What can I do with my U.S. Retirement Plan (401(k) or IRA)?

Several Canadians have worked in the United States at one time or another. Cross border employment is common for executives, engineers, accountants, minors, professional athletes, university professors, small business owners, and other professionals. Taking one’s career to the U.S. can boast many benefits. These include broadening one’s horizons, enjoying unique opportunities, and even paying lower taxes!

Of the Canadians who have sought employment south of the border, some have stayed in the United States permanently, and others have returned to Canada. The question of what to do with one’s U.S.-accumulated retirement savings becomes a pertinent issue. I am of course referring to formalized retirement savings plans (i.e. – U.S. 401(k) plans, and U.S. IRA’s). These plans are fitting for an individual who stays in the U.S. permanently, but what about individuals who funded these accounts temporarily, and subsequently moved back to Canada? I often receive phone calls and emails asking what a Canadian resident should do with his/her U.S. 401(k) plan, and/or U.S. IRA. The answer depends on the individual. I’ll begin this discussion with a brief summary of the major types of U.S. retirement plans:

A U.S. 401(k) plan is similar to a Canadian Registered Pension Plan (RPP). Both are typically administered by one’s employer, and both are tax-deferral vehicles (in that taxpayers receive a tax deduction when they contribute, and are subject to a taxable income inclusion when they withdraw). U.S. IRA’s are a little different from 401(k) plans, in that there are essentially two types – Traditional, and Roth. I am over-simplifying here, as the contribution and withdrawal rules differ between countries; but to put it plainly, Traditional IRA’s operate like Canadian RRSP’s (tax deduction when you contribute, income inclusion when you withdraw), whereas Roth IRA’s operate like Canadian Tax Free Savings Accounts (TFSA’s) (no deduction when you contribute, no inclusion when you withdraw).

As such, a Canadian resident could conceivably have multiple types of retirement plans based in the U.S., each boasting different cross-border consequences. Fortunately (take that with a grain of salt – see below), the CRA does offer a way to simplify one’s retirement holdings. Specifically, taxpayers can transfer the balance of their U.S. traditional IRA plans into their Canadian-based RRSP’s. This can be a good strategy, but not all the time. Collapsing one’s traditional U.S. IRA and transferring it into an RRSP will create an unavoidable U.S. tax hit in the year of transfer. This could create a ‘double-tax’ scenario, because as we all know, there would be a second layer of tax administered by the CRA when money was ultimately withdrawn from the RRSP. A way to avoid this scenario is to ensure that the transferring individual claims a foreign tax credit (FTC) on their Canadian income tax return for the unavoidable U.S. tax they are paying in the year of transfer.

In order to claim an FTC, one typically needs to have some other source of income reportable in Canada, and a corresponding Canadian tax liability that is sizeable enough to match the U.S. tax liability they will be generating (recall from my earlier blog entries – foreign tax credits are non-refundable, in that they can only reduce one’s tax liability to zero – they cannot generate a stand-alone refund… in essence, you need to have a Canadian tax liability that you can reduce, in order to utilize your FTC). It is also possible to transfer a U.S. 401(k) across the border, but this typically involves rolling the balance into a U.S. IRA first, then transferring into a Canadian RRSP from there.

To summarize, a taxpayer transferring their U.S. IRA to their Canadian RRSP should only do so in a year where they have other sources of Canadian income (ideally their Canadian income would exceed the amount they are transferring). Never roll a U.S. retirement plan into your Canadian RRSP without first consulting a cross-border professional. It is important that he or she ‘run the numbers’ for you, to ensure that your retirement income won’t be taxed twice!

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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