The SECURE Act 2.0 has brought significant changes to retirement savings, particularly for those aged 60 to 63. A key feature is the increased 401(k) catch-up contribution limit, which allows employees in this age range to contribute an additional $11,250 annually starting in 2025.
While this is great news for U.S. employee savers, those who live or work north of the 49th Parallel should exercise caution due to the unique tax implications.
Increased 401(k) Catch-Up Contributions
For U.S. employees between 60 and 63, the higher catch-up limit is a valuable opportunity to supercharge retirement savings. Federally, this additional contribution can yield tax savings of up to $4,162.50 for individuals in the highest tax bracket (37%).
For cross-border workers—such as residents in British Columbia, who face a combined top tax rate of 53.5% on income over $259,829—the benefit is even greater. At current exchange rates, these savers could enjoy tax savings of approximately $6,018.75 USD (or $8,628.48 CAD).
Cross-Border Tax Considerations
While increased contributions help build retirement savings, they add complexities for those engaged in cross-border 401(k) tax planning:
- RRSP Deductibility Limitations:
In Canada, the tax deductibility of 401(k) contributions is linked to your available Registered Retirement Savings Plan (RRSP) room. For 2025, the maximum RRSP room is $32,490 CAD—equivalent to about $22,663.22 USD at the current exchange rate. Contributions beyond this limit may not be deductible on your Canadian tax return. - Relocating to Canada:
If you move to Canada, your RRSP room in the first year may be limited unless you have Canadian-earned income, potentially reducing the tax benefits of your 401(k) contributions. - Filing Form RC268:
To claim a deduction for your 401(k) contributions on your Canadian tax return, you must file Form RC268 with your T1 return. Failure to do so can result in lost tax benefits. - Exchange Rate Risks:
The tax efficiency of your contributions in Canada is sensitive to currency fluctuations. For example, to fully deduct the U.S. 401(k) limit of $34,750, the exchange rate must improve to 0.935 CAD/USD or better.
Strategic Planning for Cross-Border Savers
For those navigating cross-border tax planning, careful coordination of your retirement savings strategy is crucial:
- Monitor Your RRSP Room:
Regularly track your available RRSP contribution room to avoid over-contributing, which can lead to non-deductible amounts on your Canadian tax return. - Stay Informed on Exchange Rates:
Monitor currency fluctuations as they directly impact the tax benefits of your 401(k) contributions in Canada. - File the Necessary Forms:
Ensure you complete Form RC268 with your Canadian tax return to secure the proper deductions for your 401(k) contributions. - Consult a Cross-Border Specialist:
Given the intricate rules, working with a financial advisor experienced in U.S.-Canada tax planning is essential to optimize your retirement strategy and minimize potential tax pitfalls.
Conclusion
The SECURE Act 2.0’s enhanced 401(k) catch-up contributions present a significant opportunity for U.S. savers aged 60-63 to boost their retirement funds. However, for those involved in cross-border 401(k) tax planning, the benefits come with added challenges—from RRSP deductibility limitations and filing requirements to exchange rate risks. By staying informed and consulting with a cross-border financial specialist, you can maximize the advantages of the SECURE Act 2.0 while mitigating potential tax complications.
Contact 49th Parallel Wealth Management today to learn how to optimize your cross-border retirement strategy and secure your financial future.
