# 401k to rrsp?



## MikeT (Feb 16, 2010)

I have a 401k from previous us employment worth around 100k. I have 30 years to retirement, it is invested in good products, and I am planning on just leaving it alone until retirement.

The websites on this subject often contradict each other, and reading the government rules directly are not very clear.

Here's my endgame. Someone out there likely has alot more cross border experience than I do, so please comment if you can.

1. Do nothing until age 59 & 1/2 to avoid the early withdrawal penalty.
2. After that, have them roll it into an IRA.
3. Transfer to an rrsp.

I understand it will be taxed as income in the us upon withdrawal. I can claim that tax paid as a foreign tax credit, so I need to have ample Canadian income in the year of the move to be able to use the credit.

I understand that the transfer doesn't count against my rrsp contribution limit?

Questions:
There are employer contributions to the account. I understand that those don't qualify, and I need ample contribution room in order to transfer those, but how do I account for the growth? Or is it just the original contribution amount?

Will I be able to even roll it into an IRA if I'm now a Canadian resident?

Is this even correct? Does it sound like a reasonable strategy? 

Is there a better way to go?


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## explorer416 (Jun 11, 2010)

I also have some funds in a 401k in the U.S, and am also ~20-30 years away from retirement. I don't have an answer for you but I am very curious to hear what others have to say on the subject.


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## OhGreatGuru (May 24, 2009)

Google "Transfer 401k to RRSP" and see what you get. There a number of sites that discuss this, such as http://www.howlandtax.com/answers/05Sept21.htm

CRA's bulletin on the subject is indecipherable. But the commentaries say you can't transfer directly from 401k to RRSP, you have to convert the 401k to an IRA first.


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## brad (May 22, 2009)

OhGreatGuru said:


> But the commentaries say you can't transfer directly from 401k to RRSP, you have to convert the 401k to an IRA first.


But this is part of the problem: I don't think you can do that conversion if you're not a resident of the United States. At least that's what I was told when I moved to Canada (I'm a dual citizen, born in Canada, lived in the US from age 1 to 41 and then moved back). I was told by the company holding my IRA that I could no longer contribute to it once I moved to Canada, so I'm assuming it would not be possible to open an IRA if you don't have a US residence. I've always wondered about the accuracy of that advice, though, because there are so many US citizens living abroad.


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## MikeT (Feb 16, 2010)

Ya, that's part of it. There are so many issues with it I have been sort of leaving it alone because of the complexity. In the end I think I actually going to need to spend some money on a specialist to get all this figured out.

(I'm happy that I'm not the only one who couldn't make heads or tales of the CRA interpretation)

I think it boils down to a question of paying the 10% penalty now, or a higher marginal tax rate later when it has time to grow for 25 years or so. Then if you can transfer it piecemeal over a few tax years, that problem goes away. But rules say it must be a lump sum transfer... So many caveats my head hurts thinking about it.


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## Karen (Jul 24, 2010)

Mike, have you considered the option of letting the funds grow within the 401(K) and taking it as an annuity after you have retired? My late husband, an American, had a 403(B) plan (very similar to a 401K but for employees of public institutions). I was the beneficiary of his 403(B), and I intend to do that with mine. I don't want to annuitize it until I have to because it will bring my income up to the point where I'll lose a good chunk of my OAS, and I don't see any sense in doing that when I don't need extra income now. But when I do start drawing on it, the insurance company will be required by the US-Canada Treaty to withhold 15% of my annuity payments for the IRS. I will then have to declare the income on my Canadian tax return and deduct the 15% paid to the IRS as a foreign tax credit. (If I take it the money as a lump sum or as smaller payments every year, the withholding tax would be 30% instead of the 15% applicable to pension and annuity payments.)

This may not apply to all annuities in the US but my particular 403(B) will allow me to opt for a guarantee period of 10, 15, or 20 years in return for a surprisingly small decrease in my monthly annuity payment. So that takes care of my main objection to some annuities - that I'll die after receiving only a few payments and the insurance company will keep almost all my money!


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## Karen (Jul 24, 2010)

I just searched my newsletters from David Ingram, an expert on US-Canada income taxes, and found the following answer he made to someone in your situation. This was David's reply to a person whose question was the same as yours:

_To do what you want, you must first roll the 401(K) into an IRA. 

What happens next of course is that lump sums out of your IRA are taxable in the USA first and Canada second. Canada will give you credit for the tax paid to the US on forms T2209 and T2036.Depending upon how much you remove to transfer, your US tax could be up to 33%..

And, if you are younger than 59 1/2, there is a non-refundable US 10% penalty for early withdrawal/

To achieve the 15% withholding rate, you must convert the IRA or the 401(K) into a pension or annuity at which point the US tax is 15% but you will still owe Canada the difference. i.e. if you are in the 34% tax rate in Canada, you will pay 15% to the US and 19% to Canada.

It is possible to roll the IRA into a Canadian RRSP. To do so, however, you need to be working with a fairly large income to be able to take advantage of the Foreign tax credits to make it work._


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