How to Transfer U.S. Pensions into Canadian RRSPs
Author: Brad Howland
First Posted: Jan. 23, 2006
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 likely face a 20% withholding to help cover income tax owing for the year, and be liable for (unless certain conditions are met) a 10% "additional tax" on your U.S. tax return. 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.
According to CRA Interpretation Bulletin IT-528, the U.S. pension plan must meet the definition of a "foreign retirement arrangement" in subsections 248(1) and 6803(1) of the Income Tax Act to be eligible for an RRSP transfer. According to my trusty Practitioner's Income Tax Act (27th edition), the plan must be one to which subsections 408(a), (b), or (h) of the United States Internal Revenue Code of 1986 apply.
The way I read these subsections of the current version of the Internal Revenue Code, an eligible "foreign retirement arrangement" would be a U.S. Individual Retirement Account (IRA), an "individual retirement annuity" (similar to an IRA but issued through an insurance company), or a custodial or trust account that meets all the conditions of an IRA.
CRA's policy at this time appears to be that it will accept transfers to RRSPs from IRAs, but not other plans such as 401(K)s. Some tax practitioners have stated that transfers from 401(K)s are acceptable, but I wouldn't want to risk it myself. I feel that you first need to transfer your funds from the 401(K) to an IRA, then transfer to an RRSP.
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. It could be helpful to inform the RRSP trustee that the transfer is taking place under section 60(j) 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 of the U.S. tax from Canada. The amount recoverable would not include the 10% additional tax mentioned above (here's why), but you could still get a lot of the U.S. tax back.
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