Managing Your U.S. Retirement Assets after Returning to Canada
You are a Canadian who has just returned to Canada after working for many years in the United States. In that time, you have accumulated assets in a 401(k), a traditional IRA, and a Roth IRA. In addition, you have children who were born in the U.S. and for whom you have opened 529 Plans. What can you do with those accounts?
The 401(k) and Traditional IRA
You have two options here. The first is to transfer it back to Canada, while the second is to maintain it in the United States.
Transfer Your 401(k) to your RRSP in Canada
You may wish to make this choice in order to consolidate your investments and to simplify your financial affairs. You may also wish to avoid dealing with foreign exchange rate fluctuations between the U.S. and Canadian dollars. Another consideration is to avoid having to file U.S. tax returns.
Various conditions must be met in order to transfer your 401(k) to an RRSP and maintain its tax-deferred status.
- It must be transferred as a lump sum.
- The amount being transferred must relate to your services rendered as an employee while you were a non-resident of Canada.
- You must be a Canadian resident in the eyes of the Canada Revenue Agency when the transfer to the RRSP is made. Generally, your intention is to reside permanently in Canada.
- The transfer is fully taxable in Canada in the year of the transfer. For the transfer to qualify for an offsetting deduction, it must be contributed to an RRSP in the same year as the transfer occurred or within 60 days after the end of the year of the transfer from the U.S.
- You can only contribute these funds to a personal RRSP. They cannot go into a spousal RRSP.
- Transfers to RRIFs are not allowed, which means you must make the transfer to an RRSP not later than December 31 of the year in which you turn 71.
Leave your 401(k) in the United States
There are a couple of choices here. One is to leave your 401(k) with your former employer’s plan. Not every employer will offer that choice. But if your employer does, this can be a good option. By treaty, the U.S. withholding rate is 15% for Canadian residents and the foreign tax credit may be sufficient to fully offset the tax.
One thing to note about the U.S. is that you must take your first “Required Minimum Distribution” (RMD) no later than April 1 of the year following the year you turn 72. For example, if you turned 72 in 2021, then you have until April 1, 2022 to take your first RMD. However, if you choose to delay that withdrawal until 2022, you will be required to take a second RMD later that same year, as all RMDs after the first one must be taken by December 31 of each subsequent year. Failure to take your RMD on time leads to a penalty of 50% of the RMD amount.
A second choice is to roll your 401(k) into an IRA. If your plan administrator is not able or willing to support a non-resident plan member, this may be a necessity rather than a choice. Not all IRA account providers will allow a non-resident either, but there are many that do. Rolling over your 401(k) from your employer to an IRA is a fairly common practice among U.S. residents as, among other things, it allows for a broader range of investment choices.
A Roth IRA, similar to a TFSA, does not provide for a tax deduction on contributions but investments grow tax-free and may be withdrawn tax and penalty-free depending on certain criteria being met. If you have a Roth and wish to maintain its tax-free status after you move back to Canada, you need to file a one-time election.
While a Roth IRA can be maintained in the United States, it cannot be transferred to an RRSP in Canada unless you have contribution room. Neither can it be transferred to a TFSA. In like fashion, if you have a TFSA in Canada and subsequently move to the United States, you cannot transfer your TFSA to a Roth IRA.
An interesting option if you are likely to pay tax at a higher rate in in retirement than you would while working, is to do what’s referred to as a Roth IRA conversion from a traditional IRA. This must be done before you return to Canada as a resident. The conversion process means that the entirety of the traditional IRA balance is taxed – the conversion process can be spread over several years to minimize the tax impact – but your future withdrawals from your Roth IRA will be tax-free. Note as well that there are no RMD mandates with Roth IRAs.
Two additional criteria to consider when seeking to make tax-free withdrawals from a Roth IRA: Withdrawals must take place after age 59 ½, and at least 5 years after the original Roth contribution was made.
A 529 Plan is a tax-advantaged savings plan designed to help pay for education.They are somewhat similar to the Canadian Registered Education Savings Plan (RESP) in their intent. The plans are administered by the various states as well as the District of Columbia and depending on the state, contributions may result in a state tax deduction. Unlike the RESP, qualified withdrawals are not subject to tax.
Unfortunately, unlike with 401(k) or IRA accounts, there is no tax treaty that addresses education savings plans. To my knowledge, if you move back to Canada, the only way to preserve a 529 Plan is to transfer the ownership to a resident of the United States. Clearly this person needs to be someone you trust. Like the RESP does for Canadian beneficiaries, 529 Plans recognize qualifying educational programs beyond the U.S. border.
Competent Tax Advice
This post is meant as a simple overview of how to address U.S. tax-advantaged accounts if you return to Canada after several years south of the border. If this a live issue for you, seek out professionals who specialize in cross-border financial planning and tax matters.
Note that details in some of the references below are out of date. In particular, RMDs used to become mandatory once you turned 70 ½; that has been updated to age 72.
This is the 134th blog post for Russ Writes, first published on 2022-02-07.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.