When moving between Canada and the

USA, there are common challenges that individuals often face. Aside from the

practical aspects of the move, there are also tax and financial considerations

to assess. In particular, you may have accumulated savings in a recognized

retirement arrangement like a 401k plan or an individual IRA. What should you do

with these retirement plans if you move across the border and what are some of

the consequences? Unfortunately, there is no simple answer for the procedure to

follow but below are some tips and general information.

Crossborder investment specialists

often expatriate employees accrue retirement and/or pension benefits while

working for an employer. If you decide to move back home (Canada in this case),

what should you do with the 401k or IRA account?

Your options are to: 

    1. Leave your

401K or IRA in the US and have someone manage the investments for

you;
    2. Cash out the plan and pay a lot of unnecessary

tax;
    3. Start to take a retirement distribution (if you

are of retirement age);
    4. Transfer the plan to an RRSP in

Canada.

An added complexity to these four

choices is that they are affected by tax implications and securities

regulations.

Option 1) Leave your

401k/IRA in the US
If you choose this option, you would essentially

leave the plan intact until you require the income during retirement. Unless the

manager of the 401k permits, you may be required to transfer the 401k to an IRA.

If you are over the age of 59.5, you would see a 20% withholding tax on your

distributions. If you are under this age threshold, there would be an additional

10% penalty tax unless you meet certain conditions. There would be no real tax

implications on the earnings within the plan until you begin to make

withdrawals. In Canada, the Canada Revenue Agency (CRA) would typically tax you

on an IRA if the USA's Internal Revenue Service (IRS) takes a similar position,

which normally happens once you start withdrawals.

Choosing to leave the plan as is in

the US can also lead to other challenges. Many investment firms and brokerages

will not allow an investment account (retirement account or otherwise) to be

held by a non-resident. You will need to open an investment account with either

a discount/online broker or a full service investment firm before terminating

your US residency. If you wait until you have moved to Canada to secure

investment accounts and initiate transfers of IRAs, it may be cumbersome

although not impossible. Unlike some Canadian investment firms, US investment

firms are very reluctant to have an investment/retirement account held by a

non-resident of the US.

Option 2) Cash out the plan

and pay a lot of unnecessary tax;
This option is perhaps the least

favored. There is no compelling reason why you should redeem your IRA and cash

out the plan, unless you are in desperate need of cash. For the vast majority of

individuals it just doesn't make sense from either an investment management or

tax perspective.

Option 3) Start to take a

retirement distribution;
This option is only truly relevant for

those old enough to consider retirement.  While resident in Canada,

retirement distributions from your US based 401K will be subject to US

withholding tax.  The distribution will also be declared as a foreign

pension in Canada by CRA.   Consult a qualified crossborder tax

professional to ensure proper reporting of such foreign income and to optimize

use of foreign tax credits.

Option 4) Transferring a

401k / IRA to an RRSP in Canada
A 401k is an employer sponsored

defined contribution (DC) retirement arrangement. If contributions were made by

your employer while you were a resident of US, you will be allowed to make a

lump-sum  transfer from your 401k. Specifically, you will be able to

transfer a 401k to a rollover IRA (employer permitting) and then transfer the

IRA to a Canadian RRSP.

In more detail, the transfer of a

401k ultimately to an RRSP usually occurs as follows:

    1. Open a

Rollover IRA account with an investment firm capable of crossborder investment

management.
    2. Rollover the 401k to an IRA while still a

resident of the US. You cannot roll a 401k directly to an

RRSP.
    3. Withdraw all of the IRA as a Canadian resident

(you will be assessed 20% withholding tax, possibly reduced to 15%). If you

are under 59.5 years, there will be an additional 10% penalty which is not

recoverable.
    4. The net resulting lump sum payment is then

transferred to an RRSP. The subsequent deposit into an RRSP must occur in the

year of withdrawal or within 60 days of year-end.
    5.

Determine the value of the transfer in Canadian dollars.
   

6. The full gross withdrawal including the withholding tax is included as

Canadian income with a deduction referencing a section 60(j)(ii) transfer. This

results in no additional tax liability to Canada.
    7. The

20% withholding tax paid to the IRS in point number "3" above may be claimed as

a foreign tax credit (FTC) for Canadian tax purposes. FTCs require a more

detailed explanation.?

Checklist of transferring a 401K to

an RRSP Now the complications. The 401k must be a lump-sum transfer from a

pension or superannuation and employment services rendered while a non-resident

of Canada. There are different rules for individuals living in Canada and

working in the US or in the case of temporary employees working in the US for

less than 5 years.

The withholding tax paid to the IRS

that is claimed as a foreign tax credit in Canada requires the advice of a tax

practitioner. Generally, the taxes paid in the US can be used to reduce the tax

liability in Canada. However, since the concept of FTCs are multi-faceted, it

can take several years of claiming credits to attempt to recoup the initial 20%

withholding tax that was paid.

Please bear in mind that you

haven't really paid tax to Canada at this point on the IRA withdrawal, only to

the IRS. Therefore, you need to have sufficient Canadian income tax owing from

certain sources in order to utilize the FTCs. Canada views the IRA withdrawal as

a transfer while the US views it as an early lump sum withdrawal and thus

applies the 20% withholding tax.

A final distinction also needs to

made if the IRA account has been subject to proceeds from a ROTH conversion.

Such conversions would taint the account and this technique would become muddied

because Canada does not recognize ROTH plans in the same context as "foreign

retirement arrangements." Furthermore, Canadian Tax Free Savings Accounts

(TFSAs) and ROTHs are separate categories with another set of rules and

guidelines for anyone wishing to move across the border.

What about the reverse,

transferring from an RRSP/LIRA to an IRA?

Thus far we have only explored the

mechanics of a person moving from the US to Canada but what solutions exist for

a person moving from Canada to the US?  Unfortunately, RRSPs or LIRAs

(locked-in plans) cannot be transferred to an IRA. Please also be aware that the

place and timing of these transactions should be aligned with pre- and post-move

planning that captures the realities of residency and ceasing of non-residency.

Many aspects of the information contained herein can also be applicable to

retirement arrangements from other countries like the United Kingdom.

NOTE:

Disclaimer (as per Circular

230).  To ensure compliance with the requirements imposed by the IRS, we

inform you that any tax advice contained in our communication (including any

attachments) was not intended or written to be used, and cannot be used, for the

purpose of (i) avoiding any tax penalty or (ii) promoting, marketing or

recommending to another party any transaction or matter addressed herein. Our

communication is limited to the conclusions specifically set forth herein and is

based on the completeness and accuracy of the facts and assumptions as stated.

Our advice may consider tax authorities that are subject to change,

retroactively and/or prospectively. Such changes could affect the validity of

our advice. Our advice will not be updated for subsequent changes or

modifications to applicable law and regulations, or to the judicial and

administrative interpretations thereof. Copyright Pacifica Partners Inc (August

1, 2012).

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