I am embarking on a strategy to transfer my ($120k) 401k to my Cdn RRSP over the next 3-5 years in a manner to minimize tax implications. Am retired 55 year old Cdn citizen, living in Canada.
My assumptions:
1. I am transfering the entire 401k balance to an IRA without penalty or tax implication.
2. When I'm ready to transfer an amount from the IRA into an RRSP, the IRA administrator will withhold 15% tax at source on the amount being transfered. I will be generating approx. $40,000 in taxable income, without additional deductions. The income tax payable on that income will be offset by the 15% tax withheld on the IRA withdrawal with the Foreign tax Credit. The balance will be deposited into my RRSP.
3. The IRA and RRSP are both with the same financial institution (RRSP's in Canada with RBC; IRA in US with RBC Centura)
So, for example, If I transfer $20,000 US from that IRA in 2007, I will be able to offset the $3000 (US) tax they'll withhold at source from Cdn income tax payable on my income for that tax year using the Foreign Tax Credit.
Have I missed something or made inappropriate assumptions?
Tks.
Transfering my 401k to Cdn RRSP
Moderator: Mark T Serbinski CA CPA
As outlined your plan does not work.
1. This is correct.
2. incorrect. Since you are not 59.5, your IRA withdrawls will be subject to withholding PLUS 10% penalty. The reasons: (a) your withdrawls are not 'periodic' as to be so, they would need to stretch over your life expectancy, not 5 years. (b) since they are not periodic, you do not qualify for the 15% taxrate. This in itself is not a big deal, since when you would file your 1040NR, your rate on $20,000 will be lower than 15% anyways.
What will kill your stratgey is the 10% penalty. CRA will NOT allow you to take credit for the penalty, making the maneouver pointless.
3. So what? As any RBC employee will telly, RBC centura is NOT RBC, nor does their link bring any benefit it doing this transfer.
There is no need or benefit from transferring the IRA to Canada, so sit tight for 4 years and start drawing it without penalty. Invest in foreign funds if your concern is the lousy US dollar (the Cdn dollar is little better).
One final note, even after 59.5, when the IRS penalty goes away, CRA takes the position that only lump-sum withdrawals are eligible for the RRSP transfer, not periodic withdrawals.
1. This is correct.
2. incorrect. Since you are not 59.5, your IRA withdrawls will be subject to withholding PLUS 10% penalty. The reasons: (a) your withdrawls are not 'periodic' as to be so, they would need to stretch over your life expectancy, not 5 years. (b) since they are not periodic, you do not qualify for the 15% taxrate. This in itself is not a big deal, since when you would file your 1040NR, your rate on $20,000 will be lower than 15% anyways.
What will kill your stratgey is the 10% penalty. CRA will NOT allow you to take credit for the penalty, making the maneouver pointless.
3. So what? As any RBC employee will telly, RBC centura is NOT RBC, nor does their link bring any benefit it doing this transfer.
There is no need or benefit from transferring the IRA to Canada, so sit tight for 4 years and start drawing it without penalty. Invest in foreign funds if your concern is the lousy US dollar (the Cdn dollar is little better).
One final note, even after 59.5, when the IRS penalty goes away, CRA takes the position that only lump-sum withdrawals are eligible for the RRSP transfer, not periodic withdrawals.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 