Transferring your 401K to an RRSP

Transferring your IRA or 401K to Canada can be a<br /> challenge for expats returning to Canada. When moving between Canada<br /> and the USA, there are common challenges that individuals often face.<br /> Aside from the practical aspects of the move, there are also tax and<br /> financial considerations to assess. In particular, you may have<br /> accumulated savings in a recognized retirement arrangement like a 401k<br /> plan or an individual IRA.

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Transferring Your IRA / 401K to

moving between Canada and the USA, there are common challenges that
individuals often face. Aside from the practical aspects of the move,
there are also tax and financial considerations to assess. In
particular, you may have accumulated savings in a recognized retirement
arrangement like a 401k plan or an individual IRA. What should you do
with these retirement plans if you move across the border and what are
some of the consequences? Unfortunately, there is no simple answer for
the procedure to follow but below are some tips and general information.

    Crossborder investment specialistsOften expatriate
    employees accrue retirement and/or pension benefits while working for
    an employer. If you decide to move back home (Canada in this case),
    what should you do with the 401k or IRA account?

    options are to:


    1. Leave your 401K or IRA in the US
      and have someone manage the investments for you;
    2. Cash out the plan and pay a lot of
      unnecessary tax;
    3. Start to take a retirement
      distribution (if you are of retirement age);
    4. Transfer the plan to an RRSP in

    An added complexity to these four choices is that they are affected by
    tax implications and securities regulations. 

    Option 1) Leave
    your 401k/IRA in the

    If you choose this option, you would essentially leave the plan intact
    until you require the income during retirement. Unless the manager of
    the 401k permits, you may be required to transfer the 401k to an IRA.
    If you are over the age of 59.5, you would see a 20% withholding tax on
    your distributions. If you are under this age threshold, there would be
    an additional 10% penalty tax unless you meet certain conditions. There
    would be no real tax implications on the earnings within the plan until
    you begin to make withdrawals. In Canada, the Canada Revenue Agency
    (CRA) would typically tax you on an IRA if the USA’s Internal Revenue
    Service (IRS) takes a similar position,
    which normally happens once you
    start withdrawals.

    Choosing to leave the plan as is in the US can also lead to other
    challenges. Many investment firms and brokerages will not allow an
    investment account (retirement account or otherwise) to be held by a
    non-resident. You will need to open an investment account with either a
    discount/online broker or a full service investment firm before
    terminating your US residency. If you wait until you have moved to
    Canada to secure investment accounts and initiate transfers of IRAs, it
    may be cumbersome although not impossible. Unlike some Canadian
    investment firms, US investment firms are very reluctant to have an
    investment/retirement account held by a non-resident of the US.

    Option 2) Cash
    out the plan and pay a lot of unnecessary tax; 

    This option is perhaps the least favored. There is no compelling reason
    why you should redeem your IRA and cash out the plan, unless you are in
    desperate need of cash. For the vast majority of individuals it just
    doesn’t make sense from either an investment management or tax

    Option 3) Start
    to take a retirement distribution; 

    option is only truly relevant for those old enough to consider
    retirement.  While resident in Canada, retirement
    distributions from your US based 401K will be subject to US withholding
    tax.  The distribution will also be declared as a foreign
    pension in Canada by CRA.   Consult a qualified crossborder
    tax professional to
    ensure proper reporting of such foreign income and to optimize use of
    foreign tax credits.

    Option 4)
    Transferring a 401k / IRA to an RRSP in Canada

    A 401k is an employer sponsored defined contribution (DC) retirement
    arrangement. If contributions were made by your employer while you were
    a resident of US, you will be allowed to make a lump-sum 
    transfer from your 401k. Specifically, you will be able to transfer a
    401k to a rollover IRA (employer permitting) and then transfer the IRA
    to a Canadian RRSP.

    Transferring assets from an RRSP to a 401K or IRA

    Click Here to view a larger version of
    this diagram

    In more detail, the transfer of a 401k ultimately to an RRSP usually
    occurs as follows:

    1. Open a Rollover IRA account with an
      investment firm capable of crossborder investment management.
    2. Rollover the 401k to an IRA while
      still a resident of the US. You cannot roll a 401k directly to an RRSP.
    3. Withdraw all of the IRA as a
      Canadian resident (you will be assessed 20% withholding tax, possibly
      reduced to 15%). If you are under 59.5 years, there will be an
      additional 10% penalty which is not recoverable.
    4. The net resulting lump sum payment
      is then transferred to an RRSP. The subsequent deposit into an RRSP
      must occur in the year of withdrawal or within 60 days of year-end.
    5. Determine the value of the transfer
      in Canadian dollars.
    6. The full gross withdrawal including
      the withholding tax is included as Canadian income with a deduction
      referencing a section 60(j)(ii) transfer. This results in no additional
      tax liability to Canada.
    7. The 20% withholding tax paid to the
      IRS in point number “3” above may be claimed as a foreign tax credit
      (FTC) for Canadian tax purposes. FTCs require a more detailed

    Checklist of transferring a 401K to an RRSPNow the
    complications. The 401k must be a lump-sum transfer from a pension or
    superannuation and employment services rendered while a non-resident of
    Canada. There are different rules for individuals living in Canada and
    working in the US or in the case of temporary employees working in the
    US for less than 5 years.

    The withholding tax paid to the
    IRS that is claimed as a foreign tax credit in Canada requires the
    advice of a tax practitioner. Generally, the taxes paid in the US can
    used to reduce the tax liability in Canada. However, since the concept
    of FTCs are multi-faceted, it can take several years of claiming
    credits to attempt to recoup the initial 20% withholding tax that was

    Please bear in mind that you haven’t really paid tax to Canada at this
    on the IRA withdrawal, only to the IRS. Therefore, you need to have
    sufficient Canadian income tax owing from certain sources in order to
    utilize the FTCs. Canada views the IRA withdrawal as a transfer while
    the US views it as an early lump sum withdrawal and thus applies the
    20% withholding tax.

    A final distinction also needs to made if the IRA account has been
    subject to proceeds from a ROTH conversion. Such conversions would
    the account and this technique would become muddied because Canada does
    not recognize ROTH plans in the same context as “foreign retirement
    arrangements.” Furthermore, Canadian Tax Free Savings Accounts (TFSAs)
    and ROTHs are separate categories with another set of rules and
    guidelines for anyone wishing to move across the border.

    What about the reverse,
    transferring from an RRSP/LIRA to an IRA?

    Thus far we have only explored the mechanics of a person moving from
    the US to Canada but what solutions exist for a person moving from
    Canada to the US?  Unfortunately, RRSPs or LIRAs (locked-in
    plans) cannot be transferred to an IRA. Please also be aware that the
    place and timing of these transactions should be aligned with pre- and
    post-move planning that captures the realities of residency and ceasing
    of non-residency. Many aspects of the information contained herein can
    also be applicable to retirement arrangements from other countries like
    the United Kingdom.

    Transferring assets from an RRSP to a 401K or IRA

    Click Here to view a larger version of
    this diagram


    (as per Circular 230).  To ensure compliance with the
    requirements imposed by the IRS, we inform you that any tax advice
    contained in our communication (including any attachments) was not
    intended or written to be used, and cannot be used, for the purpose of
    (i) avoiding any tax penalty or (ii) promoting, marketing or
    recommending to another party any transaction or matter addressed
    herein. Our communication is limited to the conclusions specifically
    set forth herein and is based on the completeness and accuracy of the
    facts and assumptions as stated. Our advice may consider tax
    authorities that are subject to change, retroactively and/or
    prospectively. Such changes could affect the validity of our advice.
    Our advice will not be updated for subsequent changes or modifications
    to applicable law and regulations, or to the judicial and
    administrative interpretations thereof. Copyright Pacifica Partners Inc
    (August 1, 2012).

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