Author Topic: How much should I contribute to my 401k if I'm planning to move to Canada  (Read 4602 times)

EfficiencyNerd

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Hello,

I'm looking for advice on my contributions to a 401k. My fiancee and I plan to move to Canada sometime within the next 5 years or so, where we plan to stay. I'm 22, fresh out of college, and have a steady job with matching up to 4%. Initially, for my very first paycheck, I set it up to contribute just enough to get the full matching ($104 every 2 weeks, or about $2700 annually).

I'm considering seriously upping my contributions, but I'm concerned about the tax I'll have to pay to get that money to Canada. Will it still be worth it to raise my contributions if I later want to take the money across the border, or would it be better to invest elsewhere? When we move, will I be able to leave that money here in the U.S. in a 401k (or IRA, etc) to grow, and if so, what are the pros and cons of doing that? If I could leave the contributions in a 401k (or IRA, or Roth IRA, or whatever would be most beneficial) to grow until I'm 59.5, would that get rid of the penalty taxes, or would there be even more taxes/fees to get that money across the border to Canada?

Thanks for any help on this. I'm trying to save money in the best ways that I can, while being smart about what that will mean for taxes down the road.

EfficiencyNerd

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Re: How much should I contribute to my 401k if I'm planning to move to Canada
« Reply #1 on: December 16, 2014, 06:46:51 AM »
Cathy,

I appreciate the reply. I was unaware that I would be able to claim a foreign tax credit in Canada. I'll just have to play the math right with any withdrawals so that my foreign tax credit is less than or equal to my Canadian income tax (I assume?). I'll certainly look into this more, but it sounds like I should go ahead and contribute as much as I can to my current 401k. That is good news to my ears!

nereo

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Re: How much should I contribute to my 401k if I'm planning to move to Canada
« Reply #2 on: December 16, 2014, 07:09:24 AM »
Cathy,

I appreciate the reply. I was unaware that I would be able to claim a foreign tax credit in Canada. I'll just have to play the math right with any withdrawals so that my foreign tax credit is less than or equal to my Canadian income tax (I assume?). I'll certainly look into this more, but it sounds like I should go ahead and contribute as much as I can to my current 401k. That is good news to my ears!
Cathy is right on.  Also, I would recommend contributing as much as you possibly can to your 401(k) now.  Even if your Canadian tax credit isn't substantial enough to warrant collapsing the entirety of your 401(k) balance, you still have the option of leaving some or all of it exactly where it is until you need it.  In that case, you'd get the tax benefits now of funding a 401(k), the possibility of collapsing it if/when you become a permanent resident of Canada (effectively eliminating the early-withdrawl penalties), and the certainty that it would be there for you later if your plans change or you just want to leave it where it is.
just curious - what's driving the move to Canada?

EfficiencyNerd

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Re: How much should I contribute to my 401k if I'm planning to move to Canada
« Reply #3 on: December 16, 2014, 07:19:49 AM »
just curious - what's driving the move to Canada?

The main reason is that my fiancee is Canadian, and we'd like to be close to her parents in Ontario. We also both enjoy colder climates. We met at college in Boston, MA; I am now working while she finishes school. Sometime after that, we plan to move back to Ontario. I don't know if you were looking for sociopolitical reasons or not, but this is just a personal decision in our case.

nereo

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Re: How much should I contribute to my 401k if I'm planning to move to Canada
« Reply #4 on: December 16, 2014, 07:39:43 AM »
just curious - what's driving the move to Canada?

The main reason is that my fiancee is Canadian, and we'd like to be close to her parents in Ontario. We also both enjoy colder climates. We met at college in Boston, MA; I am now working while she finishes school. Sometime after that, we plan to move back to Ontario. I don't know if you were looking for sociopolitical reasons or not, but this is just a personal decision in our case.
cool.  no, i wasn't looking for any sort of sociopolitical reason, I was just genuinely curious, particularly when there was such a vague timeline.  We moved to Canada two years ago because of a specific job, but we don't have any family on this side of the border, so there's less tying us here if circumstances change.  Personally, I think everyone would be better off if they contemplated moving to/from Canada with the same level of scrutiny as they do when they want to move to a different state/province within the same country.  Of course immigration makes that slightly more difficult (but only slightly).

Cookie78

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Re: How much should I contribute to my 401k if I'm planning to move to Canada
« Reply #5 on: December 16, 2014, 07:54:29 AM »
Personally, I think everyone would be better off if they contemplated moving to/from Canada with the same level of scrutiny as they do when they want to move to a different state/province within the same country.  Of course immigration makes that slightly more difficult (but only slightly).

I'm contemplating moving from Canada to the states in a few years too (or maybe bf will move here instead), but it makes my head spin every time I start looking into immigration, taxes, investments, health insurance, and visas. I'm happy to see you use the word 'slightly'.
« Last Edit: December 16, 2014, 09:39:02 AM by Cookie78 »

wtjbatman

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Re: How much should I contribute to my 401k if I'm planning to move to Canada
« Reply #6 on: December 16, 2014, 09:31:29 AM »
We also both enjoy colder climates.

Who are you people??

nereo

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Re: How much should I contribute to my 401k if I'm planning to move to Canada
« Reply #7 on: December 16, 2014, 10:04:32 AM »
We also both enjoy colder climates.

Who are you people??
+1 to enjoying colder climates.  We both love snow and the skiing & snowshoeing that goes with it.  Also nice is the ridiculously long (and warm) summer days - so much longer than when I lived in northern Virginia. For the most part good clothes counteracts the low temps.  About the only thing I don't like is the time it takes to layer up (and de-layer) every time we go outside. 

Goldielocks

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Re: How much should I contribute to my 401k if I'm planning to move to Canada
« Reply #8 on: December 25, 2014, 05:19:35 PM »
Thanks, Cathy!  I could really use that guide too.  Preparing to pull the money out soon, myself.

OP:
Another option, not as good, is that you can leave your 401k (IRA) in your us account for years until you are ready to withdraw it.

I have a modest amount (10% of my portfolio) left in my wells brokerage, in us stocks that I could not buy directly and efficiently from Canada, due to exchange and service fees.

Because I left the usa before Canada rules changed to allow foreign tax claims on the 10% penalty, and because I like these investments, I have left them alone to grow and grow.

Non residents can only sell from accts created when you are resident, not rebalance or reinvest, so only do this for very long term holds, with no dividends, unless you want to periodically pull cash out and trigger lots of tax forms.  It is locked up until I withdraw it, pay the withholding and 10% penalty, then wait for reimbursement a few months later.  (Looking forward to Cathy's tips)


Oh, one more thing, transferring from 401k or traditional IRA to RRSP does NOT reduce RRSP contribution room.