Keep 401(k) or rollover to IRA before leaving US?

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

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canadiandeserter
Posts: 58
Joined: Sun Mar 01, 2015 10:52 pm

Keep 401(k) or rollover to IRA before leaving US?

Post by canadiandeserter »

What are the pros and cons of keeping a traditional 401(k) account as-is compared to rolling it over to a traditional IRA before leaving the US?

Both my employer (multinational company) and custodian (Fidelity) confirmed the 401(k) account can stay open with full trading privileges after terminating US residency (at least for now). My 401(k) plan allows purchases of any securities allowed in IRA plans, including Fidelity ZERO funds, so investment options is not a consideration.

The main advantage I have seen reading through this forum for retaining the traditional 401(k) account is the ability to pension split 401(k) but not IRA distributions in Canada. Do other countries also give preferential treatment to 401(k) accounts over IRAs?

Since Roth distributions are not taxable in either the US or Canada, I assume it does not matter whether the Roth balance is held in a 401(k) account or a IRA for Canadian retirees? Are there any countries that tax Roth IRA distributions but not Roth 401(k) distributions?
nelsona
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Re: Keep 401(k) or rollover to IRA before leaving US?

Post by nelsona »

You are not likely to find information here about 3rd country matter, as this forum deals with US/Canada matters.

As you point out, 401(k) and taxable Roth401(k) distributions are splittable for CRA purposes. IRA and taxable RothIRAs are not.

Since your plan seems to have a more varied investment choices that most employer plans, I don't see any reason to change.

Be warned however, that generally (and this varies from plan to plan) you cannot split out 401(k) distributions from Roth401(K) distributions, neither can you ask for "some" of your plan to be transferred out to an IRA. If you want to move your funds, they entire plan will be moved to an IRA and a Roth IRA. You can check on that.

What that also means is any periodic withdrawal is a "blended" one, proportioned between your 401(k) and Roth401(K) portions.

If you begin taking distributions prior to 59.5, some of the Roth401(K) will still be taxable (they will calculate that) in both US and Canada. That taxable portion disappears at 59.5. In a privately held Roth IRA, you can use up the contribution portion first, before any of the withdrawal becomes taxable.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
canadiandeserter
Posts: 58
Joined: Sun Mar 01, 2015 10:52 pm

Re: Keep 401(k) or rollover to IRA before leaving US?

Post by canadiandeserter »

Thank you nelsona for the wealth of information! The taxability of Roth 401(k) distributions was especially helpful. Since my Roth IRA was opened more than 5 years ago, rolling over the Roth 401(k) balance into the Roth IRA would immediately eliminate both US and Canadian taxes if only the contribution was withdrawn?

My 401(k) plan document allows partial (non-periodic) distributions after terminating employment, but I will have to ask if I can rollover just the post-tax Roth balance since the investments are comingled. If only the Roth portion of the 401(k) is rolled over into a Roth IRA, this should not be considered a Canadian contribution if even if done after becoming a Canadian resident?
nelsona
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Re: Keep 401(k) or rollover to IRA before leaving US?

Post by nelsona »

Once you meet the 5-yr rule in one account, any future account is considered to have met it, so then it will just be age that determines if any is taxable.

Transfers between roth accounts is NOT considered a Cdn contribution.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
canadiandeserter
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Joined: Sun Mar 01, 2015 10:52 pm

Re: Keep 401(k) or rollover to IRA before leaving US?

Post by canadiandeserter »

Thank you nelsona for all your help!
martinleroux
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Re: Keep 401(k) or rollover to IRA before leaving US?

Post by martinleroux »

A potential problem with an IRA rollover is that many IRA custodians do not allow non-US residents to hold IRAs, or they may impose trading restrictions when you leave the US. If you already have an IRA and you're unable to find a custodian that will allow you to continue to trade in the account, you might want to look into transferring the IRA to your 401(k). Many 401(k) plans allow this, but you'd have to check, especially if it's a Roth IRA. Typically you'd only be able to do this if you're still employed by your 401(k) plan sponsor.
canadiandeserter
Posts: 58
Joined: Sun Mar 01, 2015 10:52 pm

Re: Keep 401(k) or rollover to IRA before leaving US?

Post by canadiandeserter »

Thanks martinleroux for bringing that up! Are 401(k) accounts more likely to be kept open without restrictions compared to IRAs?

My plan is to keep IRAs open at multiple brokerages so I can rollover accounts from custodians who may no longer serve non-residents in the future. TD Ameritrade used to be recommended for Canadians but recent threads in the Financial Wisdom Forums indicate they are now closing accounts of Canadian residents (due of the Schwab acquisition?).

Would the safer plan be to keep all funds in the 401(k) account and rollover the Roth amounts to a Roth IRA only when needed (e.g. to avoid early withdrawal taxes before 59.5 or required minimum distributions after 72)?

Once I leave my employer (before leaving the US), funds can only be rolled over from the 401(k) account to an IRA but not from an IRA to the 401(k) account.
canadiandeserter
Posts: 58
Joined: Sun Mar 01, 2015 10:52 pm

Re: Keep 401(k) or rollover to IRA before leaving US?

Post by canadiandeserter »

Went through all of the tax treaty technical explanations on the IRS web site and found 6 countries that exempt Roth IRAs from taxation: Belgium, Canada, Chile, Malta, Poland, UK.

However, only the Canadian one explicitly mentions Roth 401(k) arrangements. The others lump 401(a) plans into pensions; are Roth 401(k) arrangements are considered a subset of 401(a) plans?

Canada is also the only country that bifurcates the Roth IRA after a Canadian contribution.
martinleroux
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Joined: Fri Dec 29, 2006 2:14 pm

Re: Keep 401(k) or rollover to IRA before leaving US?

Post by martinleroux »

canadiandeserter wrote:
> Are 401(k) accounts more likely to be kept open without restrictions compared to IRAs?

As far as I can tell, you're less likely to have difficulties with a 401(k). My wife and I have 401(k) accounts at Fidelty, Voya and TIAA, and they've all told us that we'd be able to keep them open if we move back to Canada. This is just a guess, but I think the reason for the difference between 401(k) accounts and IRAs is because a 401(k) is governed by a contract between the administrator and the plan sponsor, not the individual plan member.

However, I'm not sure if this extends to self-directed brokerage accounts inside 401(k) plans. At least in my wife's case she would have to transfer everything back to the plan's core mutual fund options.
canadiandeserter
Posts: 58
Joined: Sun Mar 01, 2015 10:52 pm

Re: Keep 401(k) or rollover to IRA before leaving US?

Post by canadiandeserter »

martinleroux wrote:
> However, I'm not sure if this extends to self-directed brokerage accounts inside
> 401(k) plans. At least in my wife's case she would have to transfer everything back
> to the plan's core mutual fund options.
Thank you martinleroux for sharing your experience! Would you mind sharing which custodian would force your wife to close the self-directed brokerage portion of the 401(k) plan?

A Fidelity phone representative claims the BrokerageLink account in my 401(k) plan would be unaffected after moving to Canada. My 401(k) plan has some good core funds with low MERs, but it would be nice to have a tax-free account for day trading while in Canada since the CRA frowns on day trading in TFSAs.
martinleroux
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Joined: Fri Dec 29, 2006 2:14 pm

Re: Keep 401(k) or rollover to IRA before leaving US?

Post by martinleroux »

canadiandeserter wrote:
> Would you mind sharing which custodian would force your wife to close the self-directed
> brokerage portion of the 401(k) plan?

It's TIAA. Actually in her case it's a 403(b), not a 401(k). I don't know if that makes a difference.
canadiandeserter
Posts: 58
Joined: Sun Mar 01, 2015 10:52 pm

Re: Keep 401(k) or rollover to IRA before leaving US?

Post by canadiandeserter »

martinleroux wrote:
> canadiandeserter wrote:
> > Would you mind sharing which custodian would force your wife to close the
> self-directed
> > brokerage portion of the 401(k) plan?
>
> It's TIAA. Actually in her case it's a 403(b), not a 401(k). I don't know if that
> makes a difference.

Thank you for that detail. Hopefully our Fidelity 401(k) BrokerageLink accounts are safe!
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