How to Withdraw a IRA and 401K for Returning Canadians

Are a returning Canadian with an IRA and 401K? The tax man could be around the corner. Learn the best ways for withdrawing your IRA and 401K.

Your Options:

1) Keep your IRA and 401K as is. The advantage of this is your investments can continue to grow within these tax-deferred retirement accounts completely tax-free. The disadvantage is that withdrawals from your 401K and IRA would be subject to a 20% withholding tax in the US if you are 59 and a half years old (or older), or 30% if you are younger. Plus the cash withdrawals received would be taxable to you in Canada. However, you can claim a foreign tax credit on your Canadian tax return for the withholding taxes paid to the IRS.

2) Cash out. If you cash out the entire amount of your 401K and IRA upon leaving the US, you will be subject to tax at your US marginal tax rate on the whole amount. This is definitely a bad idea!

3) Transfer your IRA and 401K to your Canadian RRSP. IRAs can be rolled over on a tax-free basis to Canadian RRSPs. While there is a withholding tax imposed by the IRS on the transfer, the withholding tax can be recovered by claiming a foreign tax credit on your Canadian personal tax return. You cannot directly rollover a 401K to an RRSP. To get around this, you should convert your 401K into an IRA, and then make a tax free transfer of the IRA to an RRSP. Withholding taxes, which can be recovered, still apply.

Here’s the Tip:
Slowly withdraw funds from your IRA and 401K after you move to Canada. Furthermore, consider a tax free transfer to your RRSP.

If you left Canada you may have become a non-resident for tax purposes, if so then you might want to have a look at this article on becoming a non-resident of Canada.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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