401K vs RRSP

petersj · Post by **petersj** » Tue Jun 03, 2008 10:44 am

In Oct I will move back to Canada after a 4 year stay in the US. My employer has given me the option of contributing to my 401K prior to my departure or to my RRSP upon my arrival in Canada. RRSP limit is not an issue. Which is the better choice?

nelsona · Post by **nelsona** » Tue Jun 03, 2008 11:07 am

Please define the options more clearly.

I don't see how your US employer can prevent you from contributing to your 401(k) while an employee , and him matching your contributions according to company policy.

Same for the Cdn company when you become a Cdn employee?

What 'options' is is trying to pull over on you?

petersj · Post by **petersj** » Tue Jun 03, 2008 11:15 am

my employer will make a contribution of $12,000 to either my 401K before I leave the US or to my RRSP when I arrive in Canada.

nelsona · Post by **nelsona** » Tue Jun 03, 2008 12:22 pm

2 questions:

1. have they verified that they can do this with their 401(k) trustee?
2. What about employer matching in either case?
3. Are you going to be working once you are in canada?

petersj · Post by **petersj** » Tue Jun 03, 2008 12:28 pm

1. have they verified that they can do this with their 401(k) trustee? Good question I will need to ask.
2. What about employer matching in either case? The $12K is the employer match.
3. Are you going to be working once you are in canada? Yes, I am transfering back with the same company.

nelsona · Post by **nelsona** » Tue Jun 03, 2008 12:58 pm

1 & 2. The reason I ask is that 40(k) are regulated by the IRS, and have contribution limits for both the employer (fixed amount) and the employer (% of wage). Now you may be making a sufficient wage as to be allowed this much matching (and if you are, they can afford to hire you an accountant to figure this out).

Putting that aside..

3 points:

1. your marginal tax rate is bound to be higher in Canada than in US, So 12K will have a greater impact on your Cdn tax return -- even this year. favour RRSP. If it turns out that your tax rate is low for 2008 (only working 2 months) then you can always claim the contribution on your 2009 return at your full marginal rate, which you can't do with your 401(k) deduction.

2. RRSP withdrawls made before retirement age are simply considered regular income. 401(k) withdrals are too, but will ALSO be subject to 10% penalty. And you have to deal with the foreign tax credits which may not mesh. If your plan is to live/retire in canada, I would choose more RRSP and less 401(k) going forward.

Just a side note. You may want to consider delaying your transfer to 2009, so that you can take advantgae of the Roth rollover provision before returning to Canada. This would see you convert all your 401(k) to Roth before leaving, paying the US tax on this orollover, and then having the Roth completely tax-fre in both US and canada forever.

petersj · Post by **petersj** » Tue Jun 03, 2008 1:14 pm

Thanks, good information.

cfn2007 · Post by **cfn2007** » Tue Jun 03, 2008 10:07 pm

I don't see how petersj (or his company) can contribute anything to an RRSP. Limits are based on prior year income. As a non-resident, his prior year Canadian income would have been zero.

nelsona · Post by **nelsona** » Wed Jun 04, 2008 6:34 am

He said limit is not a problem. Most Cdns who have gone down to US left with some RRSP room (at a minimum the room from the last year they were there).

nelsona · Post by **nelsona** » Wed Jun 04, 2008 6:35 am

.. so it is NOT prior year income, it is previous contribution room that determines RRSP limit.