Canadian with 401K/IRA/Roth IRA in the U.S.

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rogerme
Posts: 30
Joined: Tue Mar 22, 2011 8:23 am

Canadian with 401K/IRA/Roth IRA in the U.S.

Post by rogerme »

Hello,

Based on what I've read in this forum, it seems that a popular recommendation is to convert your 401K/IRA to a Roth IRA before you return to Canada from the U.S.. Correct me if I am wrong, but the reason is that you would be paying a lower tax (U.S. tax) versus Canadian tax if you keep the 401K/IRA and take distributions when you retire.

However, I'm wondering if this still applies if you are currently in the highest tax bracket. For example, if someone makes 150k/year and has 50K in his/her IRA. When he/she returns to Canada and converts to Roth IRA, the 50K will be taxed at the highest marginal tax rate. Whereas if the same person waits until retirement at 65, the IRA will be taxed at a Canadian rate, but albeit at a lower rate due to the fact that he will have no other income.

Furthermore, in the U.S. long term capital gain is taxed at 15%. If you are investing for the long run, is the 15% worth the lack of flexibility (locking in your money until 65?)

To summarize, in the current situation, for a Canadian in the U.S. who is making roughly 100K/year, would the best course of action be:
- Contribute to 401K, convert to Roth IRA before leaving the U.S. for Canada in ~10 years
- Contribute to 401K, withdraw all money before leaving the U.S. (pay 10% penalty and any additional tax)
- Contribute to Roth 401K, when leaving the U.S. for Canada in ~ 10 years, withdraw the Roth and pay the 10% penalty (money is now unrestricted)
- Contribute to normal brokerage account (no tax on gains if i go back to Canada)
- Any other options?

Sorry for the long question and thank you in advance for taking the time to read this!
nelsona
Posts: 18680
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Nothing new in this post.

The question really is, is the marginal rate on Roth (either because of choosing Roth401(k) over 401(k) or converting instaed of waiting to take as pension) really is higher than the marginala rate in Canada when taking the pension.

Remember that you will be making at least 30K of SS/CPP/OAS etc before you take your IRA. This means you will be i n a substantial Cdn/Prov tax bracket at that point.

if you become US GC holder or citizend, the tax-free aspect of your cap gains goes way.

One would want to structure a Roth conversion at the beginning of the year, and then move to canada, resulting in low tax on the Roth conversion.

Even at 100K/yr salary, one can easily lower their marginal rate to the 15% mark by using 401(K). Putting more than this into Roth 401(k) (ie. getting only the 15% saving is probably not useful in teh context of this discussion).
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
rogerme
Posts: 30
Joined: Tue Mar 22, 2011 8:23 am

Post by rogerme »

Thanks Nelsona,

Would you mind elaborating a little on how to bring marginal tax down to 15% on a 100K/yr salary with 401K? Isn't the contribution limit 16K?


Thanks again!
nelsona
Posts: 18680
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

For marrieds, even the standard deduction, your 2 exemptions, plus however many you have for your kids, plus your medical deductions lowers your taxable income to near the 15% rate ($69,000).

So that is the number you should be tracking during the year.

Make 401(k) contributions to lower your taxable income to 69K, any excess should be Roth or Roth401(k). This will mean you are getting 25% deduction on 401(k) contributions. Otherwise you are putting 401(k) contributions at 15% rate, and will likely pay more than this on withdrawal.
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
rogerme
Posts: 30
Joined: Tue Mar 22, 2011 8:23 am

Post by rogerme »

Thanks nelsona
unfortunately, i am single and no kids. So for me, 15% ends at $32550?
nelsona
Posts: 18680
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Yeah, so then take alook at the next taxbracket and be sure you aren't in that one: $83K
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
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