Olivier Custeau, Fiscaliste, B.A.A., M. Fisc., EA

Transferring a 401 (k) or IRA to Canada: How does it work?

American citizen living in Canada  —   —  Share

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Have you ever worked in the United States and contributed to a 401 (k) retirement plan or an individual retirement account (IRA) and do not want these amounts to stay in the United States? Note that you can repatriate them to Canada, generally without immediate Canadian tax consequences, by transferring them to your RRSP. If you have instead contributed to a Roth IRA, which is a plan similar to the Tax-Free Savings Account (TFSA), a tax election may be made when you return to Canada. 

Tax compliance

First, if the repatriation occurs before the age of 59 and a half, you will be subject to a penalty of 10% on the value of the withdrawal. Although there are usually no immediate tax consequences in Canada, the withdrawal will still need to be added to your income, but you will normally benefit from an equivalent RRSP deduction since this withdrawal will generally not affect your rights to unused contribution. Please note that your RRSP contribution must be made on time, at the latest within the first 60 days of the year following the transfer.

Also, withdrawal from your 401 (k) plan or IRA will be taxable in the United States on your US income tax return (for US citizens or permanent residents) or through a withholding tax (for non-residents) of 30%, which could be reduced to 15% if the withdrawal is considered to be periodic annuity benefits, according to the tax treaty between Canada and the United States.

Foreign tax credit

Since the withdrawal will be taxable in the United States, a foreign tax credit will be allowable in Canada for tax payable in the United States. In addition, since 2011, the Canada Revenue Agency has admitted as a foreign tax credit the 10% penalty on withdrawals made before age 59 and a half.

But be careful, it is essential to calculate whether the American foreign taxes will be well absorbed in the Canadian declaration, otherwise there will be double taxation! It will be possible to plan withdrawals over two years or more, depending on the size of the 401 (k) plan and the tax situation in Canada. These calculations must obviously be made before proceeding with withdrawals. Our team will be happy to help you with these calculations.

This text only covers some of the things to consider when repatriating from a 401 (k) plan or IRA. For more information, we would like you to make an appointment with one of our tax experts specializing in international tax. We have the expertise to help you repatriate your 401k or IRA and we will make sure that the planning is done properly!