I’m on H1b but planning to move to Canada soon as a PR. I was wondering what would happen to my pension plan with my US employer when I resign? Thanks!
Pension plans (eg 401k) stays as it is except your former employer will stop contributing to it. So whatever increases/decreases you see in total valuation will be due to market forces. You have multiple options from here on out:
A) keep the money there and let it grow (won’t be a huge payout since you are not contributing to it) and get a distribution after retirement to avoid penalties
B) pay the penalties and taxes now and get a distribution so that you get all the money out of US market and can choose to either save it or reinvest
C) Rollover to IRA in USA so that u have more control over it.
In any case if you get a distribution you’ll get penalized and taxed on it if you’re younger than 59.5
Normally you get penalized 10% and additional tax withholding is 20% by the 401k administrator.
However if you take a big distribution you taxable income goes way higher for that tax year and you end up paying even more in taxes when you file next year (my tax consultant says could be as high as 35% overall). This could vary on your filing status and many other taxation variables. Therefore you’ve to weigh this while making a decision.
This could also change due to COVID-19 401k temporary penalty and tax relief (see the news), or if you’re a first time home buyer etc.
Note that I’m not a tax consultant and most of this advice is based on my research. Always talk to a tax consultant before making the decision.
Thank you for your response in detail, really appreciate it!
It’ll take some time for me to do some research and speak with a tax consultant before making a decision. How easy is it to take out the money, when I decide to, when I’m already in Canada not in the US? In case you know this, is my US tax bracket next year dependent on my US income only or US and Canadian incomes combined? I’m likely to start my Canadian job in the summer.
Thank you so much for sharing your experience and knowledge!
You need to call your 401k administrator and request some forms to fill out and choose your options (e.g. withdrawal, rollover etc); might be differ with administrators. If you are in US for partial year and in Canada for rest, you need to file both US and Canada taxes and claim US taxes paid as credits, in Canada tax filing. Your tax consultant might be able to help you better with this, but one thing is for sure, once you take a large distribution your taxable income shoots up and you may end up paying through your nose with taxes.
One more point. IRA can be converted to Canada’s version of registered account. 401k can however can not be converted.