Canadian Deductibility of 401(K) Contributions and U.S. Deductibility of RRSP Contributions::Cross border tax strategies

Are Your 401(K) Contributions Deductible in Canada?

You might recognize this case. You are a Canadian resident employed in the USA on a TN visa. Your employer comes with a 401(K) plan that features a matching contribution. For additional about us can financial planning. You know adding to the 401(K) plan lowers your taxable income in the US. Does exactly the same hold true on your taxable income in Canada?

Provided certain conditions are met, you may deduct, for Canadian tax purposes, the contributions you create to a 401(k) plan in the US.

For example, let's assume you are a resident of Canada who's employed in the USA and you also contribute in your employer-sponsored 401(K). Under the US-Canada tax treaty, your contribution to the plan (up to your remaining RRSP deduction room) will be deductible for Canadian tax purposes. But you should be careful when your 401(K) deduction on your own Canadian return is bound to your RRSP contribution room minus another RRSP contributions. So if you've made RRSP contributions as well as 401(K) contributions, then you could possibly have to defer some of the RRSP contributions you have made and deduct them in a future year.

In addition, keep in mind that IRA contributions are NOT treated a similar way as 401(K) contributions and therefore are not deductible in Canada.

Are Your RRSP Contributions Deductible in the US?

In these scenario, we discussed deducting 401(K) contributions for reasons like Canadian taxation. Now we turn our focus on whether or not contributions for an RRSP are deductible for reason for US taxation.

John is really a dual US-Canadian citizen who may have been living and in Canada for upwards of 5 years. As a result, John files a Canadian tax return because he is really a tax resident of Canada anf the husband also files a 1040 return because he can be a US citizen residing abroad.

If John makes a deductible contribution to a RRSP on his Canadian tax return, then will this contribution even be deductible on his US tax return? Generally, an RRSP contribution is not deductible on a US tax return.

There is, however, very under the Canada-US tax treaty that permits a RRSP deduction in a few instances. In particular, if your RRSP contribution is created via employee contributions for an employer sponsored group RRSP plan, then this contribution is deductible around the US tax return.

But there is a limit how much you are able to contribute. Specifically, the RRSP contribution is limited towards the lower of one's RRSP deduction limit in Canada or maybe your 401(K) limit (currently at $18,000 for those under the age of 50).

In addition, you will have to notify the IRS that you're lowering your taxable wages by the RRSP contribution. You do this by filing a Form 8833 using your US return and claiming an exemption beneath the tax treaty.

At Cardinal Point, were here to assist residents on both sides of the border using their cross-border tax filing requirements and retirement planning scenarios.

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