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.
- How to bring 401(k)s and IRAs to Canada | Advisor's Edge
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.