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