Pre/Post Tax 401k Contributions Question
Moderator: Mark T Serbinski CA CPA
Pre/Post Tax 401k Contributions Question
Ok, I know there are a bunch of posts already for this, but I couldnt really find the answer I am looking for. I am a Canadian in the US on a TN visa and would like to contribute to my company's 401k. I am hoping to extend my stay with the company beyond my current visa, but there is a chance that I will be back in Canada in the future. Anyways, I am not sure if I should contribute to the Pre-Tax 401k or the Post-Tax 401k. So what is the better option if I may need to move it back to Canada, and what are the best options for doing that, if and when the time comes...
Quick primer:
401(k): PRE-TAX your taxable income is reduced, but the fund is 100% taxable when you take it out.
Roth40(k): AFTER-TAX you get no deduction when you put it in, but NONE of it is taxable when you take it out.
The idea is that if you will pay less taxes when you retire, you should use 401(k). But if you think you will pay more tax, you fund Roth401(k).
1) The advice I give is at least fund enough of eithr to get the compnay match.
2) The other sdvice is to make sure you are not hitting a higher tax bracket with your last dollar. Use 401(k) to lower income into lower bracket. The rest you put in Roth401(K).
Now, regardless of whether you fund 401(k) or Roth, the company tax does into your a 401(k)
3) At some point after quitting, but before returning to Canada, you will put any Roth401(k) into an IRA, pay the tax, and then have a completely tax free Roth401(k) forever in US and Canada.
Point (2) is optional if you feel that you are comfortable paying your tax now, and simply use Roth401(K) 100%.
401(k): PRE-TAX your taxable income is reduced, but the fund is 100% taxable when you take it out.
Roth40(k): AFTER-TAX you get no deduction when you put it in, but NONE of it is taxable when you take it out.
The idea is that if you will pay less taxes when you retire, you should use 401(k). But if you think you will pay more tax, you fund Roth401(k).
1) The advice I give is at least fund enough of eithr to get the compnay match.
2) The other sdvice is to make sure you are not hitting a higher tax bracket with your last dollar. Use 401(k) to lower income into lower bracket. The rest you put in Roth401(K).
Now, regardless of whether you fund 401(k) or Roth, the company tax does into your a 401(k)
3) At some point after quitting, but before returning to Canada, you will put any Roth401(k) into an IRA, pay the tax, and then have a completely tax free Roth401(k) forever in US and Canada.
Point (2) is optional if you feel that you are comfortable paying your tax now, and simply use Roth401(K) 100%.
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
As discussed above in point 3, it is tax free in Canada and the US but make sure you wait at least 5 years after you rollover the funds before taking any money out to avoid teh 10% penalty, and make sure you do teh rollover completely before you return to Canada or it will be voided, this advise is crutial if you want to make this plan work as stated many times here before by Nelsona its crutial to complete all the steps before you come back to Canada.
JG
It is not advisable to roll 401(k) to RRSP.
It is best to put it into Roth 401K IF you think that the tax savings you give up now (by not making a deductible contribution) will be outweighed by the tax saving you will have later by the Roth not being taxable.
It's a safe bet that that will be the case if you return to Canada.
It is best to put it into Roth 401K IF you think that the tax savings you give up now (by not making a deductible contribution) will be outweighed by the tax saving you will have later by the Roth not being taxable.
It's a safe bet that that will be the case if you return to 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