Pre-tax VS After-tax 401K Plan

harjindermall · Post by **harjindermall** » Mon Jan 09, 2012 10:36 pm

Hi,

I am a Canadian citizen currently working in the US. My employer is offering a pre-tax and after-tax 401k plan. The term they use is Thrift-Incentive Plan.

I am not sure which one to choose and what are the tax consequences as my wife and I will be moving back to Canada in about 5 years. I have a Roth IRA with Fidelity and a RRSP with RBC.

Does anyone have any suggestions?

Best,
Harjinder

nelsona · Post by **nelsona** » Mon Jan 09, 2012 10:57 pm

after-tax is like a Roth. Pre-tax is like an IRA.

Most people thinking of moving back to Canda should fund an after-tax plan, since the tax you would save today in US by funding a 401(K) will be less than the tax you save later in Canada and US by funding a Roth401(k)

harjindermall · Post by **harjindermall** » Mon Jan 23, 2012 10:19 pm

Is it worth it for me to contribute to an after-tax 401K if I'm planning on moving back to Canada within 5 years?

My wife's been contributing to a pre-tax 401K for about 6 years and will be moving back as well to Canada. She's still contributing and we are now wondering how to prepare before we move back.

We each have a Roth IRA.

Any suggestions?

nelsona · Post by **nelsona** » Tue Jan 24, 2012 12:18 pm

I think it is good to put as much as you can in your Roth401(K), but realize that by not getting a deduction, you are giving up well over 25% in tax over a normal 401(k) which give a deduction, there may be a break-even point.

Before you leave US, both of you should consider having only Roths left, paying the tax before you leave, so that it will be tax-free forever.

harjindermall · Post by **harjindermall** » Tue Jan 24, 2012 1:54 pm

Understood. If I stay less than 5 years the vested percentage is at 80%. My company won't start matching before 6 months anyways.

Eventually, would I transfer the Roth to a TFSA account tax free? Do I need to keep the money in the US for a certain time period before doing so to avoid tax penalties?

nelsona · Post by **nelsona** » Tue Jan 24, 2012 2:19 pm

The money would stay in the Roth for at least 5 years. Its should be well into the 6-figures buy the time you leave, so putting it into a TFSA will not be possible, since the TFSA limit is so low.

You will leave it in US until you need it.

harjindermall · Post by **harjindermall** » Tue Jan 24, 2012 2:48 pm

I would need to be here in the US to do the transfer afterwards to a Roth IRA which I have currently with Fidelity before moving back, right? I would roll it over from the Roth 401K to a Roth IRA.

I'm not sure if I will be even staying here for 5 years and I won't be vested at 100%.

nelsona · Post by **nelsona** » Tue Jan 24, 2012 4:25 pm

Surely what you put in will all be yours. You can both put 16K per year, so it should be a good chunk.

Whether it remains in the roth401(k) or is moved to a Roth will be up to you. You just need to be sure the broker you are with will deal with you after you leave. You can transfer from Roth401(k) to Roth anytime.

What you cannot do is transfer 401(k) to Roth after you leave US.

harjindermall · Post by **harjindermall** » Tue Jan 24, 2012 5:02 pm

I had a conversation with Fidelity and they will keep the account open but no changes can be made after moving to Canada.

The thing that I am hesitant about is that even if I was to contribute to a 401K and I move in 3 years. I won't be vested to at 100%.

Basically, I would need to transfer the 401K to a Roth IRA and keep that money in there for 5 years and I'll be able to take it out tax free?

nelsona · Post by **nelsona** » Tue Jan 24, 2012 5:06 pm

I think you are confusing what "vesting" means. In 401(k) world, it means the employer portion (or matching) may have some vesting period. But all that YOU put in will be yours always.

Fidelity's arrangemet will not work for you, you will need to find another US brokerage that will work with you.

The money will come out tax free because -- this is important -- you will pay the extra tax when you transfwer it from 401(k) to Roth -- akll taxable at that point. That is why you need to decide whether you put it in 4019k) now, or in Roth401(k) now.

harjindermall · Post by **harjindermall** » Tue Jan 24, 2012 10:54 pm

If I understand this correctly, if I conttribute to a Roth 401K, I would need to transfer it to a Roth IRA before leaving the US and leave it there for 5 years and take it out tax free.

Do you know any US brokerage firm that would be handle the account when I move back to Canada?

Since my wife is currently contributing to a pre-tax 401K and has a significant amount in there, should she continue to contribute and roll the money over to the Roth IRA before leaving?

nelsona · Post by **nelsona** » Tue Jan 24, 2012 10:59 pm

You will have to contact brokers on your own. Schwab sometimes works.

If you contribute to Roth401(k), then you can take it out tax free as soon as you leave the company, as long as it has existed five years. Otherwise you would need to either leave it there or transferto a Roth IRA until the five year period is up.

Since your wife is contributing toe a 401(k) she should think switching her future contributios to a Roth401(k), so that she will ahve les to transfer when she leaves.

nelsona · Post by **nelsona** » Tue Jan 24, 2012 11:00 pm

... i meant less to convert to Roth after she leaves.

harjindermall · Post by **harjindermall** » Tue Jan 24, 2012 11:35 pm

So let's say I contribute to a Roth 401k for 2 years and transfer it into a Roth IRA before leaving. I will have to keep in there for an additional 3 years or does it restart at 5 years because I transferred the money to the Roth IRA?

What are my options when I'm ready to transfer the money to Canada?

nelsona · Post by **nelsona** » Wed Jan 25, 2012 8:50 am

that is correct.

What 'optios' do you need. You cash the money, take a check and deposit it in your bank account. Why you would wan to do this though is beyond ne, since you would have a large tax-free account earning tax-free income.

leave it and let it grow until you need it.