What to do with your 401(k) once you live in Canada

Many people who move to Canada still hold a 401(k) or 403(b) and are unsure what to do with it. Here are the four choices after relocating to Canada, with the trade-offs of each.

1. Keep the 401(k) in the U.S.

You can maintain your 401(k) in the U.S. However, you run the risk of receiving a notice from the brokerage company or the custodian of your plan giving you 30 to 90 days to close your account or arrange for its liquidation. That can result in a significant taxable event, in some cases with up to a 30% withholding tax bill. The reason is that some U.S. firms are not licensed to deal with a Canadian resident client.

2. Cash it out

Although you would get money right away, the size of the tax payment would create a sizable reduction in your retirement funds: in some instances up to 30% withholding tax, plus a 10% penalty if you are under 59½.

3. Transfer the 401(k) or IRA to an RRSP

Due to U.S. withholding taxes, this is difficult and may result in double taxation without proper tax consultation. This type of transfer does not use the RRSP room you established. For instance, if you had a $100,000 401(k) you were planning to transfer to an RRSP, you would instead move it to an IRA.

4. Roll the 401(k) to an IRA at a firm registered to serve Canadian residents

Roll the 401(k) into an IRA held at a firm that is registered in both countries and can manage it for a Canadian resident. The rollover itself is not taxable if done directly, the account keeps its tax-deferred status, and the firm handles the U.S. and Canadian reporting. Only a small number of firms offer this, they charge advisory fees, and you should confirm the firm’s registration in your province before transferring. Many cross-border planners favour this route because it avoids the tax hit of options 2 and 3 and the forced-liquidation risk of option 1.