How to bring 401(k)s and IRAs to Canada

By Melissa Shin | September 9, 2016 | Last updated on September 21, 2023
11 min read

Crossing borders for work often means cross-border tax issues, especially when it comes to retirement accounts.

Moving 401(k)s and IRAs to Canada must be done with plenty of forethought; otherwise, owners could face big tax bills on both sides of the border. In a case that got accountants buzzing, CBC’s Go Public reported that an Ontario couple lost almost a quarter of their U.S. retirement savings to taxes when they followed improper advice about making the transfer.

And even if clients don’t want to move their money, they may be forced to. “Plans have the ability to kick a participant out either due to account size or non-residency in the U.S.,” says Debbie Wong, a CPA and vice-president with Raymond James in Vancouver. That means Canadian residents could be out of luck.

Jacqueline Power of Mackenzie Investments in Toronto agrees. “A lot of U.S. suppliers don’t want to deal with Canadians anymore,” she says. “We’ve had lots of advisors saying their clients are being essentially forced out of the U.S.”

L.J. Eiben, president and CEO of Raymond James (USA) Ltd. in Vancouver, says “a U.S. firm usually gives the individual 30 to 60 days to transfer out. If not done by that date, the firm will liquidate the retirement account and send the participant a cheque for the remaining proceeds minus withholding tax, penalties, et cetera.”

If your clients are Canadians who have 401(k)s or IRAs and are considering moving them, or they’re Americans who have the accounts and are moving to Canada, here’s what to do.

The choices

When a cross-border client has a U.S. retirement account, she has four main options.

1. Leave the account in the U.S. Canadian residents can continue to defer tax on their U.S. retirement accounts until withdrawal. If the Canadian resident has an IRA, only an advisor who’s licensed in both the U.S. and Canada can help manage the funds.

2. Withdraw the money as a lump sum. This is taxable, and the taxing jurisdiction depends on the client’s residency status. The standard withholding tax for non-resident aliens is 30%.* If the client is a Canadian resident, the U.S.-Canada tax treaty allows the plan administrator to withhold 15% instead of 30% for periodic payments, but it’s unclear if lump sums are considered periodic payments. Some practitioners suggest filing Form W8-BEN with the administrator to see if the administrator will withhold 15%; the result is ultimately up to the issuer.

3. Transfer the U.S. plan to an RRSP. The treaty allows plan participants to transfer 401(k)s and IRAs to RRSPs without the penalty of double taxation—at least in principle. Canadian residents who collapse a U.S. plan will have the proceeds taxed as Canadian income in the same year.

Typically, the U.S. plan administrator will withhold 15% (keeping in mind the point above about periodic withdrawals) which, thanks to the treaty, covers off the U.S. tax obligation. The transfer creates RRSP room for the amount moved, which is meant to offset the income inclusion. So, if a Canadian resident transfers $100,000 from her IRA, $100,000 will be included on her Canadian income, and she’ll get $100,000 in new RRSP contribution room; that amount must be used in the same tax year and cannot be carried forward. Crucially, her carrier will withhold $15,000, netting her $85,000­—even though she still has $100,000 in RRSP room.

If she can’t contribute the remaining $15,000 from another source in the same tax year, she’ll lose that room forever. And, being unable to contribute means she’ll be taxed on the $15,000 income inclusion ($7,500 based on a 50% tax rate), which can be partially offset by the $15,000 in U.S. tax paid. The remaining $7,500 foreign tax credit (FTC) cannot be carried forward, and can only be used to offset Canadian tax owing. If she owes less than $7,500 in Canadian tax, the remaining FTC goes to waste.

Even if she finds $15,000 to contribute, she’ll be left with a $15,000 FTC that cannot be carried forward. And she’ll need to owe at least $15,000 in Canadian taxes to come out tax neutral.

The rules are different for U.S. persons; we’ll discuss later in this article.

4. Convert an IRA to a Roth IRA. That allows the client to create a tax-free account in the U.S. for life while the client is a Canadian resident. To be effective, this must be done before the client becomes a Canadian resident, says Matt Altro, president and CEO of MCA Cross Border Advisors. The conversion is a taxable event in the U.S. But, assuming the client is moving to a higher-tax jurisdiction (e.g., Canada), the Roth conversion allows her to access lower tax rates. The catch: earnings (but not contributions) must be held for at least five years for the withdrawals to be tax-free. Altro also points out that clients cannot contribute to Roth IRAs after moving to Canada. “That would contaminate the whole thing. The only way Canada deems it to be tax-free is if you’ve contributed before you became a Canadian resident.”

As a result, it’s a good idea to convert to a Roth IRA several years before moving to Canada. That will also allow the client to spread the tax bill from the conversion over several years, and to stay in lower tax brackets.

Update, October 7: A reader reminds us that Canadian plan owners must file an election each year with their Canadian tax returns to defer tax on their IRA and 401(k) plan balances. CRA provides no form or published guidance for plan owners wanting to make this election, except in the case of Roth IRAs.

Ask these questions

The proper choice depends on several factors, so ask the following questions.

What kind of plan is it, and have you already started withdrawing from it?

If the client has already started withdrawing from the plan, she cannot transfer it into an RRSP, says Power. She adds 401(k)s that have been rolled over into annuities cannot be transferred.

There are considerations for each plan. For 401(k)s, only the employee-contributed amounts can be transferred to an RRSP without using up RRSP room. Any employer contributions can still be transferred, but the client needs commensurate RRSP room. To get around that, “We always recommend converting from a 401(k) to an IRA first,” says Altro. That’s not a taxable event, he adds, and it allows both portions to be transferred to an RRSP without using up contribution room.

Another reason to convert is if a client was a Canadian resident while she participated in the 401(k) plan­—for instance, a cross-border commuter, says Wong. That’s because she’s ineligible for a direct 401(k) to RRSP transfer.

For IRA-to-RRSP transfers, Wong says that “the transferred value cannot include amounts contributed from someone other than the taxpayer or taxpayer’s spouse,” such as employer pension amounts.

A big caveat: “With U.S. retirement plans, unlike in Canada, contributions can be made with after-tax money,” says Altro. “Those contributions can later be withdrawn tax-free, though any associated growth from those contributions will be taxable on withdrawal.” As a result, “Only the pre-tax portion of a U.S. retirement plan should be transferred to an RRSP and never the after-tax portion,” he says, “because you never want to move after-tax money into a environment where it will be taxed upon withdrawal.”

With 401(k)s, the employer plan administrator is responsible for keeping track of the after-tax and pre-tax contributions. With IRAs (including when 401(k)s are rolled over to IRAs), that tracking responsibility shifts to the individual, says Altro. Advisors must ask clients if they have any after-tax contributions in their U.S. plans.

When do you plan to move to Canada, and will it be permanent?

Transferring 401(k)s and IRAs to RRSPs only makes sense for people who are moving to Canada permanently (or moving back permanently), since it’s not possible to transfer RRSPs to IRAs.

Let’s assume the move is permanent. If she knows several years in advance, and her marginal tax rate isn’t too high, it may make sense for her to convert from an IRA to a Roth IRA so she’ll have paid tax on the capital at a lower rate. (If she can’t or won’t open a Roth IRA, but she knows she’s in a lower tax bracket now than in retirement, she could still collapse the plans while a U.S. resident.)

Are you a U.S. citizen or a U.S. person for tax purposes?

If yes, your client will likely have a bigger tax bill from collapsing a retirement plan than someone who’s not. But it depends.

While Canadian residents are only taxed 15% on 401(k) and IRA withdrawals, withdrawals for U.S. persons are taxed as ordinary income at their marginal rate, which is usually higher than 15%. So, a 60-year-old U.S. person in the 33% bracket would only net $67,000 when collapsing a $100,000 IRA. If he transferred his IRA to an RRSP, his FTC would be $33,000 and he would need to owe $33,000 in Canadian tax to be in a tax-neutral position. The larger the FTC, the more unlikely it is that the person has enough Canadian tax owing to offset the entire FTC.

In the Go Public case mentioned earlier, the couple’s bank overlooked the fact that the husband was a U.S. citizen. Which brings us to…

What is your U.S. and Canadian income for the year you want to make the transfer?

The true test, says Altro, is the client’s taxes owing for the year in which she wants to make the transfer. The RRSP transfer only makes sense if the client can fully use the foreign tax credit, created by her U.S. withholding, against that year’s Canadian tax owing. “If you can’t do that, don’t do the RRSP strategy,” says Altro. “Otherwise you’ll have double tax at some point.”

If the client’s U.S. withholding tax is higher than her Canadian taxes owing, then she should consider leaving the plan in the U.S. She’ll be forced to make withdrawals after age 70½. If she’s a Canadian resident at the time, those withdrawals will be subject to a 15% withholding. (If she’s a U.S. person, they’ll be subject to her marginal U.S. tax rate.)

For a client flexible with timing, estimate what her taxes owing will be next year. If those Canadian taxes will absorb the FTC, she could delay the RRSP transfer.

A client leaving the U.S. early in the year may want to collapse an IRA, since it’s likely she’ll be in a low tax bracket. “But that’s not generally what I see, because most of my clients are wealthy and don’t need the money,” says Altro. “If you keep it in, you can defer tax for many more years.”

How old are you?

If your client is 59½ or younger, there’s typically a 10% early withdrawal penalty for both IRAs and 401(k)s (there are exceptions, as when the withdrawal is due to disability or death). Fortunately, CRA allows the 10% penalty to be claimed as a FTC on the Canadian return in addition to the 15% withholding. On a $100,000 plan, that’s $75,000 net; the client would also need to owe at least $25,000 in Canadian tax for the transfer to be tax-neutral.

If your client is 70½ or older, she must start withdrawing from the U.S. plan by April 1 of the year following the year the client reached that age. “If you’re comfortable with where the money is and how it’s being invested, it’s probably better to leave it tax-deferred as long as you can,” says Altro. “You can even withdraw the IRA at a slower pace than a RRIF; the minimums are lower than they are in Canada.”

If your client is 71 or older, she must convert her RRSP to a RRIF, and it’s no longer possible to contribute to the RRIF.

Tips and tricks

Here are some additional tips to help your client avoid transfer problems.

  • In advance of collapse, find out from the plan administrator what the rate of withholding tax is. Some administrators withhold 30%, which is the non-treaty rate, and there’s a lot of paperwork to recover the extra 15%. Remind non-U.S. clients to file W8-BENs, which may mean they can access the 15% rate.
  • If your client collapses a plan in order to transfer it to an RRSP, make sure she deposits the money before the RRSP deadline (60 days after the year-end of the withdrawal year). Otherwise, there will be no offsetting RRSP deduction to her Canadian tax owing on the withdrawal.
  • Only products that can be held in Canada can be transferred in-kind from an IRA to an RRSP, says Wong. The rest will have to be liquidated.
  • Exclude any years when a client was resident outside Canada when calculating TFSA room, says Power. This might come up if a client wants to put the proceeds of a withdrawal from her 401(k) into her TFSA. Warning: the proceeds will be taxed before going into the TFSA.
  • If a client decides to leave a plan in the U.S., account for the risk of having retirement funds denominated in a foreign currency. It’s also more likely that her plan assets will be biased toward U.S. securities.

For clients with U.S. retirement plans, tax traps abound if they want to bring the plans to Canada. Protect them by asking the right questions and running the tax numbers before they move. There’s no need for additional headaches in their cross-border transition.

Common U.S. retirement accounts at a glance

For all three plans, withdrawals before age 59½ are usually subject to a 10% early withdrawal penalty.

401(k): An employer-sponsored defined contribution pension account. Similar to an RRSP, contributions are from pre-tax income and funds do not get taxed until they’re withdrawn.

Individual Retirement Account (IRA): A self-directed defined contribution pension account. Similar to an RRSP, contributions are from pre-tax income and funds do not get taxed until they’re withdrawn. An IRA can be converted to a Roth IRA. Usually, IRAs are not employer-sponsored.

Roth IRA: A self-directed defined contribution pension account. Similar to a TFSA, contributions are from after-tax income, but funds do not get taxed when they’re withdrawn. Earnings (but not contributions) must be held for at least five years prior to withdrawal.

Editor’s note: The author is a journalist and cannot provide advice.

*A previous version of this story stated that lump sum withdrawals qualify for 15% withholding due to the U.S.-Canada Treaty, as long as the client files Form W8-BEN with the administrator. While some practitioners hold that view, others are more cautious and prefer to assume a 30% withholding. Read more about that here. Return to the corrected sentence.

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Melissa Shin

Melissa is the editorial director of and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at You may also call or text 416-847-8038 to provide a confidential tip.