Tax free savings account:::Canadian Deductibility of 401(K) Contributions and U.S. Deductibility of RRSP Contributions

07/02/2016 06:52

Are Your 401(K) Contributions Deductible in Canada?

You might recognize this case. You are a Canadian resident in the USA on the TN visa. Your employer provides a 401(K) plan that includes a matching contribution. You know adding to the 401(K) plan lowers your taxable income in the US. Does exactly the same hold true to your taxable income in Canada?

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

For example, let's assume you might be a resident of Canada who's employed in the USA and also you contribute in your employer-sponsored 401(K). Under the US-Canada tax treaty, your contribution towards the plan (around your remaining RRSP deduction room) is going to be deductible for Canadian tax purposes. But you have to be careful because your 401(K) deduction in your Canadian return is restricted to your RRSP contribution room minus some other RRSP contributions. So if you've made RRSP contributions along with 401(K) contributions, then you may have to defer many of the RRSP contributions you made and deduct them in a future year.

In addition, keep in mind that IRA contributions are NOT treated exactly the same way as 401(K) contributions and so are not deductible in Canada.

Are Your RRSP Contributions Deductible in the US?


In the above scenario, we discussed deducting 401(K) contributions for reasons like Canadian taxation. Now we turn our awareness of whether or not contributions to a RRSP are deductible for purpose of US taxation.

John is a dual US-Canadian citizen who's been living and in Canada for more than 5 years. As a result, John files a Canadian tax return because he is really a tax resident of Canada and that he also files a 1040 return because he is really a US citizen residing abroad. Considerably more Related Posts regarding tax free savings account.

If John produces a deductible contribution to some RRSP on his Canadian tax return, then will this contribution be also deductible on his US tax return? Generally, an RRSP contribution is just not deductible on the US tax return.

There is, however, the best under the Canada-US tax treaty that enables a RRSP deduction in common situations. In particular, in the event the RRSP contribution is created via employee contributions with an employer sponsored group RRSP plan, then your contribution is deductible on the US tax return.

But there can be a limit on what much you are able to contribute. Specifically, the RRSP contribution is limited to the lower of the RRSP deduction limit in Canada or your 401(K) limit (currently at $18,000 for those underneath the age of 50).

In addition, you simply must notify the IRS that you are lowering your taxable wages by the RRSP contribution. You do this by filing a Form 8833 together with your US return and claiming an exemption underneath the tax treaty.

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