that IF yoru marginal rate is higher now than your marginal rate will be later, Riths are not the preferred choice.
You do have to absolutely know that however.
And the 25% marginal is only upto 401K, then it jumps, and then we are also talking clawback once you add OAS,CPP, and SS, so one has to be careful.
But, yes, all contemporary analyses show that IF yoru marginal rate is higher now than your marginal rate will be later, Riths are not the preferred choice.
You do have to absolutely know that however.
And the 25% marginal is only upto 401K, then it jumps, and then we are also talking clawback once you add OAS,CPP, and SS, so one has to be careful.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
One other point, is that at least with a Roth, you always have the option of withdrawing much of the funds tax and penalty free at any time, not just after 59.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best