Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.
I’ll be relocating to Canada closer to the end of the year. I currently have a 401k that I contribute to through my employer. I will still be working for the same employer when I move to Canada (remotely). Should I continue contributing to my 401k? What is a 401k in Canada?
As with most cross-border tax questions…it depends.
First, you’ll want to ensure your employer truly understands their Canadian tax obligations for having employees in Canada. For example, if you’re doing the work in Canada you should be paid on a T4 with proper CPP and EI withholdings. This, compared to traditional W2 reporting for US companies and social security and FICA tax withholdings.
Second, whether you should contribute to your 401k depends on a few factors. You’ll need to have existing RRSP room available to be able to deduct your 401k contributions on your Canadian return (other criteria also apply). Only having the deduction available on your US return won’t help much with your overall tax liability. However, even if you have existing RRSP room available I would forgo the 401k contribution and simply open up an RRSP and contribute directly to the RRSP. Unless of course, your employer matches your contributions. In that case it would make sense to take advantage of the extra matching through your employer. Once again, you will need to have enough RRSP contribution room in order to fully utilize any 401k contributions as a deduction on your Canadian return.
Generally speaking, an RRSP is similar to US 401k and IRA accounts. You get a deduction on your tax return for any contribution and any withdrawals are taxed upon receipt. Income earned within the plans is compounded tax-free until its eventual withdrawal. Typically 401k are employer-sponsored plans while IRAs are individual retirement plans.