401 withdrawl into Canada

[rsmith]

I am a Canadian citizen, but still retain a 100k balance in a 401 k in the US (where I once worked).
Been back in Canada for two years, am 54 years old, retired, and would like to withdraw the 100K.
Can I withdraw directly from the 401k without first transfering to an IRA?
What are the penalties/taxes in both US and Canada I can expect pay on the withdrawl?

Thanks

[nelsona]

You do not have to transfer to an IRA before withdrawing.

So you will report the entire ammount on a 1040NR and on your Cdn return, plus pay a 10% tax in US.

However, the 10% penalty in US extra penalaty that you will not be able to claim in Canada, so you are best to hold off on taking the US money until you are 60, and use your RRSP, for which there is no penalty (and no US tax) until then.

[Norbert Schlenker]

It would be interesting to know if there were case law on this fine point. The Code makes this exception from the 10% penalty for 401(k) plans:

72(t)(2)(A)(v) made to an employee after separation from service after attainment of age 55,

Without punctuation, that is an ambiguous clause, readable either as

"(made to an employee after separation from service) after attainment of age 55"

or

"made to an employee after (separation from service after attainment of age 55)"

The IRS presumes the second interpretation, which restricts distributions without penalty to those who leave employment after age 55, but some brave person should argue that ambiguities should favor the taxpayer.

Perhaps rsmith, who will be 55 in less than a year, would like to be a test case.

[rsmith]

Thanks for the insights. Would still like clarification on whether the 10% "early withdrwal penalty" can be applied to the Canadian tax credit calculation.
Nelsona's advice from another inquiry ("IRA withdrawal;randyb") was:

"The entire withdrawl is taxable. The final US tax, along with the penalty, is eligible towards the tax credit calculations, first federally , then the remainer provincially".

Am I correct in assuming that the US tax (20%) and the 'penalty' (10%) are both eligible towards the tax credit calculation?

Thanks, again.

[nelsona]

It would appear that for WITHDRAWALS, the 10% penalty is NOT creditable in Canada, thus my advice to either wait until 59.5 or begin to draw down your 401(k)/IRA is such a way as to avoid penalty. There are several ways to do this, and can be found on the IRS website. Note that there may be differences betwqeen how the penalty is avoided for 401(K) withdrawals and IRA withdrawals (ie. eligible expenses are not the same).

[thegarnetgroup]

I would contact the Plan Sponsor and ask them what % they will withhold if you take the full withdrawl. One question - Are you a US Citizen?

[nelsona]

The poster is Cdn.

The initial withholding made by the firm is of little importance in determining one's final tax liability.

If too much is withheld, you will get it back when you file your 1040NR; if not enough is withheld, IRS will demand more. And CRA will also decide whether the US tax was correctly paid or not, when determining how much credit to give.