How to Transfer U.S. Pensions into Canadian RRSPs
Author: Brad Howland
First Posted: Jan. 23, 2006
Revised:
If you move to Canada and have money in U.S. retirement arrangements (such as 401(K)s or IRAs) , you may be wondering what to do with that money!
If you withdraw from your 401(K) or IRA before reaching retirement age, you will in general (unless certain conditions are met) pay a 10% penalty tax to the IRS. You also face an additional 20% withholding to help cover income tax owing for the year. For these reasons, you should strongly consider leaving your money in the U.S. plan until retirement.
However, if you really want to get the money to Canada, CRA will allow a transfer to be made from certain U.S. pension plans to Canadian RRSPs, as long as the following conditions are met:
- You must have been a resident of the U.S. when the contributions to the plan were made;
- The withdrawal must be a lump sum payment;
- The withdrawal must be taxable in the U.S.; and
- The transfer has to be made in the year the amount is included in the individual's income or within 60 days after the end of the year.
At the time of this writing (Jan. 24, 2006), CRA policy appears to be that they will accept transfers from IRAs, but not 401(K)s.
Note that your RRSP contribution limit does not factor into the amount you can transfer—transfers are made in addition to any contribution room you might have. However, you should inform the RRSP trustee that the transfer is taking place under subparagraph 60(j)(ii) of the Income Tax Act so they can note that on the RRSP Contribution Receipt.
The IRA withdrawal will be viewed as a transfer only from Canada's perspective. The U.S. will still view it as an early withdrawal and impose the taxes mentioned above, but there is a little maneuver that can recover part of the taxes paid to the U.S. from Canada.
This technique works if you wait until entering Canada and becoming a resident before making the IRA to RRSP transfer. Include the withdrawal in income on your Canadian tax return and claim the transfer into your RRSP, resulting in no additional tax liability to Canada. Then claim foreign tax credits on your Canadian return for taxes paid to the U.S. on that income, thereby recovering some or all of the U.S. tax from Canada (Ref: Section 126 of the Income Tax Act).
You aren't actually paying tax to Canada on the pension withdrawal, so you need sufficient other Canadian income and tax owing to Canada for this maneuver to work. It is highly recommended that you do a formal tax planner with a qualified tax preparer, crunching the numbers first before making an actual move.
Related Websites
Transfer from a non-registered pension plan
http://www.cra-arc.gc.ca/E/pub/tp/it528/it528-e.html#P211_32394