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
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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.
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:
- Plan the move and minimize your tax bill,
- Help you find the right financial institution to handle the transfer, and
- File your tax return.
Related Articles
- US Citizen & Resident Working in Canada
- Moving To Canada & Income Tax
- Early Withdrawal Of RRSP While A Resident Of The USA
- US Citizens in Canada With Taxable US Bonds
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Hi,
I moved back to Canada recently and have bank accounts – one trading account and one IRA account. I trade stocks in both and have had quite a bit of appreciation recently in both.
First question:
Is their a requirement by law in either country to transfer these accounts to canadian accounts? Since, I have moved back to canada.
Second question:
Can I continue to trade in my regular trading account with a US bank and my IRA with a US bank, as a canadian resident.
Finally, where should I keep my accounts – Canada or US banks for the best tax advantages for my situation?
Would much appreciate your insight.
Thanks,
—baljinder
There is no law requiring that you transfer accounts to Canada. You may be restricted from placing trades in foreign accounts however. It depends on the laws of the foreign state.
Both the US and Canada tax based on worldwide income so it really doesn’t matter where your assets are physically.
I have a 401K I contibuted in the ’90′s. I now live in Canada and would like to rollover my 401K. The amount in it is small (around 1 000). I do not have an income in Quebec as I opted to be a stay-at-home mom. How do I transfer my 401K to Canada ? Can I roll it over in my REER account … although I do really see the benifits of that since I am in the lower tax bracket (I did work part time last year). Would the 10% penality fee apply ? Should I put this money in my CELI ? I should have taken care of that a long time ago as the 401K has lost a lot of it’s value and I am paying yearly fees.
My question is : what is the best and wisest move to do with this money ?
I have the dual citizenship; not sure if this makes a difference.
Thank you
I assume you are still under age 59.5 and if the 401k was the result of working while you were not a resident of Canada , then you may bring it to Canada and roll it into an RRSP. Unfortunately, the fact that you live in Quebec complicates this for me as I am not familiar with taxation in Quebec.
I’ll put this out to some others who may be able to respond.
Hi! I worked in the US for 2 years and contributed to a company 401K. My company also contributed. I moved back to Canada, however still work for the same company–they have opened a Canadian branch and I am now on a Canadian payroll. I no longer can contribute to my US 401K, but it is just sitting there. I have ample RRSP room, and am wondering if I can close my US 401k (with ~ $20K sitting in it) to my RRSP. I am going on maternity leave this coming May, so my taxable income will be low this year–thinking this might be a good time to move things if penalties are income-based. My company has told me that they can’t close my 401k because I still work for them. Is that true? It seems odd that I would have to let money sit in a US account that I will likely never access even when I do retire??
Thanks for any advice you can give!
Maria
The portion of the 401k attributed services rendered while you were not a resident of Canada may be rolled into an RRSP without affecting your contribution room. To qualify, the payment must be lump sum, attributable to services rendered while the person was not resident in Canada, and the full amount of the payment must be included in your taxable income.
You contribute the net proceeds to an RRSP under 60(j) and you advise the plan provider of this fact. On your tax return, you include the full payment in your taxable income, deduct the RRSP contribution on line 232 with the description 60(j) and claim a foreign tax credit and deduction for the 30% withholding tax. You will not be able to claim the 10% penalty tax as a tax credit or deduction.
If you do decide to move the 401k here, be sure you have an accountant who can help you with the taxes and an informed investment broker to help with the RRSP.
Employer contributions to the 401k that are attributed to service rendered while you WERE a resident of Canada cannot be rolled over to an RRSP. If you deregister, these amounts will be included in your taxable income and you may offset only to the extent you have RRSP contribution room.
I moved back from the US to Canada and (naively) cashed in two 401(k) accounts after arriving in Canada. The 401(k) pension funds both deducted 20% US witholding tax and mailed me the cheques. I did not declare it as income on my Canadian return, and the CRA subsequently audited and taxed me for the gross amount. Two questions: Am I able to deduct the 20% witholding tax from my Canadian income (the CRA did not appear to credit me for the US withholding tax on their assessment), and can I elect to split this Pension income with my wife through a T1032? I was over 60 when I repatriated the 401(k) funds to Canada.
You can claim the withheld tax as a foreign tax credit but cannot split the fund with your spouse.
I am a Canadian living in Canada, who worked in the US for a number of years and have
an IRA in the US. I took the 1st disbusment in 2010 with a 30% withholding tax. Do I need to file US taxes and if so which US tax form do I use?? With Canadian taxes on top
of this, it takes quite a bite out of the disbursement. Is there any way of reducing the
tax burden, such as rolling this over into a RRSP ?
Peter,
The 30% withholding tax cane be claimed as a foreign tax credit in Canada.
You can try and file a US return (I’m not sure is you can or cannot). This would reduce the foreign tax credit if you can.
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
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?
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.
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!
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.
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!
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.
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.
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?
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