I’ve been able to move my non registered US trading accounts into Questrade without any problems and am now thinking of moving over my retirement funds as well.
I’m wondering if someone has moved a 401k into a RRSP? If so could you lay out the process and your experience with it?
I’ve read about this online and I think the outline of the process makes sense, just wondering if someone had more specifics. Bonus points if you have experience with the CARES act no withholding on retirement plan distributions.
I was able to do this successfully last year and am sharing the steps. It’s very important to clearly understand the tax considerations if you choose to do this, this is also a one way process which can’t be reversed so you really need to be sure if you want to do this or not. In general leaving a 401k or IRA as is in the USA is also a good strategy.
I also recommend reading these to get a better idea of the process, these were extremely helpful for me and I followed the process as listed mostly.
Once I did the math and kenw that I had adequate Canadian tax liability to offset the US tax liability and the early withdrawal penalty then this is what I did -
Convert the 401k to an IRA
This step I recommend to everyone, regardless of whether you plan to move the funds to Canada. If you’ve had multiple employers, this allows you to consolidate all your retirement funds as well as to decide how you want to invest them. In my case my 401k was with Fidelity and IRA with Schwab, Fidelity wrote me a check and sent it in the mail and I had to mail that back to Schwab. This if done correctly is a non taxable event.
Make a lump sum withdrawal from your IRA into your US checking account. This is a taxable event, I chose to not have any amount withheld for US taxes so I was able to get the entire amount. If you have a tax withholding, that’s fine be sure that you have enough funds in Canada so that you can top up the difference.
Open a RRSP account if you haven’t already. I opened an account with Questrade but you can open one at any broker or bank.
Move your RRSP lump sum to your Canadian US Dollar Checking account.
Move the funds from your Canadian US Dollar Checking account into your RRSP account.
At this point, you’ve successfully completed the transfer.
Next let’s discuss what needs to be done at tax time -
File US taxes, in my case this was 1040NR as I was a non resident. I did this with an online program i.e. TaxAct it was fairly affordable I also got the audit defence and protection and altogether paid less than $100 USD. I did have to pay the 10% penalty for an early withdrawal as well. So all in all I owed the IRS a pretty hefty payment, make sure that you have enough money in America to cover this payment. The US tax return is very important as this will have the exact details of how much tax you paid and will server as proof should CRA audit your return and ask for it.
File Canadian taxes, since this was my first year filing taxes in Canada I had to do a lot of reading to understand exactly what I needed to do, the main things to keep in mind is -
a. You need to declare your IRA withdrawal as Foreign Income and list down the amount of foreign tax paid from step 1 to get a credit for this from the CRA.
b. In the RRSP contribution section, you need to declare this as a transfer and not a contribution. This doesn’t eat into your contribution room but creates new contribution. It’s very important that you contribute the full amount that you withdrew (or top up if there was a withholding on the US side), otherwise you will lose this room.
Complete the Canadian taxes and you should see an additional refund equal to the amount of taxes you paid in step 1 to the IRS. I used SimpleTax from WealthSimple to file Canadian taxes (which is free or donate what you want) and got the priority support and audit defence package here as well. I was quite impressed with SimpleTax, I found it comparable with the quality of TurboTax which I used in the US perviously for self filing.
And that’s it, you’ve now successfully completed the transfer, satisfied both the IRS and CRA. Be very sure to keep a track of the amounts and dates and to keep a record of these just in case your return is picked up for a random audit.
What is the benefit of doing this instead of keeping it in IRA in USA?
Someone earlier on this forum told we can keep it in IRA and just change our address to Canadian residence.
I mean you paid the taxes to US which you saved all those years from contributions to 401K every year and on top you paid extra 10% penalty…
Thanks for the detailed post. Can you please share the math with some dummy numbers? Also, what conversion rate did you use for Step 2 for claiming tax credit in CAD, while paying tax to IRS In USD?
Oh, btw looks like Schwab isn’t letting Questrade transfer non-registered account these days. Did you transfer the brokerage over from Schwab?
You might find the examples here helpful for some dummy math.
I don’t know about the current status, but yes I transferred my non-registered account from Schwab into Questrade last year. Schwab had rejected the first request because that form didn’t have my US SSN and signature, so I had to get Questrade to do this again with these pieces of information. At the second time the request went through without any issues. You should talk with somebody on the Questrade Accounts Transfer team if you haven’t already.
There is no benefit to doing this, if your broker allows a Canadian address on the IRA then that’s a perfectly fine strategy to managing your US retirement savings.
As for the taxes paid, this is a tax neutral maneuver if done correctly, so you don’t pay any net taxes (you do pay taxes to the IRS and the CRA reimburses you the amount that you paid).
Quick question - did you start the RRSP account in your first year in Canada? I read on lot of posts that your RRSP contributions are determined after you file your first tax returns in Canada.
Yes I did start my RRSP account in my first year in Canada. You’re right that the RRSP contribution room only starts after you’ve filed your first tax return. However as I’ve explained in the post I didn’t make any RRSP contributions per se, I have essentially done a transfer which creates it’s own separate RRSP room. You absolutely shouldn’t be making RRSP contributions in your first year as a tax resident.
I moved from US to Canada in Jul 2021. I started contributing to my employer sponsored Group RRSP 5% with equal match from my employer. Am I missing something that I shouldn’t contribute anything to RRSP in 2021 being my 1st year in Canada?
What are the cons of contributing to RRSP when there is a employer match?
Jai Shri Ram @sysout, that’s not a very good idea tax wise.
If you don’t contribute the entire amount, then you will lose the contribution room and be taxed on the portion of your income that you didn’t contribute to the RRSP in Canada.
The general idea here is that your withdrawal is first added to your taxable income and then you get a credit for the amount that you contribute if you contribute less than your 401k withdrawal then the problem is that you pay taxes on the amount that you don’t contribute back.
@panditji Thanks for your prompt response!
Yeah I totally agree with you!
The situation that I’m in is, I withdrew from my 401K at the start of this year and Fidelity withheld I think 30% of it. I transferred over that money to my Canadian Account (not a US dollar account) and had to use for personal reasons. Now I’m in a state where I don’t have enough money saved up in my Canadian account to contribute to RRSP to match the 401K withdrawal amount. I can contribute to the RRSP about 50% of it. Just wanted to know that, if I’m ok to loose the rest of the contribution room, can I still do the partial deposit to RRSP and file taxes accordingly?
In that case, I think it’s best to contribute as much of it as you can. You have 60 days next year to contribute to the RRSP, so you have until Feb 2022 to make the contribution (just incase there is an end of year bonus or some other money stream coming in between now and then). Another option would be to use a line of credit if one is available at preferential terms (borrowing to invest is in general risky and not something that I personally advice but depending on the amounts in question, the tax rebate may be worth paying interest especially if you can pay the balance and interest down fairly quickly)
So yeah, given your circumstances contribute as much of it as you can and unfortunately write off whatever you can’t.
Ohh I didn’t know I had until Feb 2022 to make the contribution to my RRSP. I was working with the assumption that I had only till December 31. But having that extra time might me help figure out some
extra cash availability and minimize the tax loss.
Really really appreciate your quick responses and ideas!
Sure, happy to help. Mandatory disclaimer around this not being tax advice etc applies.
I recommend reading Sec 60 (j) of the income tax act which is the authority for this type of transfer. It’s surprisingly clear and easy to read and understand. I’ve highlighted the relevant section, if you do contribute after the year and within 60 days be sure to tell your broker to designate the contribution for the year 2021.
(iii) does not exceed the total of all amounts each of which is an amount paid by the taxpayer in the year or within 60 days after the end of the year in respect of the amount so designated
