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Relocating from Canada to the United States involves a complex web of financial and tax considerations. To ensure a smooth transition and maintain financial stability, it’s essential to understand the implications of such a move and plan accordingly. This comprehensive guide delves into the critical aspects of financial and tax planning for Canadians moving to the U.S., including various immigration pathways.

Immigration Pathways from Canada to the U.S.

Before addressing financial and tax planning, it’s crucial to understand the immigration options available for Canadians:

1. Family Sponsorship: If you have immediate family members who are U.S. citizens or permanent residents, they can sponsor you for a Green Card. 
2. Employment-Based Visas:
   • TN Visa: Under the United States-Mexico-Canada Agreement (USMCA), Canadian professionals in specific occupations can obtain a TN visa to work in the U.S. 
   • H-1B Visa: For specialized occupations, subject to annual caps and more stringent requirements.
   • L-1 Visa: For intra-company transferees who work in managerial positions or have specialized knowledge. 
3. Investment-Based Visas:
   • E-2 Visa: For investors who commit substantial capital to a U.S. business but have the intent to depart the U.S. once their E-2 visa status ends – essentially a non-immigrant visa in nature
   • EB-5 Visa: Requires a more significant investment in a U.S. enterprise and the creation of jobs for U.S. workers, with the option to become a lawful permanent resident in the U.S. if certain conditions are met
4. Student Visas: F-1 visas allow Canadians to study in the U.S., with potential pathways to work authorization post-graduation.

Key Consideration: Each visa category has specific requirements, benefits, and limitations. Consulting with a Cardinal Point cross-border financial advisor and an immigration attorney can help determine the most suitable pathway based on your circumstances.

Tax Residency and Departure Tax

Determining Tax Residency

Upon moving to the U.S., it’s essential to establish your tax residency status:

• Canada: Canada taxes individuals based on residency. Departing Canada may trigger a “departure tax,” which is a deemed disposition of your worldwide assets, potentially resulting in capital gains tax liabilities. Many tax and financial planning items can be completed before you leave Canadian tax residency to reduce or eliminate this departure tax, and properly structure your assets while in the U.S. 

Understanding the Deemed Departure Tax in Canada

• United States: The U.S. taxes are based on immigration and residency status. As a Canadian moving to the U.S., you’ll become subject to U.S. tax laws and may need to file U.S. tax returns.

Key Consideration: Properly severing Canadian tax residency is crucial to avoid ongoing Canadian tax obligations. This involves cutting significant residential ties, such as selling your Canadian real estate and moving your property to the U.S. Consult with a Cardinal Point cross-border tax advisor to discuss your specific situation. 

Cross-Border Investment Management – Coordinated Approach to Investments

Managing investments across borders necessitates an understanding of both U.S. and Canadian regulations to ensure tax efficiency and compliance. Unfortunately, most Canadian investment advisors are not registered and licensed to provide investment advice to a resident of the U.S. nor do they have the experience overseeing the investment needs of U.S. residents. Partnering with a Canada-U.S. dually registered and licensed  Cardinal Point cross-border financial advisor that can oversee investment accounts domiciled in both Canada and the U.S. ensures all cross-border assets are managed in a coordinated and integrated fashion.

 

Managing Retirement Accounts

Registered Retirement Savings Plan (RRSP) & Locked-In Retirement Accounts (LIRA)

Your RRSP or LIRA can remain in Canada, and you can continue to defer Canadian and U.S. taxes on its growth. The Canada-U.S. Tax Treaty allows for this deferral, but not all States abide by the Treaty. It’s also essential to understand the tax implications of withdrawals, as they will be taxed in both countries, with potential foreign tax credits available to mitigate double taxation.

Securing Your Financial Future Across Borders: Navigating RRSPs/RRIFs/LIRAs/LIFs – An eBook Guide for Tax Planning for Canadians Moving to the U.S.

Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP) and First Home Savings Account (FHSA)

The TFSA, RESP and FHSA are not recognized as tax-exempt accounts in the U.S.:

• Income and gains within a TFSA, RESP and FHSA are taxable under U.S. law.
• Consider closing the TFSA before moving to avoid complex reporting requirements and potential taxation.
• Consider rolling the FHSA into your RRSP before moving to avoid complex reporting requirements and potential taxation.
• Consider closing the RESP before moving or transfer the plan’s subscriber to a family member who is a Canadian resident and citizen.  See our blog: Cross Border Wealth Management: Navigating your RESP

Key Consideration: Consult with a Cardinal Point cross-border tax advisor to develop a strategy for managing Canadian retirement accounts post-move.

Investment and Financial Accounts

Non-Registered Investment Accounts

Unrealized capital gains accrued before your move are subject to the Canadian departure tax, while gains after becoming a U.S. resident are taxed by the U.S. Obtain valuations of your investments as of your move date to distinguish between Canadian and U.S. tax obligations as well as to assist in quantifying your Canadian “exit” tax exposure Work with Cardinal Point on strategies to mitigate this “exit” tax.

Moving from Canada to the U.S.: What to do with your Canadian dollar investments

Currency Considerations

Fluctuations between the Canadian dollar (CAD) and U.S. dollar (USD) can impact your finances. Consider converting CAD to USD when favorable or maintaining dual-currency accounts to manage exchange rate risk.

Key Consideration: A Cardinal Point cross-border financial advisor experienced in cross-border transitions can help optimize your investment strategy and currency management.

Real Estate Holdings

Primary Residence

Selling your Canadian primary residence before moving can exempt you from capital gains tax under the principal residence exemption.

Rental Properties

If retaining Canadian rental properties:

• Report rental income to both Canadian and U.S. tax authorities. For specifics regarding non-resident withholding on Canadian sourced rental income, check out our blog: Understanding the Tax Implications of Leaving Canada. 
• Be aware of specific withholding tax and compliance requirements in Canada and claim foreign tax credits in the U.S. to prevent double taxation.

Key Consideration: Work with a Cardinal Point cross-border tax advisor to evaluate the financial benefits of keeping versus selling Canadian real estate, considering tax implications and market conditions.

Estate Planning

Wills and Trusts

Review and possibly update your estate planning documents to ensure they are valid under U.S. law and still reflect your current wishes. Also, review beneficiary designations on investment accounts, retirement plans, and insurance policies to comply with U.S. inheritance rules.

Estate Taxes

The U.S. imposes estate taxes on worldwide assets for its residents above $13.99 million USD (for 2025). Understand the current estate tax exemption limits and plan accordingly to minimize potential liabilities.  Canadians moving to the U.S. should carefully structure their cross-border estate to minimize exposure.

Key Consideration: Engage with a Cardinal Point cross-border financial advisor and an estate planning attorney familiar with cross-border issues to develop a comprehensive plan.

Health Care Considerations

Unlike Canada’s publicly funded healthcare system, the U.S. operates largely on private health insurance, often provided through employers. Health insurance should be prioritized if you’re moving from Canada to the U.S.

• Employer-Sponsored Health Plans: If you’re moving for a job, your employer may provide a health plan. Be sure to review coverage details, including deductibles and out-of-pocket costs.
• Marketplace/Private Insurance: If you’re self-employed or don’t have employer coverage, explore Affordable Care Act (ACA) plans via the Health Insurance Marketplace or private insurers.
• Medicare: If you are 65 or older and have lived in the U.S. long enough to qualify, you may be eligible for Medicare. However, if you’re newly arriving in the U.S., you may need private insurance coverage to bridge you until you are eligible for Medicare.

Key Consideration: Unlike Canada, where health care is funded through taxes, in the U.S., you must pay for private insurance or employer-sponsored plans. Work with a Cardinal Point cross-border financial advisor to factor this into your financial planning when estimating your cost of living.

Cross-Border Tax Compliance and Reporting Obligations

Moving to the U.S. does not eliminate all Canadian tax filing obligations. You must ensure compliance with tax laws in both countries.

Canadian Tax Filing Requirements Post-Move

• If you have Canadian assets, such as rental properties, investments, or business interests, you may still have tax obligations in Canada.
• Departure Tax: When leaving Canada, you may be subject to deemed disposition on certain capital assets, triggering capital gains tax.
• If you receive income from Canada post-move, such as rental income, dividends, or pensions, you must file a Canadian non-resident tax return (T1135 for foreign asset reporting).

U.S. Tax Reporting Requirements

As a U.S. tax resident, you will be taxed on your worldwide income and must file annual IRS tax returns. This includes:

• Form 1040 (U.S. individual income tax return).
• FBAR (Foreign Bank Account Report) if your Canadian (or other non-U.S.) financial accounts exceed $10,000 USD at any time in the year.
• FATCA (Form 8938) if your foreign (non-U.S.) financial assets exceed $100,000 USD at year-end (or $150,000 at any point during the year, for married individuals filing jointly).

Note: Unlike Canada where most provincial tax is filed in concert with CRA tax filing, U.S. States require a separate State income tax return. Some States (like California) do not honor the Canada-U.S. Tax Treaty), therefore proactive planning is a necessity. 

Key Consideration: The Canada-U.S. Tax Treaty prevents double taxation through foreign tax credits. However, tax treaty benefits must be applied correctly, so working with a Cardinal Point cross-border tax advisor is highly recommended.

Retirement Accounts and Social Security Considerations

Canada Pension Plan (CPP) and Old Age Security (OAS)

If you have contributed to the Canada Pension Plan (CPP) or qualify for Old Age Security (OAS), you may still be eligible to receive benefits while living in the U.S.

• CPP Benefits: The U.S.-Canada Totalization Agreement ensures that Canadian workers who relocate to the U.S. can still qualify for CPP benefits, even if they haven’t contributed for the full eligibility period.
• OAS Clawback: As a U.S. resident, there is no OAS clawback reducing or eliminating your OAS benefits due to income thresholds.

Key Consideration: U.S. residents receiving CPP or OAS must report it on their U.S. tax return, but a tax treaty reduces or eliminates double taxation. Discuss with a Cardinal Point cross-border tax advisor to factor in your entitlements to CPP and OAS in your long-term planning. 

U.S. Social Security Benefits

• If you have worked in the U.S. and contributed to Social Security, you may qualify for U.S. Social Security benefits.
• The U.S.-Canada Totalization Agreement allows for combined work credits between CPP and Social Security to qualify for retirement benefits.

Key Consideration: Work with a Cardinal Point cross-border financial advisor to determine how your Canadian and U.S. benefits interact to optimize your retirement income.

Summary: Key Steps for Canadians Moving to the U.S.

• Determine Your U.S. Visa Status: Secure a visa, such as a TN, H-1B, or Green Card.
• Plan for Canadian Departure Tax: Assess capital gains tax obligations before leaving Canada inclusive of tax strategies to mitigate potential exposure.
  
• Cut Canadian Tax Residency: Close Canadian accounts, sell property, and document your move. This is not an exhaustive list. Make sure you speak with a Cardinal Point cross-border financial advisor. 
• Optimize Retirement Accounts: Understand how RRSPs/LIRAs, TFSAs,  and FHSAs are treated from a cross-border tax perspective.
  
•  Secure U.S. Health Insurance: Research employer-sponsored, private, or ACA options.
  
•  Manage Cross-Border Investments: Consider tax-efficient strategies before transitioning accounts.
  
•  Comply with U.S. and Canadian Tax Rules: Stay current on tax filings, FBAR, and FATCA requirements.
  
•  Review Estate Planning: Ensure wills, trusts, and beneficiary designations align with U.S. laws.

Moving from Canada to the U.S. requires careful investment, tax, financial, and legal planning performed in a coordinated fashion. Work with cross-border financial advisors to optimize tax efficiency, protect wealth, and avoid unnecessary penalties. Cardinal Point Wealth Management specializes in helping individuals navigate the complexities of cross-border financial planning. Learn More

Relocating from the United States to Canada involves more than just a change of address; it requires meticulous financial and tax planning to ensure a seamless transition and to optimize your financial well-being in your new home. This comprehensive guide delves into the critical considerations and strategies for U.S. citizens moving to Canada, drawing insights from Cardinal Point Wealth Management’s expertise in cross-border financial and tax planning.

Understanding Tax Residency – Residency for Tax Purposes

Upon moving to Canada, determining your tax residency status is paramount, as it dictates your tax obligations in both countries. Canada taxes individuals based on residency, while the U.S. taxes its citizens regardless of where they reside.

• Canadian Tax Residency: Generally, if you establish significant residential ties in Canada—such as owning a home, having a spouse or dependents residing in Canada, or obtaining provincial health insurance—you are considered a resident for tax purposes. As a resident, you’re subject to Canadian tax on your worldwide income.
• U.S. Tax Obligations: As a U.S. citizen, you must continue filing U.S. tax returns and reporting global income, even while residing in Canada. This dual obligation necessitates careful planning to avoid double taxation.

Key Consideration:  Whether you are a U.S. citizen or hold another U.S. immigration status (such as a Green Card, TN, H-1B, L1, etc.), engaging with a Cardinal Point cross-border tax advisor is essential. Their expertise can accurately determine your immigration and residency status, ensuring you understand the corresponding tax implications in both countries as you relocate to Canada.

Mitigating Double Taxation – Canada-U.S. Tax Treaty

The Canada-U.S. Tax Treaty provides mechanisms to prevent double taxation, primarily through foreign tax credits and exemptions.

• Foreign Tax Credits: If you’ve paid taxes on income in the U.S., you can often claim a credit against your Canadian taxes for the same income, and vice versa. This credit reduces your tax liability in the country of residence.
• Exemptions and Deductions: Certain types of income, such as specific pensions or social security benefits, may be exempt or receive favorable tax treatment under the treaty.

Key Consideration: Proper application of tax treaty provisions is complex. Consulting with a Cardinal Point cross-border tax advisor ensures you maximize available credits and exemptions, minimizing overall tax liability.

Pre-Immigration Tax Planning – Strategic Financial Moves Before Relocation

Implementing tax planning strategies before becoming a Canadian tax resident can lead to significant tax savings.

• Asset Disposition: Consider selling assets that may attract high capital gains taxes in Canada before your move, as Canada taxes capital gains accrued after becoming a resident.
• Retirement Accounts: Evaluate the treatment of U.S. retirement accounts like 401(k)s and IRAs under Canadian tax law. In some cases, withdrawing funds before relocating can be tax-efficient and/or IRA Roth conversions while still in the U.S. can provide massive long-term tax savings in both Canada and the U.S.   However, they do require  careful analysis before the establishment of Canadian tax residency.
• Asset Equalization: To optimize future Canadian household tax savings, consider a strategy that equalizes your asset base before establishing Canadian tax residency, with careful consideration of your U.S. immigration status.
• Business Structures: Certain U.S. small business structures are tailored for tax-efficient wealth accumulation. However, maintaining these structures during a relocation to Canada can result in unfavorable tax consequences. Therefore, it’s crucial to review your specific circumstances with a knowledgeable cross-border wealth advisor at Cardinal Point. 

Key Consideration: Early planning is crucial. Engage with Cardinal Point cross-border financial advisors experienced in cross-border transitions to develop a tailored strategy that aligns with your financial goals.

Cross-Border Investment Management – Coordinated Approach to Investments

Managing investments across borders necessitates an understanding of both U.S. and Canadian regulations to ensure tax efficiency and compliance.

• Investment Accounts: Determine which assets should be transferred to Canada and which should remain in the U.S. Factors include tax implications, currency considerations, investment objectives and the U.S. based custodian you have your accounts with prior to the move to Canada.
  • What are my options for my 401k 403b or 457 when moving to Canada?
  • E-Book: Options for U.S. IRA account holders when living in Canada
  • E-book: Canadian residents – What are the tax implications in Canada and the U.S. when required to close a U.S. brokerage account?
• Cross-Border Advice: Most U.S. investment advisors are not registered and licensed to provide investment advice to a resident of Canada.  It is important to seek a qualified cross-border advisor that can oversee investment accounts in both countries.
• Deemed Acquisition Dates: Aligning your investment strategy with your Canadian tax entry date is crucial. As a U.S. taxpayer residing in Canada, you’ll be handling dual sets of cost basis. The cross-border tax implications of any future sales must be carefully evaluated in relation to these competing cost bases and thoroughly analyzed through the Canada/U.S. Tax Treaty.
• Currency Conversion: Develop strategies to manage currency risk, especially if you have income or expenses in both U.S. dollars and Canadian dollars.

Key Consideration: A coordinated investment strategy that considers cross-border tax implications can enhance returns and reduce risks associated with currency fluctuations. Partnering with a Canada-U.S. dually registered and licensed  Cardinal Point cross-border financial advisor that can oversee investment accounts domiciled in both Canada and the U.S. ensures all cross-border assets are managed in a coordinated and integrated fashion.

Retirement Planning – Navigating Cross-Border Retirement Benefits

Understanding how your move affects retirement planning is essential for long-term financial security.

• Social Security and CPP: The Canada-U.S. Totalization Agreement coordinates benefits between U.S. Social Security and the Canada Pension Plan (CPP), preventing double contributions and ensuring eligibility.
• Retirement Account Distributions: Plan the timing and manner of withdrawals from U.S. retirement accounts to minimize tax impacts under Canadian law.

Key Consideration: Consult with Cardinal Point cross-border financial advisors knowledgeable in cross-border retirement and tax planning to optimize benefit claims and distribution strategies.

Estate Planning – Harmonizing Estate Plans Across Borders

An effective estate plan accounts for the legal and tax frameworks of both countries.

• Wills and Trusts: Ensure your estate documents are valid in both jurisdictions and consider the tax implications of transferring assets across borders. You should also be mindful of some of the unique planning and distribution matters with respect to where your beneficiaries are located.  
• Tax Implications: Be aware of potential estate and gift taxes in the U.S. and how they interact with Canadian tax laws.
  • U.S. estate and gift tax considerations for Canadians

Key Consideration: Regularly review and update your estate plan with Cardinal Point cross-border financial advisors experienced in cross-border estate issues to reflect changes in laws and personal circumstances.

Compliance and Reporting – Meeting Obligations in Both Countries

Maintaining compliance with tax reporting requirements is critical to avoid penalties.

• Foreign Account Reporting: Both countries have stringent rules for reporting foreign financial accounts, such as the U.S. FBAR (FinCEN 114 and IRS Form 8938) and Canada’s Foreign Income Verification Statement (Form T1135).
• Annual Filings: Stay abreast of filing deadlines and required forms in both countries to ensure timely compliance.

Key Consideration: Utilize the advice of Cardinal Point cross-border tax advisors who specialize in cross-border compliance to navigate these complex requirements effectively.

Conclusion

Moving from the U.S. to Canada presents a myriad of financial and tax planning challenges. Proactive, personalized planning guided by Cardinal Point cross-border financial and tax advisors with cross-border expertise, is essential to optimize your financial situation and ensure a smooth transition. By addressing immigration and residency status, mitigating double taxation, strategically managing investments, properly structuring your cross-border estate plan and staying compliant with reporting obligations, you can confidently navigate the complexities of your move and secure your financial future in Canada.

As you consider moving from Canada to the U.S. or vice versa, the purchase of a new residence is an integral part of the move.  In some cases, you might consider using proceeds from the sale of your previous residence.  But when moving from Canada to the U.S., foreign exchange rate concerns may be a significant hurdle to overcome. You also may need to finance the property through a mortgage originated in the new country where you are going to settle.

It is important to understand that mortgages in the United States and Canada have several key differences, including the structure of terms, the mortgage application process, income tax implications, and regulatory rules and mandates. Here are some of the major distinctions:

1. Term Lengths and Amortization Periods

• United States: Mortgage terms often range from 15 to 30 years, with 30-year fixed-rate mortgages being the most common. The amortization period is typically the same as the term length.
• Canada: Mortgage terms are usually shorter, often ranging from 1 to 5 years, but the amortization period is longer, typically 25 to 30 years. This means Canadians frequently renew their mortgage terms multiple times over the life of the loan.

2. Interest Rates

• United States: Fixed-rate mortgages are very popular, where the interest rate remains constant throughout the term. Adjustable-rate mortgages (ARMs) are also available, where the interest rate changes after an initial fixed period of time.
• Canada: Both fixed-rate and variable-rate mortgages are common. Fixed-rate mortgages have a constant interest rate for the term, while variable-rate mortgages have rates that can change with the prime rate.

3. Prepayment Penalties

• United States: Prepayment penalties are not as common, and when they do occur they are often applicable for only a few years.
• Canada: Prepayment penalties are more common. Borrowers typically face penalties if they pay off their mortgage early or make large prepayments beyond the allowable limit.

4. Mortgage Insurance

• United States: Private mortgage insurance (PMI) is usually required if the down payment is less than 20% of the home’s appraised value. PMI can be canceled once the loan-to-value ratio drops below 80%.
• Canada: Mortgage default insurance is mandatory for down payments of less than 20%. This insurance is provided by entities like the Canada Mortgage and Housing Corporation (CMHC) and is required for the life of the mortgage unless it is refinanced with a larger down payment.

5. Down Payments

• United States: Minimum down payments can be as low as 3% for certain loan programs (e.g., Federal Housing Administration (FHA) loans), although 20% is standard to avoid PMI.
• Canada: The minimum down payment is 5% for home loans up to $500,000 CAD, 10% for the portion of the loan between $500,000 and $1,000,000, and 20% for those over $1,000,000.

6. Income Tax Differentials

• United States: Under personal income tax rules, If you are eligible to itemize your deductions you can typically deduct all of your mortgage interest, up to a certain amount of indebtedness. If you acquired your home prior to Dec. 15, 2017, you can deduct the interest up to $750,000 if you’re filing taxes as married jointly − and up to $375,000 if you’re filing as single.  In order to itemize deductions when filing married jointly, your itemized deductions (including mortgage interest and certain other deductions) –need to exceed $30,000.  
• Canada: Mortgage interest on your personal residence in Canada is not tax deductible. 

7. Regulatory Environment

• United States: Mortgages are regulated at both federal and state levels. Key regulatory agencies include the Consumer Financial Protection Bureau (CFPB) and Federal Housing Finance Agency (FHFA).
• Canada: Mortgages are primarily regulated by federal bodies like the Office of the Superintendent of Financial Institutions (OSFI) and the Financial Consumer Agency of Canada (FCAC).

8. Refinancing

• United States: Refinancing is common and can be done to take advantage of lower interest rates, change the loan term, or gain access to home equity.
• Canada: Refinancing is also available, but may incur prepayment penalties if done before the mortgage term ends.

9. Qualification Criteria

• United States: Credit scores, debt-to-income ratios, and employment history are critical factors in mortgage qualification.
• Canada: Similar factors apply, but there is also a stress test that requires borrowers to qualify at a higher interest rate to ensure that they can manage potential rate increases.

These differences reflect variations in financial systems, regulatory frameworks, and housing markets between the two countries.

At Cardinal Point, we maintain meaningful active relationships with firms that provide various forms of financing for clients in both Canada and the United States. Because we operate as a true fiduciary for our clients, we receive no compensation or incentive of any kind for mortgage assistance that might be utilized by our clients in Canada or the U.S. 

For high-income earners and diligent savers, maximizing tax-advantaged retirement savings is an essential strategy. Two powerful tools in the 2025 retirement planning arsenal are after-tax 401(k) contributions with rollovers to a Roth 401(k) and backdoor Roth IRA contributions. These strategies can significantly boost your retirement savings and help you grow your nest egg tax-free. Here’s how to implement these for 2025.

What Are After-Tax 401(k) Contributions?

Many employers allow employees to contribute after-tax dollars to their 401(k) plans, in addition to the standard pre-tax or direct Roth contributions. Each 401(k) plan is different though, so subject to the 401(k) plan, these after-tax contributions can be rolled over to a Roth 401(k), where they grow tax-free.

Contribution Limits for 2025

• Employee contributions (pre-tax or direct Roth): $23,500 (or $31,000 for those aged 50+ or $34,750 for those aged 60-63).
• Total 401(k) contribution limit (employee + employer + after-tax contributions): $70,000 (or $77,500 for those aged 50+ or $81,250 for those aged 60-63).

The difference between the total contribution limit and the sum of employee and employer contributions is the maximum amount you can contribute in after-tax dollars.

Example: After-Tax 401(k) Contributions in 2025

• Employee Contributions: $23,500 (pre-tax or direct Roth).
• Employer Match: $10,000.
• Total from Employee + Employer: $33,500.
• Remaining Contribution Limit: $70,000 – $33,500 = $36,500.

You can contribute $36,500 in after-tax dollars to your 401(k). By rolling these after-tax funds into a Roth 401(k), you can benefit from tax-free growth and withdrawals in retirement.

Why Roll After-Tax Contributions Into a Roth 401(k)?

1. Tax-Free Growth: Once rolled over, after-tax contributions grow tax-free in the Roth account.
2. Streamlined Management: Keeping funds in your 401(k) may simplify tracking and investment management.
3. Avoiding Pro-Rata Rule: Direct rollovers from after-tax 401(k) contributions avoid the complexities of the pro-rata rule that applies to Roth IRA rollovers.

What Is a Backdoor Roth IRA Contribution?
A backdoor Roth IRA contribution is a strategy for high-income earners who exceed the annual Modified Adjusted Gross Income (“MAGI”) limits for direct Roth IRA contributions. This strategy is separate from the after-tax 401(k) contribution strategy and instead involves contributing to a traditional IRA (non-deductible) and then converting those funds to a Roth IRA.

Roth IRA Contribution Limits for 2025

• MAGI Limits for Direct Roth Contributions:
  • Single: $165,000 (phase-out begins at $150,000).
  • Married Filing Jointly: $246,000 (phase-out begins at $236,000).
• Contribution Limit: $7,000 (or $8,000 for those aged 50+).

How to Execute a Backdoor Roth IRA in 2025

1. Contribute to a Traditional IRA: Make a non-deductible contribution of $7,000 (or $8,000 if 50+).
2. Convert to a Roth IRA: Convert the balance to a Roth IRA, ideally shortly after funding to avoid significant taxable gains. Beware of the Pro-Rata rule if you already have a Traditional IRA. The Pro-Rata Rule taxes the percentage of the Traditional IRA relating to deductible contributions and growth/earnings that is converted to the Roth IRA. As an example, if you make a non-deductible contribution to your Traditional IRA in 2025 of $7,000, the Traditional IRA value is $100,000 after this contribution, and you then convert $10,000 from the Traditional IRA to a Roth IRA, the taxable amount will be $10,000 * ($93,000 / $100,000) = $9,300.
3. Report the Conversion: File IRS Form 8606 to report the non-deductible contribution and conversion.

Example: Backdoor Roth IRA Contribution in 2025

• Income: $250,000 (exceeds direct Roth contribution limit).
• Traditional IRA Contribution: $7,000 (non-deductible).
• Roth Conversion: Immediately convert the $7,000 to a Roth IRA. If no earnings occurred before conversion, there is no taxable event.

Over time, this $7,000 grows tax-free in the Roth IRA, providing significant long-term benefits.

Maximizing Both Strategies Together
By combining after-tax 401(k) contributions with rollovers to a Roth 401(k) and backdoor Roth IRA contributions, you can maximize your retirement savings in 2025:

Example: Maximized Retirement Contributions

• Pre-Tax 401(k) Contribution: $23,500.
• Employer Match: $10,000.
• After-Tax 401(k) Contribution: $36,500 (rolled to Roth 401(k)).
• Backdoor Roth IRA: $7,000.
• Total Contributions: $77,000 into tax-advantaged accounts, $43,500 which grows tax-free in the Roth accounts, and $33,500 which grows tax-deferred in the 401(k).

Benefits of These Strategies

1. Maximized Tax-Free Growth: Roth accounts allow tax-free withdrawals in retirement, providing significant savings over time.
2. Diversified Tax Strategy: By contributing to both pre-tax and Roth accounts, you balance taxable and tax-free income in retirement.
3. High Contribution Limits: Leveraging both strategies enables contributions well beyond the standard limits of traditional accounts.
4. Flexibility: Roth accounts have no Required Minimum Distributions (RMDs), giving you greater control over distributions in retirement.
5. Estate Planning: Roth accounts do not require annual RMDs for the beneficiary and can continue to grow tax free for up to 10 years after death for a Designated Beneficiary.

Things to Consider

1. Pro-Rata Rule for IRAs: If you have pre-tax funds in traditional IRAs, the pro-rata rule applies when converting to a Roth IRA, potentially increasing your tax liability.
2. Plan Rules: Not all 401(k) plans allow after-tax contributions or in-plan Roth rollovers. Check with your employer for availability.
3. Timing: Execute backdoor Roth IRA conversions quickly to minimize taxable gains.

Final Thoughts

Maximizing after-tax 401(k) contributions and using the backdoor Roth IRA strategy in 2025 can significantly enhance your retirement savings. These strategies are especially valuable for high-income earners looking to grow their wealth in tax-advantaged accounts.

By planning carefully and working with your financial advisor at Cardinal Point, you can ensure these strategies align with your long-term financial goals and optimize your retirement savings potential.