Written by Sandy Carp, Vice President, Tax and Estate Planning
Mackenzie Professional, June/July 2005
A Companion Advisor article

401(k)/IRA Transfer Options

Investors who have left jobs in the US may want to transfer benefits from their US retirement arrangement 401(k) or Individual Retirement Arrangement (IRA) to their Canadian Registered Retirement Savings Plan (RRSP) on a tax?deferred basis. Under the right conditions, this can simplify retirement planning and reduce or eliminate the need for duplicate tax reporting.

Depending on age, the rules for the US plan and certain other criteria, a Canadian resident taxpayer is able to transfer lump sum superannuation or pension benefits such as a 401(k) plan or a foreign pension plan such as an IRA under subparagraphs 600)(i) and 60(j)(ii) of the Canadian Income Tax Act and defer Canadian taxation on these amounts. The individual must have a Canadian social insurance number (SIN), which is the nine?digit number that identifies individual Canadian residents for income tax and benefit purposes. A SIN is also required to open a Canadian Registered
Retirement Savings Plan.

Tax treatment on cross-border rollovers

Under Canadian and US tax rules, funds withdrawn from a 401(k) plan or an IRA are taxable as income in the year of withdrawal. The amount received from the 401(k) plan assets being rolled over must be included as income in the Canadian year?end tax return, as well as the offsetting Canadian deduction for the amount transferred to the Canadian RRSP.

The US plan holder is required to withhold 20% of the withdrawal amount where paid to individuals who are subject to US taxation (reducedto 15% for payments to non?residentaliens) and make one lump sum
transfer to the RRSP. Although the withholding tax can be claimed for a refund, this means that only part of the withdrawal will be available for deposit to the Canadian RRSP. The full withdrawal of 100% (including the withholding tax) is included in income, but unless the difference is available from other means, the client will only be able to offset part of the income inclusion on transfer. If the client is under age 59.5 at the time of withdrawal, the funds may be subject to a further 10% early withdrawal penalty. This penalty is not refundable through the Canadian tax system, and is therefore a consideration when deciding to transfer the plan to Canada.

Steps to bringing US retirement accounts to Canada

1. Look at the plan specifics (is this a Simple IRA, Roth IRA, 401(k) and is it a transferable plan?). If not transferable, it can usually be rolled into another IRA in the US that is transferable. If transferable, go to the next step
   
   
2. Examine the tax implications of collapsing the plan in the US, especially if minimum distributions upon retirement will be tax-free
   
   
3. Determine the value of the transfer in Canadian dollars
   
   
4. Consider the age of the client (ideal is age 591/2 to 69) and the possibility of a future return to the US
   
   
5. Calculate the withholdings and their effect on the transfer in (and the possibility of the client replacing the amount withheld to effectively tax shelter 100% of the plan assets)
   
   
6. If not already in existence, open a Canadian RRSP account to receive the transfer
   
   
7. Deposit the funds in the tax year of the withdrawal from the US plan, or up to 60 days after year-end
   
   
8. Code the deposit as a 60(j)(i) or 60(j)(ii) transfer

Summary

Consider the alternatives of a cross border transfer for individuals planning retirement in Canada. Assisting clients in making the best choice can lead to investment and planning opportunities for you.

This article should not be construed as tax advice specific to any client, as each client's situation is different Clients should consult their own legal or tax advisors before taking any action.

The information in is article is subject to change, therefore be advised its content should be viewed as illustrative to the context of the article. Income tax laws change over time therein rendering certain numbers quoted obsolete. Please consult current tax rules or directly at CCRA

Notice: Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this article are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein. Readers should seek advice that is appropriate to their personal circumstances from a professional advisor.

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