401(K) in Canada
Plena Wealth Advisors can help manage your 401(k) in Canada.
Have you built up retirement savings in a 401(k), 403(b) or another type of U.S. employer-sponsored retirement plan and are now planning to move from the U.S. to Canada? The change in residency to Canada may cause the account to be restricted as most U.S. financial institutions cannot manage accounts for non-residents. This means your 401(k) or U.S. retirement account is now frozen and can no longer be actively managed. Managing a 401(k) in Canada with the help of a cross-border financial advisor can help resolve those issues for you.
An option for moving and managing a 401(k) in Canada is transferring the plan into a rollover IRA (individual retirement account) and having the IRA managed by a dual-licensed financial advisor. This strategy also works with multiple 401(k) or 403(b) plan accounts that can be consolidated into a single account, simplifying the income tax reporting for you and helping to create a reliable income stream now or in the future.
Work with a Cross-Border Financial Advisor
As dual Canada/USA licensed cross-border financial advisors, Plena Wealth Advisors can help transfer, manage, and invest your cross-border retirement accounts. Our team of advisors understands the complexities that arise from having financial interests on both sides of the border, will work with you to understand the important aspects of your life and ensure that you have a detailed cross-border financial plan and investment strategy that align with your individual preferences and appetite for risk.
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401(k) in Canada Summary:
- Do not collapse your 401(k) when moving from the U.S. to Canada.
- An option is to move the plan into a rollover IRA and continue managing the account.
- Do not transfer your 401(k) into an RRSP.
- Do not make any Roth IRA contributions once Canadian residency is established.
- Plan ahead and work with a cross-border financial advisor who understands both Canadian and U.S. tax laws to keep you compliant with both countries’ tax authorities.
- Develop a cross-border financial plan that encompasses 401(k)’s or IRA’s, U.S. and Canadian pension plans (Social Security, CPP, OAS) to ensure distributions and income tax reporting are managed accordingly.
401(k) in Canada Frequently Asked Questions
What is a 401(k) plan?
A 401(k) plan is a retirement account set up and administered by an employer. It is provided as part of a total compensation package where the employer contributes to or matches the employee’s contributions through payroll deductions.
A 403(b) plan is very similar to a 401(k) with the main difference being the employer that offers them. A 403(b) plan is offered for government employees and not-for-profit organizations while a 401(k) plan is offered by private, for-profit organizations.
What is a 401(k) in Canada?
The equivalent of a 401(k) in Canada is a group Registered Retirement Savings Plan (group RRSP). Similarities come in the form of an employer providing the group RRSP as part of a total compensation package. What differs is the amounts that can be contributed to the plan. The RRSP contribution limit is 18% of earned income from the previous year up to an annual maximum (2023 maximum $27,830). This amount can be carried forward indefinitely up to age 71.
RRSP vs 401(k):
Both RRSP and 401(k) accounts are designed to build savings and help plan for retirement. In both cases, the contributions are pre-tax dollars and have the benefit of tax-deferred growth. You will only pay tax when funds are withdrawn from the account. With the ability to invest the accounts in a diverse mix of securities including stocks, bonds, GICs and mutual funds, this makes a 401(k) and RRSP a great option for retirement savings.
While an RRSP does not have an early withdrawal penalty, a 401(k) has a 10% penalty for early withdrawals prior to turning age 59½ or age 55 if separated from the U.S. employer after age 55. Both 401(k) and RRSP withdrawals are subject to appropriate withholding taxes and income tax.
Upon reaching a certain age, both 401(k)s (age 73 or 75) and RRSPs (age 71) require individuals to withdraw a certain amount on an annual basis going forward, often referred to as required minimum distributions (RMDs) or minimum payments. The RMD amount is based off the account value on December 31 of the previous year divided by an age factor set out by the IRS. As you get older2, the age factor is reduced, meaning more funds are required to be withdrawn as an RMD. Similarly, a minimum payment in Canada is based on the December 31 account value for the previous year multiplied by a percentage set by the CRA. As you get older, the percentage and minimum payment increases.
Is a 401(k) taxable in Canada?
The earnings in 401(k) and 403(b)s are tax-sheltered from Canadian taxes, however, withdrawals from these plans are taxable and must be reported on your Canadian tax return. The U.S. has the first right to tax any withdrawals from these plans as the original contributions were from earnings in the U.S. Individuals who have U.S. tax reporting requirements (U.S. citizens, green card holders) will owe taxes on the withdrawals based on their taxable income on their U.S. tax return.
Typically, Canadian citizens living in Canada without U.S. reporting requirements will have a 15% withholding tax on the withdrawals in retirement. Taxes paid to the IRS can be used as a foreign tax credit on your Canadian income tax return thanks to the U.S.-Canada tax treaty. This can decrease the Canadian taxes you pay on the same income and helps to reduce or eliminate double taxation that could result from a cross-border move. We recommend working with a cross-border accountant who understands the complexities that arise from having interests on both sides of the border.
Can I transfer my 401(k) into an RRSP?
It may be possible to transfer a 401(k) into an RRSP, however, this is generally not the best solution due to the inadvertent tax consequences of such a move. In the U.S., mandatory withholding taxes at 30% for lump sum withdrawals would apply, meaning that only a portion of the withdrawal will be available for an RRSP contribution. The U.S. withholding tax will be eligible to be claimed as a foreign tax credit when filing your Canadian income tax return since the withdrawal is taxable income. Another consideration is the consequence of an early withdrawal penalty of 10% if you are under at age of 59½, which further reduces the amount to move to an RRSP.
Consequently, if you would like to transfer the full pre-tax amount of the 401(k) to an RRSP, it will be necessary to come up with the additional 30% that was withheld for taxes and the 10% early withdrawal penalty (if applicable) to fully offset the pre-tax amount of the 401(k).
A better option is to work with a cross-border financial advisor, so you can continue to hold U.S. retirement accounts. You will benefit from having the accounts actively managed by a team of dual-licensed financial advisors who specializes in cross-border wealth planning. Our team of experts can help transfer in, manage, and invest your 401(k), 403(b) and IRA accounts for you without adversely affecting your income taxes.
How to bring a 401(k) to Canada:
As 401(k)s can only be managed by the original employer, in order to transfer those assets to a Canadian dual-licensed advisor, you would first need to rollover the 401(k) to an IRA. This allows the new IRA account to be managed from Canada. There are no tax consequences on the rollover to the IRA, however, it is important to note that while 401(k) and 403(b) withdrawals in retirement are eligible for income splitting on Canadian taxes, IRA withdrawals are not. It is important to review if this may impact your retirement plans prior to initiating a rollover to an IRA. Working with a cross-border financial advisor will allow an individual to do this rollover before they move to Canada or once they are in Canada.
What about a Roth 401(k):
A Roth 401(k) is provided through your employer as part of a total compensation package where the employer may match part of the contributions. A Roth 401(k) is funded with after-tax dollars and allows for tax-free growth, but contributions are not tax deductible. These Roth 401(k) accounts have a five-year rule, meaning that an individual must wait five years from the day of the first contribution before they can take out earnings tax free. Qualified withdrawals from the Roth 401(k) account are tax free, and there are no required minimum distributions (SECURE act 2.0 – beginning in 2024).
Roth 401(k) vs. Roth IRA:
A Roth 401(k) and Roth IRA are similar. They are funded with after-tax dollars, allow for tax-free growth, and have the same five-year rule. The differences are that Roth IRAs come with an income limit per the IRS and is not an employer plan. When U.S. taxpayers earn adjusted gross income (AGI) over a certain amount, the ability to contribute to these accounts is phased out. Currently, the Roth IRA contribution limit for 2023 is $6,500 for individual under age 50 and $7,500 for individuals over age 50. If you are eligible, you can contribute to both a Roth IRA and a traditional IRA in the same year. However, you can only contribute up to the annual contribution limit among all of your traditional or Roth IRAs.
With a Roth 401(K), there is no income limit, so individuals with high income can still contribute to a Roth 401(k). The contribution limit in 2023 is $22,500 if under age 50 and $30,000 if age 50 or older. However, these limits apply to the total 401(k) plan (Traditional 401(k) and Roth 401(k)), so combined contributions cannot exceed the deferral limit. Due to changes in the SECURE Act 2.0, in 2024 Roth 401(k)s no longer have RMD rules. However, for a designated Roth 401(k) account in 2023 with a required beginning date, that is reaching age 73 in 2023, of April 1, 2024, RMDs will still apply.
Once you are a Canadian resident, you will need to make a one-time election to treat Roth IRAs as non-taxable in Canada. Do not make any Roth IRA contributions once you are a Canadian resident as the tax-free status will be tainted.
Unique Circumstances: 401(k) Deduction in Canada:
A 401(k) deduction is not based on income, rather, it is a standard yearly amount set by the IRS that cannot be carried forward. The contribution limit for a 401(k) in 2023 is $22,500 if under age 50 and $30,000 if age 50 or older as the 401(k) offers a “catch up” provision to individuals who will be at least age 50 by the end of the year.
In most cases, an individual will be changing employers or retiring when crossing the border to live in Canada. However, there is the potential for deduction for residents of Canada continuing employment in the U.S. and thus contributing to the 401(k). Under the U.S.-Canada tax treaty, contributions to the plan (up to your RRSP deduction room) in certain circumstances may be deductible for Canadian tax purposes. However, care needs to be taken as your 401(k) deduction on your Canadian return is limited to RRSP contribution room. As each person’s situation is unique, it is advisable to consult with your cross-border accountant to determine whether this would be beneficial for you.
Plena Wealth Advisors Help with All Aspects of Cross-Border Financial Planning:
- Cross-border retirement, investment, and tax planning.
- Management of Canadian (RRSP, TFSA, RESP) and U.S. retirement accounts (IRA, Roth IRA, 401(k)).
- Analysis of retirement benefits including pension plan and government-assisted plans (CPP, OAS, U.S. Social Security).
- Estate planning and risk management strategies.
- Multi-currency investment accounts in CAD or USD to keep investment strategies separate.
Plena Wealth Advisors specialize in handling cross-border retirement accounts and work diligently to serve as the ultimate stewards for your wealth.
Set up an appointment with our team of cross-border financial advisors and let us help get you on your way to pursue all you have envisioned for retirement.
Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The views are those of Plena Wealth Advisors, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.
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