When you move to Canada from the United States, you might face many challenges in terms of your retirement accounts, including your 401(k) plan.
Our cross-border financial advisors can help you navigate these challenges and make the best decisions for your financial future.
There are several options available to you for dealing with your 401(k) when you move to Canada, but it can be difficult to know which one is the right choice for your individual situation.
We understand the tax and regulatory implications of each choice. Our team will provide you advice and strategies to help you can make an informed decision about your 401(k).
401(k) While Living In Canada: What Are My Options?
Option 1: Keep your 401(K) while living in Canada
You can leave your 401(k) plan unchanged when you move to Canada. However, this choice brings complicated tax and regulatory challenges.
For example, if you leave your 401(k) plan as is, you must comply with both U.S. and Canadian tax laws. This can be challenging because the two tax systems have different rules and regulations for retirement plans.
In addition, your 401(k) plan administrator may not allow you to keep the 401(k) if you no longer work or live in the U.S. The plan administrator may require you to roll your 401(k) into an IRA or transfer it to a new 401(k). You should consult the plan administrator about your move to Canada.
Canada generally recognizes the tax-deferred status of your 401(k), just as the US does. Earnings within your 401(k) are not taxable. However, when funds are withdrawn from the 401(k), those withdrawals become taxable in Canada in the year the withdrawal is made.
Option 2: Rollover 401(K) into an IRA in Canada
You can roll over your 401(k) plan into an Individual Retirement Account (IRA). This option may allow you to simplify your retirement planning by consolidating your accounts in one place. However, it can be a complex process to navigate on your own. There are many rules and regulations to comply with when transferring retirement funds across borders.
For example, consider carefully the timing of rolling over a 401(k) to an IRA. Decide whether it may be advantageous to roll the amount into a traditional IRA or Roth IRA.
Generally, if the 401(k) to traditional IRA rollover is done as a Canadian tax resident, Canada will follow the US tax rules and not consider the rollover to be a taxable event. However, any rollovers from a 401(k) to a Roth IRA would be subject to US tax, plus Canadian tax if completed during your Canadian residency period.
Our team can help you weigh the pros and cons of a 401(k) rollover. We can help you make an informed decision considering your move to Canada and future goals.
More information about rolling over a 401(k) into an IRA is available on the following page: How to Transfer your 401(k) into an IRA.
Option 3: Fully withdraw the 401(k)
When fully withdrawing a 401(k), the full amount is subject to US tax. If withdrawn before the age 59½, there is a 10% early withdrawal penalty tax. If withdrawn as a Canadian tax resident, the amount withdrawn will also be fully included in Canadian taxable income, and subject to Canadian tax. You may claim a foreign tax credit on your Canadian tax return to reduce double taxation.
If you withdraw the 401(k) and contribute the proceeds into an RRSP, you can claim an RRSP tax deduction. You can use this tax deduction on your Canadian tax return to reduce tax on your income and reduce the tax on 401(k) income not fully covered by the foreign tax credit. It is important to consider that when moving to Canada, one may not have existing RRSP contribution room if you had not previously worked in Canada or received foreign “earned income” as a Canadian tax resident.
Under certain conditions, the gross amount of a lump sum 401(k) withdrawal can be contributed to an RRSP without the use of RRSP contribution room through what is referred to as a 60(j) transfer. Absent of the conditions of the 60(j) transfer being met, it will be important to consider whether there is sufficient RRSP room to facilitate the contribution and deduction.
More information about the 60(j) transfer is available on the following page: IRA to RRSP.
In addition, withdrawing the 401(k) and contributing the funds to an RRSP could likely result in double taxation as there will be US tax payable upon withdrawal of the 401(k) in addition to Canadian taxes when the same capital is withdrawn from the RRSP/RRIF in retirement.
Unlike options 1 and 2 above, which may allow you to keep the tax deferred status of the retirement accounts while in Canada, withdrawing your 401(k) may have unavoidable tax implications on both sides of the border in the year of withdrawal.
Partner With Us
Moving from the U.S. to Canada can be a complicated process especially when it comes to your retirement accounts.
We can help you navigate the complex tax laws and regulations in both countries and ensure that you are taking advantage of all the available tax breaks and incentives.