Moving An IRA or 401(k) to Canada

by Tax Guy - Burlington Accountant on March 10, 2011 Print This Post Print This Post

If you have lived or worked in the U.S., you may have an Individual Retirement Account (IRA) or 401k plan. Leaving these accounts in the U.S. can be administratively challenging and you may wish to consider moving them to Canada.

In certain circumstances, a person with a 401k or IRA may be able to rollover their U.S. retirement account to a Canadian RRSP. The process can be tricky because the tax systems in Canada and the U.S. are different.

What Is A 401k?

The 401k is an employer sponsored defined contribution retirement plan that is similar, in many respects, to the Canadian Deferred Profit Sharing Plan (DPSP).

Step 1 – Does The 401k Qualify For A Rollover?

The tax implications of moving your 401k to Canada depends on whether you were a resident of Canada at the time the contributions were made to the plan.

If You WERE A Resident When The Contributions Were Made

Tax paperwork

By iowa_spirit_walker via Flickr

If you were a resident of Canada when your employer contributed to the plan, you will not be allowed to rollover the 401k to an RRSP. Although you can cash out your 401k, the lump-sum will be taxable in Canada. However, you can offset this by contributing to your RRSP, if you have RRSP contribution room available.

If You WERE NOT A Resident When The Contributions Were Made

A lump-sum payment from a 401k that are considered to be in the form of pension or superannuation attributed services rendered while you were NOT a resident of Canada may be transferred to an RRSP without affecting your RRSP contribution room.

Step 2 – Meet The Conditions To Transfer The 401k

Transferring a 401k to an RRSP without affecting your RRSP contribution room is possible provided you meet the following conditions:

  1. Lump-Sum Payments Only - The amount received from the 401k must be a lump-sum payment and be part of a series of periodic payments.
  2. Non-Resident Contributions – As outlined above, the payment must be the result of services rendered while you or your spouse or common law partner was not a resident of Canada.
  3. Included In Taxable Income – You are required to report the gross amount (i.e. before U.S. withholding tax or the penalty tax) in your taxable income on Line 115.
  4. Contribute By The Deadline – You must make a contribution to your RRSP for an amount up to the gross amount received within 60 days after the end of the tax year you received the lump-sum payment. This is done under s.60(j)(i) of the Income Tax Act and is reported on Line 240 of Schedule 7.

You should advise your RRSP plan provider that the contribution is a section 60(j)(i) contribution.

Step 3 – Consider The Tax Implications

The lump-sum payment will be subject to a 30% U.S. withholding tax and if you are under age 59.5, a 10% penalty tax.

For Canadian tax purposes, the gross amount is included in your income and you deduct the amount contributed to your RRSP under s.60(j)(i). The 30% withholding tax may be claimed as a foreign tax credit but if you paid the 10% penalty tax, it cannot be claimed.

The foreign tax credit and foreign tax deduction system is complicated and you should consider having your taxes done by a designated accountant.

What Is An IRA?

An Individual Retirement Account (IRA) is very similar to a Canadian RRSP.  Contributions made to the account may be deducted from income in they year the contributions were made.  Income accumulates in the account free of tax and is taxed as income when withdrawn.  Withdrawals or collapse of the IRA before age 59-1/2 are also subject to the penalty taxes.

From a Canadian point of view a regular IRA can be rolled into an RRSP without affecting your RRSP contribution room.

The lump-sum payment must be included in your taxable income and you can make a contribution to your RRSP under s.60 of the Income Tax. Like the 401k, the IRA will be subject to U.S. withholding tax and potentially the penalty tax. The withholding tax may be claimed as a foreign tax credit. Refer to Step 3 – Consider The Tax Implications above.

Get Help!

If you want to make the move but don’t know where to start or how to handle the taxes, contact me today to get started. As an accounting and financial planning professional, I can:

  1. Plan the move and minimize your tax bill,
  2. Help you find the right financial institution to handle the transfer, and
  3. File your tax return.

 

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 72 comments }

Ludwig March 19, 2011 at 3:04 pm

I use to work in the US and now a retiree in Canada for the first time I received $9000 of 401K benefits and $1500.00 income tax was deducted in the sates. How much of foreign tax cr a’I eligible to and what are the schedule #s to claim it on.
thank you for your advise,
ludwig

Frank April 2, 2011 at 10:19 pm

I am an American citizen planning to move to Canada when I turn 59 1/2 (about two years from now). I have a 401k worth approximately $US 800 000. Is there any advantage (or disadvantage) in my transferring these funds to to an RRSP? If I make this move, I presume I will pay US taxes on my withdrawals. Will I owe Canadian taxes as well? Finally, I expect to work at least part time in the US after I move. Again, I presume I will pay US taxes, but will I be obligated to pay Canadian taxes as well?

Tax Guy April 4, 2011 at 3:16 pm

Frank,
The article covers your exact question assuming you are already a Canadian resident. You are moving the funds from one tax-deferred account in the US to one in Canada.

Monty April 4, 2011 at 8:35 am

First off, great info here, I’ve been looking for something like this.

I worked in the US for 3 years 2001-2004 and lived in Canada (commuted over the border). Have always been a Canadian resident and during that time had to file both US and Canadian taxes.

During that time I contributed to a 401k through the company; the company matched my contributions (I don’t recall to what degree, but there was a yearly limit).

I would like to move/withdraw what I have in the 401k and transfer it over to RRSPs. From what I understand, I would have to pay to 10% withdrawal fee and another 15% fee?

I guess my question is what is the best way to do this to minimize the amount of fees paid? Limit on my RRPs are not an issue.

Thanks!

Tax Guy April 4, 2011 at 3:49 pm

Since you were a resident of Canada the withdrawals will be fully taxable as income in Canada. You include the gross withdrawal in taxable income and claim the 30% US withholding tax as a foreign tax credit.

You can offset the taxable income by contributing your RRSP. Be aware that you will be limited to your RRSP contribution limit as there would be no rollover provision.

Lost in Taxation April 15, 2011 at 2:12 am

Great tips Tax Guy. Thanks in advance!

My question:

I was a non-resident of Canada for 4 yrs while working in the US and stopped paying Can tax for the applicable years during that time. While in the US I contributed to an employer matching 401(k). When I left my job I rolled that over into a self-directed IRA in States. I then re-entered Canada, declared myself a resident, starting paying Can tax and stopped paying US tax (I filed my split-year on the year I left).

Last Spring (four years after I left the US) as a resident of Can, non-resident US Alien, I took a lump-sum distribution from my IRA and closed the account. I received a 1042-S, filed a 1040NR and paid the balance due to the US Treasury. The US monies from the distribution were deposited, and are still, in a US bank tied to my US TIN. They have not yet entered the country. I have claimed no tax treaty benefits on the US side of things. I have yet to file tax for 2010 in Canada.

I called CCRA twice about the issue. Once in Jan 2010 and once in Jan 2011. Last year they told me I did not owe any Can tax on the monies as the monies in the IRA where funded when I was a non-resident. This year they told me I had to pay Can tax on the money as foreign income but I should be eligible for a foreign tax credit.

My Questions:
1. Do I owe Can tax on this distribution?
2. How do I claim this on my Can tax?
3. What can I deduct (if applicable)?

Any help or links are greatly appreciated!

Tax Guy April 15, 2011 at 9:07 am

A resident of Canada is taxed on worldwide income. The lump-sum distribution from your IRA is to be included in your Canadian taxable income under s.56 of the Act. You report gross withdrawals from the IRA on Line 115 and convert the amount into Canadian dollars using the exchange rate that was in effect on the date of the lump-sum payment. You can use the exchange rate published on the Bank of Canada website on the date of the payment.

To avoided double taxation, you should also claim the foreign tax credit for the US tax paid on the payment. This is claimed on Line 405 of Schedule 1 along with form T2209. Note that the foreign tax credit cannot include the 10% penalty tax, if applied.

Funds remaining in the IRA are not taxabale until withdrawn.

Lost in Taxation April 22, 2011 at 10:12 am

Thanks again Tax Guy. We spent half a day off/on the phone with the CCRA last week and this is basically what they said. Done, filed and paid.

Learn from my mistakes people! Get some tax advice form an accountant *first* before making these decisions. I’m sure there is a better way to do this that minimizes your tax responsibilities.

ATA January 18, 2012 at 7:41 pm

I have company stocks that I bought when I was employed with a compnay that offered their stocks at a discount to their employees. I don’t want to sell these stocks and instead roll these into a RRSP contribution or have these registered. Is it possible and how do I do this?

Resident? January 19, 2012 at 8:01 pm

Great website, thanks for those who posted detailed questions and many thanks for replying to those questions.
I was a Canadian citizen who moved to the US in 2004 on a TN visa. I worked there for 6-years and contributed to 401k plans. I kept a Canadian bank account and occasionally visited family. Thanks to some horrible family advice, I filed Canadian taxes in Canada based on Canadian earnings and bank interest and filed US taxes on US earnings and interest. Never disclosed to either country my global income. I know I need to talk to an accountant about this to make whatever amends need to be made. Moving on though…

In 2010 I moved to Australia and am currently seeking Australian Permanent Residency. Here in Australia they have a mandatory Superannuation vehicle to which my employer is contributing to.

My retirement plans are pretty complicated and I would like to simplify my retirement plan(s) while benefiting from whichever country provides the most flexible benefits. I have many years to go before I retire and I’m not sure where in the world I’ll end up retiring. I don’t know if I am a Canadian resident for tax purposes, but I plan on filling out a CRA Determination of Residency form to get a definitive answer.

Would you suggest trying to consolidate my 401k into my existing RRSP? Since I’m not a US resident, and I have a feeling I’m also not a Canadian resident, what can or can’t I claim on my Canadian taxes? Or would it be better to try and consolidate everything into my Australian Superannuation? Perhaps just bite the bullet and plan on administering each plan individually and continue filing taxes in which ever countries require me too.

Some accountants I’ve talked to informally seem “pushy”, so any suggestions or options you might give would help me have more meaningful dialogues with future accountants.
Thanks

Tax Guy January 19, 2012 at 8:31 pm

Unfortunately, you`re going to get what you pay for. I`m unable to comment on your specific situation in this forum except to say that you will need to hire someone. It may not be too late to fix the mistakes and save you some money. You can contact my firm via the contact form above.

Lee January 31, 2012 at 12:25 pm

Hello,

I am a Canadian citizen who lived in the U.S. legitimately for 33 years. During that time I contributed to an IRA. I never became an American citizen, and I moved back to Canada in 2002. I read the above information, but am wondering about the tax implications of moving my paltry ( $84,000 US) IRA to Canada now? I am 60 years old.

Thank you for this service.

Tax Guy January 31, 2012 at 1:58 pm

See Step 3 in the article above!

eliz September 6, 2012 at 6:16 pm

I was a resident alien in the US, and then recently came back to Canada for family reasons. I have a 401K as a divorce QDRO. I have 2 QDRO pensions, one as an annuity, and the other as a lump sum (or annuity, but I think it better come out as the lump sum now due to the state of the company). Can I open an IRA in NY and roll over the lump sum and leave it there (I am 55 – will need it starting at 60). Will I be taxed NOW in Canada with it being income? Can I roll it into a RRSP later when I have little income? If I take the annuity now, can I put it into the IRA too or into the RRSP, or do I have to declare it as income now in Canada and pay taxes? I think I live here but the US still wants to think I live there. I am confused? Thanks.

Tax Guy September 10, 2012 at 9:17 am

Hi Eliz,

Unfortunately your question is outside my area of expertise. I would suggest you contact a Canadian trained US tax specialist and arrange a meeting to discuss your issues.

If you need help finding someone, please contact me directly and I may be able to put you in touch with a couple.

Osman K September 29, 2012 at 3:56 pm

My wife and I are Canadians who moved to USA and became US resident (TN visa) in 2001. 2001 was our last year as Canadian resident and we did not open any retirement accounts in USA that year.

In 2008 we have got a green card but we had to move to overseas, thinking it would be temporary. We continued to file as resident of US until 2011. In 2011, we gave up our green cards.

Now, my wife and I, both have IRA (converted from 401k) of about 125k and Roth IRA of about 20k and don’t know what to do about them. We both are 42 years old with no intention of going back to USA, but hoping to move to Canada sometime. We have three kids (one Canadian, two Americans).

Any advise would be greatly appreciated. 2012 taxes worry me a lot and we would be looking for professional advice as we are very confused about the earnings on those retirement accounts.

Thanks –

Tax Guy September 30, 2012 at 8:50 pm

Taking the funds out of the IRA would result in the US withholding tax at 30% plus the 10% penalty.

If you do the withdrawal after coming back to Canada, you can roll this to an RRSP. However, you will likely lose some of the account value to taxes unless you are in a very high income bracket.

If you me directly and I can draft a plan for you.

Nick K October 30, 2012 at 10:58 pm

Hi there.

I’m just wondering if you have any knowledge of whether an Australian Superannuation Pension can be transferred to an RRSP in Canada? I assume it cannot, but wonder if you have any experience with this type of scenario. Thanks.

Nick Klianis

Tax Guy - Burlington Accountant November 1, 2012 at 3:00 pm

Yes. An Australian Superannuation Pension can be transferred to an RRSP.

Dale December 7, 2012 at 4:00 pm

I read that there may be an advantage in rolling a 401K into an IRA before transferring it to Canada. Also I read that the transfer should be done in a high income year to take advantage of the higher tax refund when it goes into the RRSP. I would be grateful if you could comment both these points.

Mark Cauchi April 12, 2013 at 3:55 pm

I am a Canadian citizen who lived and worked in Texas for 3 years. During that time I had a 401k thqt I and my US employer contributed to. Last year I cashed out the 401k and a 30% tax witholding was taken in the US before they sent me the cheque.

I understand from the post above that I need to declare the total 401k valus on my Canadian 2012 tax return as well as declaring the witheld amount as a foreign tax credit.

The question I have is do I need to complete a 1040NR return in the US for 2012 as well? Is there any benefit in doing so?

Thanks

Mark

Jim Hand April 22, 2013 at 8:34 pm

I am living in Calgary but am a US citizen. Previously I was with a US employer and have US Funds in a Traditional IRA. I’ve opened a Self-Directed Traditional IRA and to transfer some of my funds from the Traditional IRA into the Self-Directed IRA to purchase commercial real estate. The Self-Directed IRA will have a custodian to assure I stay in compliance with IRS requirements (IRC Section 408). I know I’m fine on the US side but will I remain tax projected until distribution on the Canadian side?

WB July 10, 2013 at 9:06 pm

I worked in US from 2000-2002, and have been back in Canada ever since. I have a 401K that I’d like to cash out and move to Canada, but not to an RRSP.

Aside from the 30% withholding tax, will I need to file US taxes next year or pay any additional taxes in the US?

Thanks

Tax Guy - Burlington Accountant July 13, 2013 at 7:51 am

You don’t have to file a US return but may be able to file a 1049NR.

Peter Hindle October 17, 2013 at 10:56 pm

I have an IRA from when I worked in the US as a resident alien. I am a Canadian
& moved back to Canada 12 years ago. I am 73 & have taken 3 disbusements with the US & Canadian taxes paid. Would I be able to roll this over into an RRSP at my age? My wife has an RRSP, but I do not. Can I open a RRSP at my age to do a rollover, or could I do the rollover to my wife’s RRSP?
Thanks

Tax Guy - Burlington Accountant October 22, 2013 at 5:30 pm

Hi Peter,
Unfortunately it is too late because you cannot open an RRSP.

Scott October 29, 2013 at 9:24 pm

Is the 30% withholding tax a temporary deduction that you can get refunded provided you have no other U.S. income in the year you withdraw 401K funds, provided you are under 59?

Or is it 30% out of your pocket that you’ll never see again?

Tax Guy - Burlington Accountant November 4, 2013 at 1:24 pm

Scott,
Assuming you are living in Canada and are not a US citizen, likely it’s gone.

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