401(k) in Canada: What You Need to Know

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.

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.

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.

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).

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.

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.

If you live in Canada while remaining employed by a U.S. company, you will likely become a Canadian tax resident, which means Canada taxes you on worldwide income, including your U.S. salary. At the same time, if you are a U.S. citizen or green card holder, you must continue filing U.S. tax returns on worldwide income. The Canada-U.S. Tax Treaty helps prevent double taxation by allowing foreign tax credits, but Canadian tax rates are often higher, so your primary liability will usually be in Canada.

U.S. citizens and green card holders face unique challenges when living in Canada. They must file annual U.S. tax returns and comply with FATCA and FBAR reporting for foreign accounts. While RRSPs are recognized under the treaty, Canadian accounts like TFSAs, FHSAs and RESPs are not, and they can trigger punitive U.S. tax rules such as the PFIC rules.

Additionally, green card holders who have held status for eight of the last fifteen years may face U.S. expatriation tax (exit tax) if they relinquish their card, which can include deemed sales of assets and retirement accounts. This exit tax test is based on three criteria including a Net Worth Test, Average Income Tax Test and Certification Test.

Before moving, review your U.S. retirement accounts and consider strategies like Roth conversions if you expect higher Canadian tax rates later. Confirm if your U.S. brokerage will allow you to keep accounts as a Canadian resident. Oftentimes, the account will need to be moved to a dual Canada/USA licensed advisor who can then continue to manage the accounts for you.

After moving, establish Canadian banking and credit history, file any necessary tax elections with the help of your cross-border accountant, and ensure you have properly reported adjusted cost bases (ACBs) for both U.S. and Canadian tax purposes. Update your address with U.S. institutions carefully to prevent account freezes.

Canadian tax residency is based on significant residential ties such as a home, spouse, and dependents, as well as secondary ties like bank accounts and health coverage. Spending 183 or more days in Canada generally makes you a deemed resident. Once you are a Canadian resident, you must report worldwide income, but under the treaty, your U.S. 401(k) remains tax-deferred until withdrawn. Withdrawals will be included in your taxable income in Canada and may also be subject to U.S. withholding tax, with foreign tax credits available to offset double taxation.

A key advantage to keeping your 401(k) as a Canadian resident is that withdrawals from a 401(k) qualify as eligible pension income for Canadian income-splitting. This allows you to allocate up to 50% of withdrawals to a spouse, reducing overall household tax. In contrast, IRA withdrawals do not qualify for income splitting in Canada, which can result in higher combined taxes for couples. Rolling into an IRA provides more investment options, control and flexibility. Transferring U.S. retirement accounts directly to Canada is generally not possible without cashing out, which triggers taxable income and punitive penalties—including a 30% U.S. withholding tax on lump sums and an additional 10% early withdrawal penalty if under age 59½. The most practical approach is to keep U.S. accounts in the U.S., either as a 401(k) or rollover IRA, and have a dual Canada/U.S. licensed advisor manage your accounts.

The Canada-U.S. Tax Treaty, specifically Article XVIII, determines how retirement distributions such as 401(k), IRA, and RRSP withdrawals are taxed when you live in one country and receive income from the other. The general rule is that pensions and annuities are taxable in the country of residence, but the treaty also limits taxation so that the source country cannot tax more than it would under its own laws.

For example, if you live in Canada and withdraw from a U.S. 401(k), Canada will tax the full amount as ordinary income. The U.S. will typically apply between 10-15% withholding tax, depending on your citizenship status, on the distribution (instead of the standard 30%) because of the treaty. You can then claim a foreign tax credit in Canada for the U.S. tax paid, which prevents double taxation.

A Roth IRA is a U.S. retirement account that allows after-tax contributions and tax-free growth. Withdrawals in retirement are also tax-free under U.S. rules if you meet the qualified distributions requirements:

• The account has been open for at least five tax years, and
• You are age 59½ or older, or meet an exception (disability, first-time home purchase, or death)

In Canada, there is no Roth IRA, but Canadians may hold a Roth IRA if they previously lived or worked in the U.S. Canada does not automatically recognize Roth IRA tax-free status, meaning growth and withdrawals could be taxable in Canada. However, you can file a one-time election under the Canada-U.S. Tax Treaty to treat the Roth IRA as tax-free in Canada going forward. This election must be filed correctly and on time to avoid Canadian taxation.

The Canadian equivalent of a Roth IRA is the Tax-Free Savings Account (TFSA). Both accounts share the same core concept: you contribute after-tax dollars, and the growth and withdrawals are tax-free in the home country. However, there are important differences:

Similarities:

• Contributions are made with after-tax dollars.
• Investment growth and withdrawals are tax-free (in the home country).
• No tax on qualified withdrawals for retirement purposes.

Key Differences:

• Contribution Limits & Withdrawals:
  • Roth IRA (2025): $7,000 USD per year ($8,000 if age 50+)
  • TFSA (2025): $7,000 CAD per year
  • Annual limits are similar, but TFSAs have cumulative room since 2009—currently $102,000 CAD (2025) for someone eligible since inception. Roth accounts do not have cumulative catch-up beyond annual limits
  • TFSA withdrawals restore contribution room where Roth IRA withdrawals do not.
• Income Restrictions: Roth IRA contributions phase out at higher incomes levels where TFSAs has no earned income restrictions.
• Tax Recognition Across Borders: TFSAs are not recognized by the U.S. for tax-free treatment, so U.S. citizens living in Canada face complex reporting and potential U.S. taxation on TFSA income. As such, generally it is advisable to avoid holding a TFSA if you are a U.S. taxpayer living in Canada.

Oftentimes, when clients move to Canada, their U.S. brokerage firm may not be able to manage their Roth IRA anymore. Luckily, with the help of a dedicated cross-border wealth management team, Plena Wealth Advisors can assist you in the movement of Roth IRA accounts. We can transfer in, hold, manage and invest your Roth IRA accounts without any adverse tax consequences to you.

Your dedicated cross-border wealth management team, which consists of dual-licensed financial advisors, financial planners and tax specialists will help ensure your Roth IRA accounts are managed and invested in a manner that suits your needs. We advise on certain investments and rules in order to keep you compliant and avoid any investments that may cause you to pay unnecessary taxes. As dual-licensed financial advisors, we are licensed and regulated in both Canada and the U.S. and understand the complexities that arise from the different countries’ laws.

With complexities that arise from moving across the border, ensuring you are compliant from a Canadian and U.S. tax perspective is of utmost importance. In order to keep your Roth IRA tax exempt in Canada, you must file a one-time Treaty election in the first taxation year you are in Canada (latest by April 30 of the following year). We can help navigate this filing with you, provide cross-border tax planning advice and, in conjunction with your dedicated cross-border accountant, ensure complexities are simplified for you.

Contributions to your Roth IRA, while residing in Canada, have the potential to create a tax issue and contaminate the account. This poses a problem and could cause you to lose the tax-free growth for Canadian tax purposes. In order to avoid contaminating your Roth IRA, ensure any deposits happen prior to your move to Canada.

Converting an IRA to a Roth IRA could prove useful if you believe your future tax rates will be higher. Remember that this conversion is generally added to your income and reportable in the year of the conversion, and once made, you cannot revert to an IRA account.

For more FAQs on Roth IRAs, 401(k)s or traditional IRAs, check out our Cross-Border FAQ page and Cross-Border Wealth Planning blog!

As specialists in cross-border wealth management and financial planning, your Plena Wealth Advisory team is here to help navigate these complexities with you. Whether you have questions or want help transferring, managing, and investing your Roth IRA or 401(k), we would be happy to help. Set up a discovery call today to discuss your specific situation to ensure you are making the right decisions.