Contributing to both RRSP and 401(k) in the same year

rugby style · Post by **rugby style** » Mon Oct 24, 2011 7:35 pm

I moved to the US last month on an H1-B visa. Prior to moving, I put ~$25k into an RRSP to offset my Canadian income of ~50k.

I'll have 3 months of income this year in the US, totally $54k. I plan on claiming departure from Canada on my tax return when filing my taxes in April 2012, filing an NR-73 if required.

My question relates to impact of the CAD/US tax treaty on retirement saving decisions. I'm financially able to contribute the full $16500 limit to a 401(k) this year by contributing $5500/month for the months of October, November, and December.

In my simple tax-world view, this seems like a good plan: I've contributed a bunch to my RRSP to offset this year's Canadian income, and I'll contribute a bunch to my 401(k) now that I'm in the US to offset my US income. My question is, am I missing something? Can I contribute to both RRSPs and 401(k)s during my transition year?

Thanks in advance for the help!

JGCA · Post by **JGCA** » Mon Oct 24, 2011 8:04 pm

Filing a departure return in Canada and claiming the RRSP is based on limitations of the prior yrs cont room so this can be claimed on your CND tax return as a deduction as long as you have the room.

On arrival into the US you will be taxed on income associated to your post arrival date this work income and work deductions of 401 k plan contributions will reflect the deductions on this income reported on your 1040. I suspect you will file a 1040 with only the income from date of arrival so the CND income will not appear on this return, however you could under treaty elect to file a full yr 1040 with the CND income less any treaty credits to offset the income inclusion. RRSP will not be allowed to be claimed on your 1040 but as I said you do not have to include your CND income unless you decide to do so as is your right to file a full 1040 under treaty.

nelsona · Post by **nelsona** » Mon Oct 24, 2011 8:50 pm

Couple of things to remeber that were not covered in JCGA's post:

You might decide to file a full year 1040, and use the foreign earned income exemption to eliminate US tax on your Cdn income. So the effects of RRSP contribution will not be lost in any event.

Remember that you are trying to get a Cdn tax decution that will be more than the tax you will eventually pay, so don;t brinh your Cdn taxable income too low or you will be getting a dimnishing tax deduction. You will in all likelihood be paying 25+% tax when you withdraw the RRSP later, so don't contribute just to get a 17% deduction (you can figure this out in the spring). The rule of thumb is to never lower your income below 29K with an RRSP contrib.

Also, know that you can only contribute to your 401(k) through payroll deduction, so that needs to have been set up already by now.

Also, your US tax will be very small this year, regadless of 401(k) contribution, so you migt -- if the company offers -- use a Roth401(k) instead, which will grow tax free.

So, in actaulity, RRSP and 401(k) contributions in your move year are not the best move (other than to get company matching), unless you are in a very high tax bracket, which you will not be in either country.

JGCA · Post by **JGCA** » Mon Oct 24, 2011 8:57 pm

Correct, Nelsona you have indeed made it more clear that he should not try to deduct as much as he can seeing if the tax paid will be less than what he saves.

ANother point I did not mention now that you are in the US make sure you disclose the RRSP value to the IRS annually.

nelsona · Post by **nelsona** » Tue Oct 25, 2011 8:42 am

You mean to say file form 8891 for RRSP and FBAR for all foreign accounts.

JGCA · Post by **JGCA** » Tue Oct 25, 2011 10:08 am

I meant to say, as I did, that he has to file all required disclosures to IRS and yes it may include the two you mentioned, but could also entail many more you did not mention, that is why I made a general statement .

But yu are correct in saying these 2 would be the most common ones.

nelsona · Post by **nelsona** » Tue Oct 25, 2011 10:09 am

"he should not try to deduct as much as he can seeing if the tax paid will be less than what he saves."

Not sure what you are saying here.

What I said was try not to put money in an RRSP or 401(k) with the result that the deduction you get (tax saved) will be at a lower rate than the tax rate you will likely pay when you take the money out.

It has nothing to do with amount of money he saves.

JGCA · Post by **JGCA** » Tue Oct 25, 2011 12:13 pm

What I said was try not to put money in an RRSP or 401(k) with the result that the deduction you get (tax saved) will be at a lower rate than the tax rate you will likely pay when you take the money out

Is this not a savings? You do not try to get a benefit now that will cost you more later, to me this clearly indicates a savings not looking at the present but taking into consideration the future.

But you can look at it any way you like I stand by my initial statement.

nelsona · Post by **nelsona** » Tue Oct 25, 2011 12:18 pm

You r statemnr was not genral on RRSP, it was over simplified,
I know what you meant; you simply did not phrase it correctly, just as I might misspeak if I was writing in French.

JGCA · Post by **JGCA** » Tue Oct 25, 2011 12:34 pm

I like to keep things simple, its much easier for the readers to follow.

I don't thing in Columbus you really need to write a lot of French, do you?

nelsona · Post by **nelsona** » Tue Oct 25, 2011 12:46 pm

Columbia, not Columbus

But I can write in French, having spent 35 years in East-end Montreal, probably not as well as you can write in English. It would expect that I would be imprecise if doing so however on these technical matters, and would also expect such imprecision to be corrected, particularly when trying to sum up something that had already been explained.

But, don't get to too touchy. Not meaning any disprespect. Your advice on business and corporate affairs is highly appreciated here and is 100% spot-on. This ia a very weak area for me.

JGCA · Post by **JGCA** » Tue Oct 25, 2011 1:03 pm

I respect you, and admire your writtings very much. You are teh only one that can keep this forum going, I truly appreciate your technical know how.

Hey, hope to meet ypu some time when your up around here, you have my e-mail it would be my greatest pleasure, Regards Jim

rugby style · Post by **rugby style** » Tue Oct 25, 2011 9:23 pm

Thanks, both of you!

That's a good point about diminished returns on over-eager contributions. Luckily for me, I contributed approximately enough to bring my CAD income down to 30k this year, so I think I'm safe there.

On the US side, if I make the maximum 16.5k contribution, my US income will be down in the high 30s. I get paid monthly so I could do 3 installments of $5500 to get the max benefit, plus some employer match. My 401(k) allows me to put up to 90% of my pay into the 401(k), so I think it's a good idea to max it out, assuming I have enough ramen noodles to live off until the new year.

nelsona · Post by **nelsona** » Tue Oct 25, 2011 10:40 pm

I think you are missing the point.

Is your 401(k) set up yet? Your pay for October has already been processed. You can't contribute for past months now.

Also, your are hardley saving tax this year. a Roth401(k) is arguably a better deal ALL the time. This year it makes no sense to not use Rth.

rugby style · Post by **rugby style** » Wed Oct 26, 2011 1:40 pm

Point taken on the ROTH vs. traditional 401(k). I'm not sure if my employer plan allows ROTH contributions, but I'll definitely check it out.