• by admin
• November 28, 2021

Are you wondering if you could move your 401k investments in the United States to Canada? The answer is yes. However, you need to know the tax implications on both sides of the border before you make your decision, We are trying to outline here those tax implications.

Notes to Canadian Resident with US income and 401(k) Contribution

 

Subject to certain conditions, your contribution to 401(k) is deductible from your income in the United States and in Canada when you report your US income on your Canadian Tax return in the year in which you have contributed. However, the extent of the 401(k) deductions you claim on your Canadian tax return will reduce your RRSP contribution limit accordingly. Different rules apply to your IRA contribution and are not deductible on your Canadian tax return.

Is your move permanent?

Suppose you are moving permanently from the United States to Canada. In that case, you have the option to transfer your savings in 401(k)s and IRAs (Individual retirement account) to your RRSPs (Registered retirement saving plan) in Canada.

You do not have an option to transfer your RRSP to IRAs if you are moving from Canada to the United States. 

First, let’s know a little more about the RRSP, IRA, and 401(k) retirement plans available in Canada and the United States. This will help you understand, first the tax implications in the country-specific in which your savings are deposited. Then you can investigate the best time and option to withdraw and the possibility of transferring it.

To know more about the country-specific plans, please visit our following blogs:

 

RRSP tax planning in Canada

IRA tax planning in the United States

401(k) tax planning in the United States

 

Having read the above blogs, we will be focusing our discussions on the Traditional IRA or 401(k) from here onwards.

Now let’s discuss the process of transferring your 401(k) or IRA money to your Canadian RRSP.

• First thing first, you should establish that you are now a Canadian Resident for tax purposes.
• The fund you roll over from your US retirement savings to Canadian savings must be in a lump-sum amount.
• It is always advisable to move your US retirement savings funds to your Canadian RRSP directly.
• The movement of funds should be done in the same year or within 60 days after the year-end.

The above transfer is reported as your income on your Canadian tax return. However, you get an offset as your RRSP deductions when you enter the amount on Schedule 7 on your Canadian tax return.

Since it is a transfer, the RRSP deductions claimed on above Schedule 7 will not affect your RRSP usual contribution limit or room.

Now let’s look at your US tax implications.

• The transfer of your money from the 401(k) or IRA will be considered as withdrawal in the United States.
• Before transferring the money, your bank or the plan administrator in the United States is obligated to withhold 30% withholding tax.
• However, you can ask your bank or the administrator to withhold only 15% sitting the Canada-USA tax treaty provisions.

Now let’s look at your Canadian tax implications.

• As discussed above, you will report 100% of your 401(k) and or IRA money as income on your Canadian tax return.
• You will report and claim 85% (after deducting 15% withholding tax in the United States) of money transferred to your RRSP as RRSP deductions on your Canadian tax return.
• You will also claim “foreign tax credit” on your Canadian Income Tax return to the extent of 15% amount that has been paid as withholding tax in the United States based on the Canada-US tax treaty.

Now let’s take an example that you have $100k in your 401(k) and or IRA in the United States. You want to transfer this amount to your Canadian RRSP. If you look closely, you are reporting on your Canadian tax return a net taxable income of $15k. However, you will not have to pay tax on this income as you have more than enough foreign tax credit available. This more than enough foreign tax credit is a waste. The reason is that you can only apply your foreign tax credit to offset the Canadian income tax payable on your above $15k income. You can not use the remaining foreign tax credit to offset your income tax payable on your other sources of income reported on your Canadian tax return. Furthermore, CRA does not allow you to carry forward this unused foreign tax credit to the following year.

 

Another important aspect is to consider the early withdrawal penalty in the United States. If you have not reached the age of 59 ½ years, you will be subject to a 10% early withdrawal penalty for withdrawing funds from your 401(k) and or IRA in the United States. However, earlier CRA did not allow this 10% penalty to be reported as a foreign tax credit on your Canadian tax return. But now CRA has changed its position and has allowed this 10% penalty to be reported as a foreign tax credit.

 

But again, the main question that remains is the more than enough foreign tax credit. A great deal of planning involves utilizing this credit on your Canadian tax return. 

RKB Accounting is here to help you! We are specialized in cross-border taxation. We always establish a long-term relationship with our clients. This long relationship allows us to minimize your taxes for short periods and in the long run. We always look at your long-term tax planning before advising on your current year’s tax issues.

 

RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.

Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.

 

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