What Canadian Citizens Can Do with Their U.S. Retirement Plan (401 (k) or IRA)?

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aking employment in the U.S. is common for several Canadian professionals, including accountants, executives, engineers and athletes. Since employment in the U.S. has several benefits like lower taxes and unique opportunities, a lot of Canadian professionals work in the country from time to time. Over the years, some of these individuals stay in the U.S. permanently while others decide to come back to Canada after some years.
All of those who do come back have one major issue to think about: what to do with their retirement savings that they accumulated in the U.S. now that they are going to live in Canada permanently? These retirement savings usually include formalized retirement accounts – including IRA and 401(k) – set up during their time in the U.S.
If you had a 401(k) plan in the U.S., it is similar to the Registered Pension Plan in Canada as both of them are tax-deferred and managed by employers. The IRAs, on the other hand, are of two types: Traditional and Roth. While the withdrawal and contribution rules differ to some extent, the traditional IRAs are a lot like Canadian RRSPs while the Roth IRAs are more like the Canadian TFSAs. As a Canadian resident, you can hold different retirement plans during your stay in the U.S. while the CRA allows you a way to simplify your retirement holdings on your return to Canada.
If you have traditional IRAs and you are a taxpayer in Canada, you can simply transfer your IRA plan to RRSPs. However, there is one major downside to the option: double taxation. In the year you dissolve your IRA account, you will be required to pay taxes on it. When you eventually withdraw money from RRSP, CRA will also tax you. In order to avoid this scenario, it is important that you claim a foreign tax credit on your Canadian income tax return in the year you have made the transfer.
For claiming FTC, you need to have a source of income that is reportable in Canada and a tax liability in Canada that matches your U.S. tax liability. If you have a 401(k) plan, there is no direct way you can transfer it to Canada. To transfer such an account, you will first have to roll the balance of this account into an IRA. From there, you can transfer the amount to the Canadian RRSPs, following the same procedure as specified earlier. Again, you should be careful about avoiding the double taxation trap in order to save money.

To put it all simply, the best time for you to transfer your U.S. IRA to Canadian RRSP is when you are a taxpayer in Canada and have a source of Canadian income in the year you are making the transfer. Ideally, your income for the year should exceed the amount that is being transferred. However, it is extremely important that you consult a cross-border professional before you make any transfers from your U.S. retirement plan to the RRSPs in Canada. They can help you understand in a much better way whether your retirement income would be subjected to double taxation if you make the transfer in current circumstances. They can also help you determine the best way to make such a move if you want to avoid double taxation.

Eric La CaraEric La CaraManaging Partner and Tax Practice manager for Capital Tax in Vancouver and Tokyo. Eric is a U.S. and Japan Personal & Corporate tax specialist with more than 15 years of experience in the area of cross-border structuring and taxation. Eric is charged with developing Capital Tax overall operations and strategic direction using the business and technical skills he has acquired during his professional career in Asia.