USA to Canada Cross Border Financial Planning
There are many Canadians living in the USA who are deciding to return to Canada to live there permanently. However, a big question arises in that situation about what to do of their 401K and IRA. These two are the retirement plans through which many Canadians residing in the USA for several years accumulate significant amount which they want to continue in their home country by converting it to RRSP (Registered Retirement Savings Plan) the Canadian version of 401K. So, you can decrease or eliminate the requirement of duplicate tax reporting and so, the cross border estate planning is possible.
Based on their citizenship, age and some other criteria, Canadian citizens living in the US and paying taxes here can transfer a total accumulated US superannuation or pension plan amount to a RRSP on a tax-deferred basis. US pension plans like 401K or 403B or a foreign plan like IRA (Individual Retirement Account) can be ended into a 60(j)(i) or 60(j)(ii) rollover according to the Canadian Income Tax Act.
What to Do?
If your employer made the contributions for 401K for you when you were working in the US, you are permitted to transfer a lump sum amount from your 401K to a rollover IRA and then transfer that to a Canadian RRSP.
- First you will have to open a Rollover IRA account with a financial firm capable of managing cross border investment
- Then rollover the 401K to the IRA while you are still a resident of the USA. You cannot rollover your 401K directly to the RRSP
- Now withdraw all the IRA after you become a Canadian resident. A 20% withholding tax may be charged which may reduce to 15%. If you are less than 59.5 years of age you will have to pay a 10% non-refundable penalty
- The net lump sum thus acquired can then be transferred to the RRSP account.
- The resulting deposit in the RRSP should take place in the year of withdrawal or within 60 days of the end of the year
- Find out the value of transfer into Canadian dollars
- The full gross amount withdrawn including the withholding tax is considered as Canadian income having a deduction according to a section 60(j)(ii) transfer. Because of this, no tax liability occurs in Canada.
- You can claim the 20% withholding tax contributed to the IRS as a FTC or foreign tax credit for tax purpose in Canada.
At present, there is no provision in the US tax law for a reverse arrangement, i.e. Canada to US transfer of retirement plan. However, you have a great relief in the form of Cardinal Point. Whether you are transitioning residency between Canada and the U.S. or you have already made the move, it is important to understand the benefits of a cross-border financial plan. Learn how Cardinal Point can help when holding investment assets or financial interests in the U.S. or Canada.