How to Transfer 401(k) to RRSP
Tiffany Woodfield, Senior Financial Advisor, Associate Portfolio Manager, CRPC®, CIM®, TEP®
Summary of Key Points
There are two main considerations when deciding how to transfer a 401(k) to Canada, including the option of using an RRSP.
Rolling over a 401(k) to an IRA is easy, but moving an IRA to an RRSP is complicated because of US withholding tax and additional RRSP contribution requirements.
To move a 401(k) to an RRSP, you roll the 401(k) to an IRA and then transfer that IRA to the RRSP.
A dual licensed cross-border advisor can roll a 401(k) into an IRA and manage it, whether you live in Canada or the United States.
People with retirement accounts in Canada and the US should get cross-border financial and tax advice before making any irreversible decisions.
Video Script
In this video we’re going to review whether you can actually transfer a 401(k) to a RRSP and what your OTHER options are.
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As a cross-border financial advisor I often work with clients who have 401(k)s in the US and are living in Canada. They find it difficult to plan income streams for the future and worry the IRS may change the rules and they may lose access to their money.
There are two main things you need to know if you’re trying to figure out how to transfer your 401(k) to an RRSP.
1) Withholding Taxes
From an income tax perspective rolling over a 401(k) to IRA is easy but then to transfer the IRA to a RRSP is complicated. It’s not something I would recommend to my clients.
The problem is that there are withholding taxes in the US on IRAs.
When you take your money out of an IRA the amount created in the RRSP when you withdraw your IRA is for the full amount, before the withholding taxes in the US. If you don’t add additional funds to the RRSP, then you’ll get taxed in Canada on the difference.
For example if you have an IRA for $100,000 you create room in a RRSP for $100,000. But when transferring your IRA to an RRSP, there is withholding taxes in the US of 30%.
In the case of this example that would be $30,000. This means you have created room in your RRSP for $100,000, but after you pay the withholding taxes, you only have $70,000 from the IRS. If you don’t top up the RRSP with $30,000 of additional funds from other sources you will be taxed on the difference between the room you created ($100,000) and the amount from the IRA ($70,000.)
2) 401(k) to IRA to RRSP
If you want to transfer a 401(k) to Canada you will first need to rollover your 401(k) to an IRA and then transfer the IRA to a RRSP.
A financial advisor who is licensed in Canada and the US can help you to rollover your 401(k) to an IRA and have it managed from Canada.
You continue to benefit from your money being invested, and you don’t pay tax until you withdraw.
3) Working with a Dual-Licensed Advisor
Finally, if you work with an advisor who is licensed in Canada and the US and you have an IRA with funds rolled over from a 401(k) you can still have the IRA managed with the same advisor if you decide to move back to the US.
Are you dealing with a situation where you have retirement accounts in the US and Canada?
The first thing you should decide is where you are planning to live for the foreseeable future. From there, decide how you’re going to move your 401k and seek the advice of a cross-border financial advisor and a cross-border accountant.
Canadian tax rates are traditionally higher than the U.S, so it can help to plan taking this into consideration.