Roth 401(k) - Canadian resident contributions?

[Taxman23]

The IRS recently announced 401(k) catch-up contributions must be allocated to a Roth 401(k) for high income earners ($145k+) starting Jan 1, 2026.

I'm curious how this may impact Canadian residents with US Roth 401(k)s. My understanding was that CRA did not treat Roth 401(k) plans like Roth IRAs, but rather viewed Roth 401(k) plans as a "feature" of a 401(k) and the Canadian tax treatment "follows that of the underlying plan of which it's a feature" (ie. the regular 401(k) plan). So essentially no election required in Canada to defer current taxation (unlike Roth IRA), and theoretically no tax upon withdrawal -- if it is truly mirroring the US tax treatment of a Roth 401(k).

But would this still be the case if the taxpayer makes contributions to a Roth 401(k) whilst Canadian resident? Would that jeopardize the Canadian tax treatment upon withdrawal, assuming the taxpayer is Canadian resident at the time?

I've looked at the folio (S5-F3-C1) but still unclear on that last point.

Would very much appreciate anyone with insight on this issue chime in. Thanks!

[nelsona]

Since CRA has made this interpretation, I don't see how "forced" Roth401(k) contributions could be considered any different that "normal" elected Roth401(K) distributions.
However, I would be careful, in light of the last 3 paragraphs of the folio, that there appears to be a distinction between elected contributions and non-elected.

[Taxman23]

Thank you for the reply, very helpful.

I see your point. There is a reference in 1.27 of the folio to filing an election when no employer contributions are made. Despite the fact 1.28 clarifies that the entire plan would be an EBP so long as the employer contributes to the regular 401(k), there is still concern given CRA's mention of elections for certain arrangements to avoid current taxation.

Unfortunately CRA provides no clarity around the timing of the Roth 401(k) contributions (whether as resident or NR), so it may be best to avoid Cdn resident contributions altogether unless CRA has explicitly noted it wouldn't give rise to taxation (which they have not that I can find).

Thanks

[nelsona]

Well, since 401(k) is treated as a pension, and contributions made to the Roth "feature" while Cdn resident are ignored, then the taxation part will be as any other pension: what is not taxed in US cannot be taxed in Canada.

[Taxman23]

I am revisiting this topic around Canadian contributions to a Roth 401(k) as I worry that Article XVIII 3(b) might capture Roth 401(k) accounts in the "similar plan or arrangement" wording. If that interpretation is accurate, Canadian contributions would taint the Roth 401(k) account. Any thoughts on this? Again, no clear communication from CRA on this issue.

Article XVIII 3(b):
"...the term 'pensions' also includes a Roth IRA... or a plan or arrangement... that the competent authorities have agreed is similar thereto. Notwithstanding the provisions of the preceding sentence, from such time that contributions have been made to the Roth IRA or similar plan or arrangement, by... a [Canadian] resident..., to the extent of accretions from such time, such Roth IRA or similar plan or arrangement shall cease to be considered a pension for purposes of the provisions of this Article."

[nelsona]

The folio was written with consideration of the treaty article that you quoted, and is well known.

As I said earlier, I don't see how there would be a distinction between different types of Roth401(k) contributions. Personally I would avoid making such contributions, as in my opinion it will make the Roth401(K) growth taxable. The treaty (under another article XXI(2)) would however allow you to defer taxation until you took the monies.

[Taxman23]

Thanks for the reply. Unless I'm missing something, if there is no distinction between resident vs. NR contributions, and withdrawals from pensions follow tax treatment in the US under the treaty, presumably the Cdn resident contributions would then not result in growth of the Roth 401(k) becoming taxable (ie. no tainting of account)?

Or is your opinion to avoid Cdn contributions more of a matter of being cautious in light of the fact the CRA guidance isn't terribly clear on the matter?

Thanks

[nelsona]

Perhaps I wasn't clear: I didn't say there was no difference between resident and non-resident contributions, I meant to say there was no distinction between normal elected contributions, and forced contributions (ie catch-up contributions forced into a Roth401(k)).

I'm saying that if any Roth or Roth401(k) that you contribute to (forced or otherwise) will not benefit from the treaty protections accorded to one that was created and funded solely while a non-resident of Canada. It will not be a pension. It will be treated for tax purposes like an ordinary investment account EXCEPT that you will be permitted to defer yearly tax until withdrawal by the article I mentioned. At that time accrued income would be taxable.

That article was used by CDn residents to defer taxation on Roths in the early 2000's , until the treaty was amended in 2009 to treat Roths as they are today.