401k to Roth IRA rollover

[matthew12]

Hello,

I am a Canadian citizen (30 yo) who worked in the US from 2016-2019. In 2019 I moved to Germany and currently live in Germany. I plan to move back to Canada in the future and plan to retire in Canada. I currently have a 401k from my previous US job and I also have a Roth IRA.

I would like to roll my 401k into a Roth IRA for the following reasons:

-Value is currently lower due to market conditions, therefore tax owed on rollover will be lower.
-My tax bracket will be higher in the future, 2020 will be a low earning year for me.
-Would like to consolidate the two accounts.
-Roth IRA has much more investment options than my 401k

I am however concerned about the long term implications of this move. From my research it seems that the Roth IRA is not considered a foreign retirement account by the CRA and therefore cannot be "rolled over" into an RRSP or TFSA. I did however read that it was possible to file tax deferral for Roth IRAs, see below:

"If a Canadian Contribution is not made to the Roth IRA, the Roth IRA will continue to be subject to Article XVIII of the Convention. That is, under paragraph 7, the individual can elect to defer Canadian taxation with respect to the income accrued in the Roth IRA. The term "income accrued" means amounts that would otherwise be taxable to the individual in a taxation year under the Act, as outlined in section 1 above. Furthermore, under paragraph 1, distributions from a Roth IRA are exempt from taxation in Canada to the extent that they would be excluded from taxable income in the U.S. if the recipient were a resident of the U.S. This means that individuals are exempt from taxation on accrued income and distributions from a Roth IRA, provided that a valid Election is filed, a Canadian Contribution is not made, and distributions would not be taxable in the U.S. if the individual were resident there."

Could I potentially request this deferral annually once I move back to Canada and just keep the Roth IRA in the US account until I retire? This would allow me to keep the tax advantaged benefits of the account while living in Canada until retirement.

Would I be better served to roll the 401k into a traditional IRA which could later be transferred to an RRSP? The advantage here seems to be that I could continue to compound my earnings while in the Roth option I will be making a clean break from that sum.

Any thoughts or experience would be greatly appreciated!

[nelsona]

Since you live in Germany, you would need to consult someone familiar with how pensions (especially Roths) are treated in the US/Germany treaty.

That said, from a Cdn point of view, so long as you do not do this transfer while resident of Canada, the Roth will be recognized as such (when you file the first-year statement). This is typically how anyone coming from US keeps their Roths.

Just a reminder that, as with anyone moving to Canada, be sure that your 401(k)/Roth management firm allows Cdn residents to keep and maintain their accounts once in Canada. Quite a few do NOT. I presume you have determined this for those living in Germany.

[future_canuck]

nelsona:
sorry to dredge up an older thread and i apologize for my newbie level of understanding.
are you saying that, yes, rollover a 401k to a roth ira, and then if it's not touched until retirement (in canada), it won't be taxed?
thanks

[nelsona]

Once you make a qualifying conversion from 401(k) to Roth (ie. before you enter canada), your Roth will be treated in Canada like it is in the US. You will only be taxed on withdrawals that are taxed in US, which in general would be nil if withdrawn after 59.5, or for some other qualified reason.

You will of course pay tax in the year of the conversion on your US tax return.