Transferring an IRA or 401(k) to an RRSP: is it a good idea?
It can be done, but it starts with cashing out and paying up to 30% withholding tax. Here is how the transaction works, when a CPA might recommend it, and the far simpler alternative.
You may be familiar with a 401(k) or IRA rollover and how simple that is. Moving to Canada and transferring your funds into an RRSP is a little more complex. If you determine an IRA-to-RRSP move is right for you, the transaction should be reviewed and approved by a cross-border CPA to ensure it’s done correctly.
How the transaction works
- First you cash out your IRA. Unfortunately this initiates withholding tax upwards of 30%, as well as a 10% penalty if you are under 59½.
- With the remaining funds, you open a Canadian RRSP and deposit the funds.
- Normally you need RRSP room to contribute, and as a newcomer you have none. This transfer is different: your accountant claims it as a transfer under paragraph 60(j) of the Income Tax Act on Schedule 7, which does not require or use RRSP room.
- Once the money is in your RRSP it grows tax deferred, and the deposit can be used as an RRSP contribution to lower your Canadian taxable income.
This is an option to consider if you are being forced to cash out your 401(k) or IRA, and some CPAs recommend it where a person has very high income and specific circumstances.
The alternative: keep the IRA intact
The other route is to leave the IRA as an IRA and move it to a firm registered in both countries that can hold it for a Canadian resident. There is no withdrawal, so no withholding tax and no penalty, and the account keeps growing tax deferred. It also keeps your options open if you return to the U.S. later.
The trade-offs: only a small number of firms offer this, they charge advisory fees, and the account remains a U.S. account that you report in Canada each year. For most people that is still simpler and cheaper than paying tax on the whole balance up front.
Sources and further reading
- CRA, Certain lump-sum payments from a foreign retirement arrangement (transfers to an RRSP under paragraph 60(j))
- IRS Topic 557, Additional tax on early distributions (the 10% tax before age 59½)
- IRS Publication 515, Withholding of Tax on Nonresident Aliens
- IRS Publication 597, Information on the United States–Canada Income Tax Treaty
Related resources
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Chris is a cross-border financial advisor licensed in both Canada and the United States. He helps Americans moving to Canada and Canadians moving to the U.S. keep their retirement accounts intact and build one plan that covers both sides of the border. He writes for Cross Border Wealth in his personal capacity.
Disclosure: Chris writes in his personal capacity; his views do not represent any firm he is associated with. Cross Border Wealth does not provide advisory services. If you need advice, use the Get connected form and we will introduce you to a licensed professional.