I have helped hundreds of people successfully navigate from the US to Canada. If you're thinking of moving or retiring to Canada contact me today to chat about your plans.
I can be reached via email at phil@philhogan.com, by phone at 250-661-9417 or through my contact page here.
I look forward to speaking to you soon.
Phil Hogan, CPA, CA, CPA (CO)
Cross-Border Tax and Investment Specialist
Question
Hello Phil,
I’m a follower of your Youtube channel and would like to thank you for the educational videos you share. It is very informative and the content is delivered in an easy to understand manner.
I have a query regarding 401k accounts.
My wife and I (each XX years of age) moved from the USA to Canada in May this year. We are neither Canadian nor American citizens or permanent residents.
We were working in the USA for 3 years and moved to Canada on a work visa.
For tax purposes we are residents of the USA and Canada this year.
We might acquire permanent residence in Canada next year.
We both have traditional 401k accounts (total corpus approximately USD XXk).
We do not need this money for the next 30 years at least and would like to know from a taxation perspective what is the best way to allocate this money.
If we convert the traditional 401k to Roth IRA can we pay the tax due on conversion today (to the IRS) and then have the entire amount grow tax free until we redeem it (tax free in Canada)? OR should we just let the traditional 401k account remain as is and pay taxes on it in future when it is redeemed?
Is there any other option for us?
I came across a publication from the CRA which outlines the tax treatment of Roth IRA when someone moves to Canada; however, it does not outline the tax treatment if I convert the 401k to a Roth IRA after moving to Canada.
Link to CRA publication: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-5-international-residency/folio-3-cross-border-issues/income-tax-folio-s5-f3-c1-taxation-roth-ira.html
Kindly note our contributions to the 401k accounts ceased when we moved to Canada as we both changed jobs. We also do not have any other accounts in the USA such as Roth 401k or traditional IRA or Roth IRA. Additionally, we do not plan on returning to the USA for work any time in the future.
We also do not have any contribution room in our RRSP this year as we will be filing our first Canadian tax return next year.
Looking forward to your insights.
Thank you for your time and for the wonderful Youtube channel!
Regards,
XXXXXXXXX
Answer
Hi XXXXX
Thanks for the email and kind words about the YouTube videos, much appreciated.
I can’t give you actual tax “advice” over email, however I’ll provide some general thoughts below:
- If you’re currently a Canadian tax resident you won’t have the ability to convert the 401k to a ROTH as any future distributions will be taxable in Canada once made. You can read more about the taxation of ROTH IRAs in Canada here (http://philhogan.com/roth-ira)
- Even if you don’t have RRSP contribution room you should be able to transfer the 401k into your RRSP, however it can be quite a process to do especially once Canadian tax time comes around.
- That being said, if you plan on staying in Canada that may be a good option to keep things simply going forward. However depending on your income and potential early 401k withdrawal penalties you may end up paying double tax. Converting the 401k to an IRA and having the IRA managed from Canada might also work well. Once converted you can simply leave the money in the account to grow over many year into retirement.
Hope that helps.
Regards
Phil
