The Companion Advisor:
Taxes & Estates|
401(k)/IRA to RRSP
Bringing US retirement plans to Canada
Investors who have left jobs in the US may want to transfer benefits
from their US retirement arrangement 401(k) or Individual Retirement Arrangement
(IRA) to their Canadian Registered Retirement Savings Plan (RRSP) on a
tax deferred basis. Under the right conditions, this can simplify retirement
planning and reduce or eliminate the need for duplicate tax reporting.
Depending on age, the rules for the US plan and certain other criteria,
a Canadian resident taxpayer is able to transfer lump sum superannuation
or pension benefits such as a 401(k) plan or a foreign pension plan such
as an IRA under subparagraphs 600)(i) and 60(j)(ii) of the Canadian Income
Tax Act and defer Canadian taxation on these amounts. The individual must
have a Canadian social insurance number (SIN), which is the nine digit
number that identifies individual Canadian residents for income tax and
benefit purposes. A SIN is also required to open a Canadian Registered
Retirement Savings Plan.
Tax treatment on cross-border rollovers
Under Canadian and US tax rules, funds withdrawn from a 401(k) plan or
an IRA are taxable as income in the year of withdrawal. The amount received
from the 401(k) plan assets being rolled over must be included as income
in the Canadian year?end tax return, as well as the offsetting Canadian
deduction for the amount transferred to the Canadian RRSP.
The US plan holder is required to withhold 20% of the withdrawal amount
where paid to individuals who are subject to US taxation (reducedto 15%
for payments to non?residentaliens) and make one lump sum
transfer to the RRSP. Although the withholding tax can be claimed for
a refund, this means that only part of the withdrawal will be available
for deposit to the Canadian RRSP. The full withdrawal of 100% (including
the withholding tax) is included in income, but unless the difference
is available from other means, the client will only be able to offset
part of the income inclusion on transfer. If the client is under age 59.5
at the time of withdrawal, the funds may be subject to a further 10% early
withdrawal penalty. This penalty is not refundable through the Canadian
tax system, and is therefore a consideration when deciding to transfer
the plan to Canada.
Steps to bringing US retirement accounts to Canada
- Look at the plan specifics (is this a Simple IRA, Roth IRA, 401(k)
and is it a transferable plan?). If not transferable, it can usually
be rolled into another IRA in the US that is transferable. If transferable,
go to the next step
- Examine the tax implications of collapsing the plan in the US, especially
if minimum distributions upon retirement will be tax-free
- Determine the value of the transfer in Canadian dollars
- Consider the age of the client (ideal is age 591/2 to 69) and the
possibility of a future return to the US
- Calculate the withholdings and their effect on the transfer in
(and the possibility of the client replacing the amount withheld to
effectively tax shelter 100% of the plan assets)
- If not already in existence, open a Canadian RRSP account to receive
- Deposit the funds in the tax year of the withdrawal from the US
plan, or up to 60 days after year-end
- Code the deposit as a 60(j)(i) or 60(j)(ii) transfer
Consider the alternatives of a cross border transfer for individuals
planning retirement in Canada. Assisting clients in making the best choice
can lead to investment and planning opportunities for you.
Fiscal Agents Financial Services Group are not engaged in rendering tax,
accounting or legal professional services or advice. The comments in this
article are not intended, nor should they be relied upon, to replace specific
professional advice. Before acting on material contained herein. Readers
should seek advice that is appropriate to their personal circumstances
from a professional advisor.
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