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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