Cross-Border Question of the Week: What Happens When You Contribute to Your 401(k) or IRA While Working for a U.S. Company and Living in Canada?
Written by Carson Hamill CIM®, CRPC®, Associate Portfolio Manager & Assistant Branch Manager & Dean Moro BComm, CIM®, Associate Portfolio Manager
Question:
As a U.S. citizen living in Canada and working remotely for a U.S. company, can I receive a tax deduction for my contributions to a 401(k) or IRA in both the U.S. and Canada, especially given the high tax rates I pay in Canada?
Answer:
Navigating cross-border tax laws can be challenging, particularly when balancing U.S. and Canadian regulations. Here’s a breakdown to help clarify your situation.
Understanding 401(k) and IRA Contributions While Living in Canada
401(k) Contributions:
When you contribute to a 401(k), you can receive a deduction in Canada; however, this will reduce your RRSP contribution limit. To benefit from this, you must complete an RC268 form during your tax filing. For Canadian residents working for a U.S. employer on a U.S. payroll—like many drillers on a two weeks on, two weeks off schedule—contributing to a 401(k) is generally advisable, particularly if your employer offers matching contributions.
401(k) Solution:
To optimize your contributions and tax benefits, consider these steps:
- Complete the RC268 Form: Fill out this form accurately to reflect your 401(k) contributions and understand their impact on your RRSP limits.
- Evaluate Employer Matching: If your employer offers matching contributions, contribute enough to maximize this benefit, as it significantly boosts your retirement savings.
- Monitor Contribution Limits: Keep track of your RRSP contribution limits to avoid exceeding them, balancing your contributions between your 401(k) and RRSP for optimal growth and tax efficiency.
- Consult a Tax Professional: Given the complexities of cross-border taxation, seek advice from a tax professional for tailored guidance based on your situation.
IRA Contributions:
Traditional IRA contributions are tax-deductible in the U.S.; however, you cannot deduct these contributions on your Canadian return. The tax treaty does not treat traditional IRAs the same way it does 401(k) contributions.
IRA Solution:
If you’re living in Canada, focus on maximizing your RRSP (Registered Retirement Savings Plan) contribution room. Check your available room on the CRA website. Contributing to an RRSP can lower your Canadian tax liability and help maintain balance in your cross-border retirement strategy.
Moving Back to the U.S. with an RRSP?
If you're thinking of returning to the U.S., the Canada-U.S. tax treaty can help minimize taxes on your RRSP, depending on the state you move to. Withdrawing from your RRSP before you leave Canada could trigger a big tax bill, so it’s usually smarter to wait until you’re a U.S. resident. However, if you’re moving to a state like California, which doesn’t adhere to the tax treaty, your RRSP may be treated as a non-registered account and taxed on income and growth.
A possible workaround is the “crystallization” strategy, where you recognize RRSP gains before moving, essentially resetting the cost basis for U.S. state tax purposes. This can be particularly beneficial if your RRSP has significant unrealized appreciation. Planning ahead is key, so working with a cross-border tax professional is essential.
When It’s Time to Withdraw
When you eventually withdraw from your RRSP or RRIF in Canada, the full amount (original contribution plus growth) is taxable. For non-residents, a lump sum RRSP withdrawal triggers a 25% withholding tax. However, converting your RRSP to an RRIF and taking periodic distributions could reduce this to 15%, thanks to the Canada-U.S. tax treaty.
To qualify for this lower rate, withdrawals must meet certain criteria:
- Payments must be less than double the minimum annual requirement, or
- Withdrawals must not exceed 10% of the RRIF’s Fair Market Value at the start of the year.
In the U.S., RRSP and RRIF withdrawals are also taxable, and the amount will depend on your U.S. tax status when contributions were made. Federal foreign tax credits are generally available to help avoid double taxation, though states like California may not honor these credits.
For more details, check out this blog on managing your RRSP when relocating to the U.S.
Final Thoughts
While your 401(k) contributions get you tax benefits in the U.S., don’t expect the same treatment on your Canadian tax return. Managing cross-border finances—especially for high-income earners—requires strategy, paperwork, and careful planning.
For a smoother experience, it’s a good idea to consult a cross-border tax expert who can help you navigate these complexities and keep your financial plan in harmony.
Happy tax planning—and may your 401(k)/ IRA be as strong as your Canadian winter gear!
About Snowbirds Wealth Management
Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate portfolio managers with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.To schedule an introductory call, please click here.
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