Are Your 401(K) Contributions Deductible in Canada?
You might recognize this scenario. You might be a Canadian resident functioning inside the USA on a TN visa. Your employer offers a 401(K) strategy that incorporates a matching contribution. You understand contributing to the 401(K) plan lowers your taxable income in the US. Does precisely the same hold correct for the taxable earnings in Canada?
Provided certain circumstances are met, you may deduct, for Canadian tax purposes, the contributions you make to a 401(k) plan within the US.
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For example, let’s assume you might be a resident of Canada who's employed inside the USA and you contribute for your employer-sponsored 401(K). Beneath the US-Canada tax treaty, your contribution to the program (up to your remaining RRSP deduction area) will be deductible for Canadian tax purposes. But you will need to be careful simply because your 401(K) deduction in your Canadian return is limited for your RRSP contribution space minus any other RRSP contributions. So if you have produced RRSP contributions too as 401(K) contributions, then you definitely may have to defer a number of the RRSP contributions you produced and deduct them inside a future year.
Moreover, keep in mind that IRA contributions are not treated precisely the same way as 401(K) contributions and are certainly not deductible in Canada.
Are Your RRSP Contributions Deductible within the US?
Within the above situation, we discussed deducting 401(K) contributions for purposes of Canadian taxation. Now we turn our attention to no matter if or not contributions to an RRSP are deductible for purposes of US taxation.
John is actually a dual US-Canadian citizen who has been living and working in Canada for over 5 years. Consequently, John files a Canadian tax return because he is a tax resident of Canada and he also files a 1040 return since he's a US citizen residing abroad.
If John makes a deductible contribution to a RRSP on his Canadian tax return, then will this contribution also be deductible on his US tax return? Usually, an RRSP contribution just isn't deductible on a US tax return.
There is, nonetheless, an exception under the Canada-US tax treaty that permits a RRSP deduction in certain conditions. In unique, when the RRSP contribution is made through employee contributions to an employer sponsored group RRSP strategy, then the contribution is deductible on the US tax return.
But there's a limit on just how much you'll be able to contribute. Particularly, the RRSP contribution is limited to the reduced of the RRSP deduction limit in Canada or your 401(K) limit (currently at $18,000 for all those beneath the age of 50).
Furthermore, you will need to notify the IRS that you are lowering your taxable wages by the RRSP contribution. You do that by filing a Type 8833 together with your US return and claiming an exemption under the tax treaty.
At Cardinal Point, we're right here to help residents on each sides of your border with their cross-border tax filing needs and retirement arranging scenarios.
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