Moving Your 401(k) from the US to Canada
Tiffany Woodfield, Senior Financial Advisor, Associate Portfolio Manager, CRPC®, CIM®, TEP®
Summary of Key Points
The video explains what to do and what not to do after moving to Canada with a 401(k) or 403(b).
Keeping a 401(k) in the US may trigger a request to close or liquidate the account, creating a major taxable event.
Closing out a 401(k) provides cash but can significantly reduce retirement savings due to a large tax bill.
Rolling a 401(k) to an IRA and then to an RRSP is complex due to US withholding taxes and mismatched RRSP contribution room.
Working with a dual-licensed, cross-border financial advisor gives you greater flexibility.
Work with a cross-border financial advisor and get tax guidance tailored to your Canadian residency.
Video Script
In this video we’re going to walk through the options for what to do with your 401(k) once you are in Canada. You’ll also learn what not to do!
As a cross-border financial advisor I often work with clients who have moved to Canada but still have their 401(k)s or 403(b)s in the US as they don’t know what options there are for them.
There are four main ways to manage your 401(k)s if you move to Canada.
1) Keeping your 401(k) in the US
First …you can keep your 401(k) in the US. If you do this you are risking that the custodian of your plan may force you to transfer or liquidate and close your 401k account as you are no longer living in the U.S.
Even if you are allowed to keep your 401k in the US, it may be restricted, which means you can’t do trades or make changes to the investment choices.
2) Liquidating Your 401(k)
Your next option is to liquidate the 401(k). You may get immediate access to the cash but it causes a huge taxable event. Paying this tax significantly reduces the value of your retirement funds. You would have withholding taxes in the US, potentially penalties, and you would also be taxed in both Canada and the US.
3) Transferring your 401(k) to an RRSP
Another option is to transfer your 401(k) to an RRSP. This is complicated due to withholding taxes in the US and having to top up the RRSP with other funds because of the difference between the IRA value and the room created in the RRSP. It isn’t the best option.
4) Rolling Over Your 401(k) to an IRA
Finally the best option is to rollover your 401(k) to an IRA and have it managed by a dual licensed advisor in Canada. Your money continues to stay invested and you don’t pay tax on the growth until it is withdrawn. You benefit from increased investment options and you have access to financial planning based on your Canadian tax residency.
Are you considering closing your 401k account in the US?
If so, I recommend booking an appointment with a cross-border financial advisor before you take any actions. A financial advisor who specializes in cross-border financial planning can help you determine the best option for your exact situation.