Articles

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.

NEW YORK – January 6, 2025 – Focus Financial Partners Inc., a leading partnership of wealth management, business management, and related financial services firms, has announced that Cardinal Point Capital Management, ULC has become its latest hub firm as part of its evolved strategy, reflecting the importance it places on Canada as a key growth market.

Founded in 2009 and headquartered in Toronto, ON, Cardinal Point is a leader in cross-border wealth management, providing investment management and estate, tax, and financial planning solutions to its high-net-worth and business-management clients across the United States and Canada. Cardinal Point managed approximately CAD 3.1 billion in regulatory assets under management, measured as of September 30, 2024.

“The wealth management landscape has evolved rapidly since we joined Focus in 2021. While we have doubled our regulatory assets under management over that time, added new team members, and successfully launched our business-management division, which caters to professional athletes, we recognize the increasing importance of firms taking proactive steps to innovate and continue providing clients with best-in-class capabilities and expertise,” said Jeff Sheldon, Co-Founder & CEO of Cardinal Point. “Becoming a Focus hub underscores our responsibility to our colleagues and clients to cultivate the best resources in the industry. We are excited to be an integral part of what Focus is building and by their continued commitment to the Canadian market.”

“Cardinal Point has a differentiated value proposition in the Canadian market as one of the only full-service, cross-border wealth management firms. With exceptional leadership and client-service teams, Cardinal Point is well positioned to lead Focus’ consolidation and expansion efforts in Canada,” said Michael Nathanson, CEO of Focus Financial Partners. “Cardinal Point’s next chapter as a hub will enable the firm to extend the reach of its services while also expanding its capabilities for clients across the entirety of Focus, especially given its expertise in cross-border wealth management.”

Cardinal Point joins The Colony Group, Kovitz Investment Group, SCS Financial and Gelfand, Rennert and Feldman as the fifth Focus hub.

Press Coverage

• Advisor.ca: Cardinal Point Management becomes Focus Financial’s fifth hub
• Barron’s: Focus Financial Taps Canadian Wealth Manager as Its Latest Hub
• Citywire: Canadian wealth manager Cardinal Point becomes Focus hub
• FA Magazine: Focus Financial Adds Toronto Network Firm As Hub
• Financial Planning: Focus Financial looks north of the border with new internal ‘hub’
• InvestmentNews: Focus extends merger strategy with Cardinal Point
• ThinkAdvisor: Focus Financial Establishes Hub Office in Toronto
• WealthManagement.com: Focus Names Toronto Firm as Fifth ‘Hub’ in Consolidation Strategy

# # #

About Focus Financial Partners, Inc.

Focus is a leading partnership of wealth management, business management, and related financial services firms. Focus provides access to greater resources and services for its affiliated firms, which serve individuals, families, employers, and institutions with comprehensive financial services. Focus firms and their clients benefit from the solutions, synergies, scale, capital, and best practices offered by Focus to achieve their business objectives. For more information about Focus, please visit www.focusfinancialpartners.com.

About Cardinal Point Capital Management, ULC

Cardinal Point is a leading cross-border wealth and business-management firm that provides exceptional service to individuals across Canada and the United States. Cardinal Point offers comprehensive investment, estate, tax, business-management, and cross-border financial planning solutions that are customized to suit clients’ unique financial needs. Headquartered in Toronto, Ontario, Cardinal Point also has offices in Calgary, Alberta and Scottsdale, Arizona. For more information about Cardinal Point, please visit https://cardinalpointwealth.com/. 

Media Contact

Prosek Partnerspro-focusfinancial@prosek.com

Millions of retirees are set to see a boost in their Social Security benefits as President Biden prepares to sign a new law eliminating the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). This landmark legislation particularly impacts cross-border workers—those who split their careers between the United States and Canada, contributing to both Social Security and the Canada Pension Plan (CPP).

For cross-border workers, this change marks a significant financial improvement, addressing long-standing inequities in how their Social Security benefits were calculated.

Elimination of WEP and GPO

The WEP and GPO provisions have long reduced Social Security benefits for individuals with pensions from non-covered employment—jobs where Social Security taxes were not withheld, such as positions covered by the CPP.

• WEP Impact: Previously, workers who earned Social Security benefits from U.S. jobs and a CPP pension from Canadian employment saw their Social Security payments reduced.
• GPO Impact: Spousal and survivor benefits were also reduced for those receiving a CPP pension, significantly impacting family financial planning.

The new law eliminates these provisions, allowing cross-border workers to receive their full Social Security benefits without penalties for their CPP contributions.

Why It Matters for Cross-Border Workers

1. Fairness for Dual Contributions
   Cross-border workers often contribute to both Social Security and CPP, yet their retirement benefits have historically been penalized under WEP and GPO. With this repeal, these workers can now benefit fully from their contributions in both systems.
2. Higher Retirement Income
   The repeal is expected to increase Social Security benefits by hundreds of dollars per year, and in some cases, over $1,000 annually. These adjustments make a meaningful difference, particularly for retirees relying on fixed incomes.
3. Retroactive Payments
   The law provides retroactive benefits for 2024 and permanent increases beginning in 2025. This ensures that retirees impacted by these provisions will receive compensation for prior reductions.

For more detailed insights into the WEP and GPO repeal, check out this article on the Social Security boost.

The Role of the U.S.-Canada Totalization Agreement

Cross-border workers have historically benefited from the U.S.-Canada Totalization Agreement, which allows contributions to Social Security and CPP to be combined for eligibility purposes. However, until now, the WEP and GPO provisions undermined the Agreement’s intent by reducing benefits for those with earnings in both systems.

This new law complements the Totalization Agreement, ensuring fair treatment for workers who spent part of their careers contributing to CPP and Social Security.

Financial Planning Considerations

1. Higher Monthly Benefits
   Retirees should reassess their financial plans to account for higher Social Security payments. This may influence decisions on when to claim benefits or whether to delay withdrawals from IRAs and RRSPs.
2. Tax Implications
   While benefits are increasing, recipients should also consider the tax treatment of Social Security in both the U.S. and Canada. Social Security benefits may be taxed differently depending on residency and tax treaties.
3. Healthcare Coverage
   Cross-border retirees should revisit their healthcare plans, including Medicare eligibility in the U.S. and provincial healthcare plans in Canada, to align with higher income levels and potential changes in premiums.

Challenges and Future Implications

While the repeal of WEP and GPO provides immediate financial relief, it comes with an estimated cost of $196 billion over the next decade. This could accelerate the depletion of Social Security trust funds, currently projected to be exhausted by 2035. Future reforms, such as payroll tax increases or adjustments to benefit formulas, may be necessary to maintain Social Security’s long-term solvency.

Final Thoughts

The repeal of the WEP and GPO represents a long-awaited win for cross-border workers who split their careers between the U.S. and Canada. By removing unfair penalties, this legislation ensures these workers can fully benefit from both Social Security and CPP contributions, providing a meaningful boost to retirement income. For a more in-depth analysis of the WEP and GPO repeal and its impact, visit this detailed blog post. If you’d like to discuss how this change may impact your cross-border financial plan and how to maximize your benefits, please contact Cardinal Point.

There you are…
A Canadian resident soaking up the Florida sun. Ten days of well-deserved rest, then it’s back to the office grind in Toronto. With total disregard for your right to some peace, that office laptop you brought interrupts and starts nagging you to check your email.

With a sigh of resignation, you give in and respond to a few emails. Some of the emails require a phone reply, so you make a few calls. You schedule a few videoconferences – and at least one of them requires hours of preparation. Before you know it, you are doing your job while you are supposed to be on vacation. 

Unfortunately, that may sound all too familiar. But is doing office work also against the law? After all, you were admitted to the US as a visitor for pleasure. 

Are you doing anything wrong?

Employment in both the U.S. and Canada triggers a vast array of rules, requirements, and responsibilities in areas such as worker benefits and contributory programs, taxation, immigration, and labor relations. Failing to follow all of the rules, all of the time, can be costly for employers and workers alike. 

But does the vast U.S. regulatory regime even apply to you? The entirely truthful but frustrating answer is “it depends.” In some circumstances, managing emails, phone calls, and videoconferences in a Florida hotel room is “employment” for U.S. purposes.

It would be so simple to just look up the Department of Labor’s definition of “employment” but that would only get you so far: four federal agencies (The Internal Revenue Service, Citizenship & Immigration Services, Social Security Administration, and Department of Labor) regulate work in the U.S., and they all interpret the term “employment” differently.

Fortunately, a visiting Canadian can remain on-side with all four agencies by following some common-sense guidelines to avoid even the appearance of U.S. employment: 

1. Your employer has a brick-and-mortar address outside the U.S. 
2. Your paychecks are issued by an entity outside the U.S.
3. You receive no employment income from a U.S. source 
4. Your activities in the U.S. do not directly benefit a U.S. entity during your stay. “Entity” means a U.S. partner, supplier, client, or prospect. Activities that directly benefit a US entity may require a Business Visitor (B-1) visa or a work visa − depending on the nature of the activity and current U.S. immigration policy. 
5. You accept no reimbursement from a U.S. entity before, during, or even after your U.S. stay. All reimbursements are from non-U.S. entities, ideally your Canadian employer. 
6. Be able to prove that the primary purpose of your visit to the U.S. is pleasure and not work. There is no standard set of documents for this, so rely on common sense and a little creativity. For example:
   • Your planned trip should last no longer than your available vacation time. Save records that prove: 

• • • You have a specific number of vacation days remaining in the year. 
    • You requested and were granted a certain number of days of vacation. 
    • You booked a trip for the days granted with no expectation that you would extend your stay. 

• • Book all travel on your personal account, not that of your employer. Pay for all trip and vacation expenses with your personal credit card, not that of the business.
  • Before your trip, develop a written itinerary that does not allocate significant time to work, follow that plan, and save a copy of it.  
  • Make advance reservations for fun events, ideally before you leave Canada. Retain the written confirmations. Save other receipts that suggest you engaged in those and other vacation-oriented activities. 

Your credit and debit card statements are an easy and credible way to document the vacation-focus of your trip. However, that only works if you pay with a credit or debit card linked to an account in your name. If other members of your entourage are paying and signing, that doesn’t provide you with adequate documentation. 

Save all of this documentation in a safe place for life or until you become a dual citizen.

Note that the above guidelines are offered from a cross-border planning perspective for Canadian workers who are not a) dual citizens or b) U.S. Lawful Permanent Residents (green card holders) in compliance with the terms of their status. These guidelines are not a substitute for the expert advice of your attorney or CPA.

Is all of this really necessary?

No, it isn’t necessary—as long U.S. agencies never ask about your stay. But if they do ask, then being able to prove that you were not employed is invaluable. 

What is the worst that could happen? A finding of unlawful (and unreported) employment can trigger a host of problems for the worker: a need to report income, pay U.S. income taxes and other taxes normally addressed through withholding, IRS failure to file (income tax return) penalties and interest, deportation, inability to extend stay, inability to change nonimmigrant status, inability to adjust status in the U.S. to a green card, and a finding of inadmissibility which may render you ineligible for a green card at a U.S. Consulate abroad. Note that waivers may be available, but they are not automatically granted.

Similarly, a finding of unlawful and unreported employment in the U.S. by a Canadian employee can have ramifications for the Canadian employer, primarily: difficulty securing U.S. visas for other employees and costly compliance issues with IRS and the Social Security Administration. 

Because the consequences are potentially enormous, avoid skirting the edge of unlawful U.S. employment. Follow our approach: avoid even a whiff of suspicion that you may be engaging in U.S. employment. 

If you or your employer, need to engage in U.S. activities that look like work:

• Consult with a U.S. business immigration attorney (and perhaps a U.S. CPA) well in advance of travel. 
• Plan any interfacing with U.S. partners, suppliers, clients, or prospects in consultation with that attorney. You may need a B-1 Business Visitor visa or a temporary work visa, depending on the activities you plan to engage in while on U.S. soil. 
• Budget sufficient time for visa processing, which can be subject to long delays. 

Summary

Most Canadians who bring their office laptops to the beach are operating in alignment with our guidelines. To briefly recap, our approach is:

• Document that your stay is a genuine vacation with the vast majority of waking hours spent on pleasure activities.
• Limit your “work” to checking email, interfacing with staff and clients in Canada, and a minimal amount of additional online engagement related to work. 
• Receive no income or reimbursements from U.S. entities (i.e., U.S. partners, supplier, clients, or prospects).
• Do no work that directly benefits U.S. entities.

Those who want to do more with their time in the U.S. than enjoy a vacation should invest in advance planning that includes consultations with a U.S. business immigration attorney and perhaps a U.S. CPA as well.

The U.S. remains an attractive destination for Non-Resident Aliens (NRAs) looking to invest in assets like real estate, life insurance, and securities. But NRAs face unique challenges related to U.S. estate taxes and regulatory requirements. However, utilizing trusts can help NRAs mitigate tax exposure, protect assets, and maintain privacy. This blog post explores the strategic use of trusts for NRAs investing in U.S. assets, with examples illustrating how trusts can help NRAs optimize tax outcomes.

1. Real Estate Investments for NRAs

NRAs often purchase U.S. real estate for personal use or as an investment. But direct ownership of U.S. real estate exposes NRAs to a 40% U.S. estate tax on any U.S.-situs property that exceeds the minimal $60,000 U.S. estate tax exemption for NRAs. A popular and effective strategy to minimize this exposure involves holding U.S. real estate within a U.S. Dynasty Trust or an offshore entity.

• Example: Consider an NRA from France who wants to buy a vacation home in Florida valued at $2 million. If they purchase it outright, they risk a 40% estate tax liability, potentially incurring $800,000 in taxes upon their death. However, by establishing a U.S. dynasty trust to hold the property, they can avoid this liability. Additionally, if structured properly, the trust eliminates potential imputed rental income for the property’s use by beneficiaries, although the NRA grantor might need to pay fair market rent if they also use the property.
  • Strategy: To cover estate taxes, the NRA could also consider purchasing U.S. life insurance through a trust. This insurance policy would provide liquidity to cover estate tax obligations, ensuring the property remains within the family without being subject to forced sale for tax payments.

2. Life Insurance as a Tax-Exempt Asset

For NRAs, U.S.-based life insurance offers both investment growth and tax advantages. U.S. life insurance is an exempt asset for U.S. estate tax purposes, meaning that the proceeds from a life insurance policy on an NRA’s life are not deemed U.S.-situs property.

• Example: An NRA from Germany invests in a $5 million life insurance policy with a U.S. insurer. If structured through a U.S. trust, the insurance payout will be free of U.S. estate taxes, regardless of the NRA’s other U.S. assets.
  • Strategy: For large policies, NRAs often select trust-friendly jurisdictions like Alaska, Delaware, South Dakota, or Wyoming, that have low premium taxes and modern trust statutes that support flexibility, privacy, and asset protection.

3. Investing in U.S. Securities

U.S. securities are attractive to NRAs due to favorable tax treatment on capital gains, tax-free portfolio interest, and favorable dividend tax rates (often reduced by tax treaties). However, directly holding U.S. securities still exposes NRAs to a 40% estate tax on those assets upon death. To mitigate this risk, NRAs frequently use a Foreign Grantor Trust (FGT) as a planning vehicle.

• Example: Suppose an NRA investor from Brazil owns $3 million in U.S. stocks. If they hold the stocks directly, these assets are subject to a 40% estate tax. By setting up an FGT in a trust-friendly U.S. jurisdiction like South Dakota, they can hold these assets through an offshore entity owned by the trust. This structure protects the securities from estate tax while allowing income distributions to the NRA grantor during their lifetime.
  • Strategy: FGTs are generally revocable during the grantor’s lifetime and allow the NRA to retain control and access to income and principal. Upon the grantor’s death, the trust assets can pass to their descendants, shielding them from U.S. estate taxes.

4. The Advantages of Foreign Grantor Trusts (FGTs)

FGTs are especially beneficial for NRAs from politically unstable countries or countries with strict inheritance laws, as these trusts provide additional layers of asset protection and privacy.

• Example: An NRA from a country with forced-heirship laws establishes an FGT to hold U.S. securities for the benefit of their children. The FGT allows the NRA to bypass restrictive inheritance laws in their home country and choose how assets will be distributed among beneficiaries. Since the trust is U.S.-based, it remains outside the jurisdiction of their home country’s government.
  • Key Considerations: NRAs choosing a U.S.-situs FGT can benefit from U.S. trust privacy and asset protection laws, which prevent foreign entities from easily accessing information about the trust’s assets.

5. Choosing a Trust-Friendly U.S. Jurisdiction

The selection of a trust jurisdiction in the U.S. can significantly impact tax efficiency, trust flexibility, and cost. States like Alaska, Delaware, South Dakota, and Wyoming offer attractive options for NRAs due to their favorable trust laws, low or no state income taxes, and modern trust structures (such as directed trusts and asset protection trusts).

• Example: An NRA chooses South Dakota to establish an FGT due to its favorable trust laws and no state income tax. South Dakota allows for directed trusts, meaning the grantor can appoint a trust advisor or protector to make investment decisions independently of the trustee. This structure provides the NRA with more control and privacy in managing assets held within the trust.
  • Strategy: Directed trusts and asset protection statutes in these states enhance control over investments and provide strong protection against claims from creditors or foreign governments.

6. Portfolio Diversification and Protection with Trust Structures

By structuring their U.S. investments through trusts, NRAs can optimize portfolio diversification and asset protection. Trusts also offer tax deferral and strategic estate planning benefits.

• Example: An NRA investor allocates $5 million into a U.S.-based trust that holds a diversified portfolio of U.S. real estate, life insurance, and securities. This structure not only offers estate tax protection but also enhances the protection for each asset category.
  • Benefit: Holding a diversified portfolio in a U.S.-based trust enables the NRA to maximize investment benefits while maintaining control over their asset allocation, ensuring tax-efficiency and estate planning continuity.

Final Thoughts: Why Trusts Are Essential for NRAs Investing in the U.S.

The U.S. offers unique investment opportunities for NRAs, but direct ownership of U.S. assets can result in significant estate tax liabilities. But by leveraging structures like dynasty trusts, foreign grantor trusts, and insurance trusts, NRAs can access the U.S. market while protecting their investments from U.S. estate taxes and enhancing privacy and asset protection.

Consulting with qualified and experienced cross-border tax and trust professionals is essential to ensure that trusts are strategically structured to comply with both U.S. tax laws and the investor’s specific needs. Proper planning allows NRAs to maximize the benefits of U.S. investments and secure their assets for future generations. Additionally, it is essential to analyze the NRA’s home country’s tax laws and potential Tax Treaty with the U.S. as it pertains to U.S. trust strategies. Please contact Cardinal Point for more information or to discuss your unique situation.