Canadians who travel across the border for work may have a U.S. retirement plan such as an IRA or a 401K. While it’s okay to keep the retirement plan in the U.S. many people choose to move it over the border.
Some of the reasons for moving your plan to Canada may include:
- The desire to keep all of your financial affairs in one country
- Risk mitigation and running into possible investing restrictions
- Trying to avoid paying U.S. estate taxes
- Saving money by having one advisory service manage all your financial affairs
Whatever the reason may be, there are tax implications from both sides of the border you’ll need to keep in mind before making the move.
U.S. Retirement Plan Tax Implications
If you decide to make the switch to a Registered Retirement Savings Plan (RRSP), you will be faced with U.S. tax implications. These implications will vary depending on:
- Your age.
- Whether or not you still pay income tax in the U.S.
- How you choose to withdraw your money.
Because you are moving your money from the U.S. to Canada, you will need to sort through the U.S tax implications before moving on to the Canadian tax implications.
Early Withdrawal Penalties
Making a withdrawal under the age of 59.5 will result in a U.S. withdrawal penalty of 10% of the total amount. This fee is required for citizens in both the U.S. and Canada.
However, you are responsible for remitting the penalty as the U.S. plan administrator is not responsible for collecting this. To make the remission, you will need to complete the appropriate U.S. return depending on your filing requirements.
Withholding Tax
You will be subject to withholding tax depending on how you choose to withdraw from your U.S. retirement plan. There are two ways to withdraw, a lump sum withdrawal or a periodic withdrawal.
Lump Sum Withdrawal
A lump sum withdrawal is a one-time payment from your administrator. As a Canadian citizen, a lump sum withdrawal is subject to a 30% U.S. withholding tax. However, in some cases, your administrator may elect to enforce a reduced withholding rate so, it is advised you check with them before making any withdrawals.
Periodic Withdrawal
A periodic withdrawal means your total will be paid out in payments over a set period of time. Because of an income tax treaty between the U.S. and Canada, periodic withdrawals come with a reduced withholding tax of 15%. That 15% will be applied to each of your payments.
In order to claim this reduced withholding tax, you will need to file a W-8BEN form with your administrator. This indicates your foreign status from the U.S. and allows you to take advantage of the reduced rate that is a result of the treaty.
Canadian Retirement Plan Tax Implications
Once you’ve gone through the process of withdrawing from your U.S. retirement plan you’ll have to focus your attention on meeting the Canadian tax implications.
Regardless of how you choose to withdraw from your U.S. retirement plan, the money will need to be recorded as income on your Canadian tax return, and will therefore be taxed.
However, if you move your withdrawal directly into an RRSP, you will be eligible to claim a deduction that could help cover some or all of the costs. In order to be eligible for this deduction, there are a few requirements:
- You must withdraw as a lump sum as opposed to periodic payments.
- The money you are transferring has to be money accumulated while you were a U.S. retirement plan member and were not a resident of Canada as far as income tax goes.
- You are currently a Canadian resident and, in most cases, plan to be a permanent resident.
- You have to add your funds to your RRSP within 60 days of withdrawing from your U.S. retirement plan.
- You are under the age of 71.
Example
As an example, let’s say you are under the age of 59.5 and have a total of $45,000 in your U.S. retirement plan. You are planning to make a lump sum withdrawal.
You will be subject to both a U.S. early withdrawal penalty and a U.S. withholding tax. Your early withdrawal penalty will total $4,500 and your withholding tax (with the 15% reduced rate) will total $6,750 bringing your total tax withheld to $11,250. This means $33,750 will be available to add to your RRSP.
In many cases, people will choose to contribute the amount withheld to “top off” their RRSP considering the entire $45,000 will need to be claimed on your Canadian income tax return for that year.
Need Help With Your Retirement Plan? Turn to a Tax Professional
Making the move from a U.S. retirement plan to an RRSP can be complicated because of the U.S. and Canadian tax implications.
To ensure you are maximizing your retirement savings, get in touch with a tax professional, like Argento CPA. We will work with you to create a strategy for withdrawing that guarantees:
- The lowest possible tax implications
- A timely withdrawal
- All rules and regulations of both countries are met
- All available deductions are claimed
For more information on how Argento CPA can help you financially prepare for your future, contact us today!