Canadian with 401a from the US

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mikem
Posts: 48
Joined: Sun May 20, 2007 12:42 pm

Canadian with 401a from the US

Post by mikem »

I worked in the US for around 5 years and returned to Canada right around the time of the stock market crash. I have a fully vested 401(a) retirement fund from my previous employer & I don't really know what to do with it now that I'm back in Canada and it's finally regained most of its former value.

What are the tax implications of cashing it in? It's through Fidelity and I believe they will withhold an automatic 25% since I'm a non-resident (not 100% sure of that) plus a 10% fee for early withdrawl. Some of my questions:

Can I convert it to some other investment without incurring such high taxes?
Would I get some of the 25% + 10% refunded from the US since I don't actually live there? Would I need to file a return in the US?
What would be the tax implications in Canada?

I really wish I had cashed this in or did something with it before leaving the US, but it had devalued so much that it seemed pointless to withdraw at that time.

Thanks for any advice.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Yeah, you probably should hve cashed it then.

The fact that it had devalued was actually MORE reason to cash it (or put it in Roth), as the tax would have been less. You could have then invested the proceeds and they would have grown back in anotther account.

I would not cash in now (or move to Roth) as a Cdn resident, as the taxes and penalty are too high. You will pay 10% in US plus 10% penalty, and pay more in canada.
Maybe you'll go back to US at some time. Consider moving it toroth at that point.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
mikem
Posts: 48
Joined: Sun May 20, 2007 12:42 pm

Post by mikem »

Ok so I called Fidelity today to discuss withdrawal options & they recommended transfering this to a "roll-over IRA". I told them I now live in Canada and was concerned about the tax consequences -- that I only want to worry about paying tax once when I withdraw, but they said it wouldn't be a problem and the money wouldn't be subject to any sort of taxation until an actual withdrawal occured.

Does this sound right or was this guy misinformed? Not sure if there is a difference between a roll-over IRA and a Roth IRA.

Thanks.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Since there would be no tax on this rol-over to an IRA there will be none in canada at this time.

This is NOT a tax-free Roth IRA, it is still a tax-deferred IRA account, like your 401(a) is.

I do not know why you would move it from the 401(a) to an IRA however. Although there is nothing wrong with doing this, it would be good to make the decision to do this based on some benefit, not just because som guy on the phone suggests it.

Did the Fidelity guy tell you why he thought their IRA was better than their 401(a)?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
mikem
Posts: 48
Joined: Sun May 20, 2007 12:42 pm

Post by mikem »

The only benefit would be that I could take withdrawals at any time & without any extra paperwork. In order to make a withdrawal now, I need to get a signed document from my old employer giving me permission to make the withdrawal. Knowing my old employer, it could take weeks or longer to get the form signed and sent back to Fidelity, during which time the market could have tanked or had another "blip" like last week.

He also said I could make adjustments in the investments once it's in an IRA, but couldnt do anything while it's in a 401a. It all sounds good as long as their isn't any extra taxation aside from my eventual withdrawal.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Sounds good.

Most people are advised to take their 401(k) etc away from their employer paln when they leave thefirm, for the very flexibility you mentionned.

Just wanted to make sure you had been properly advised.

Also, good to know that Fidelity will keep Cdn retirement clients.

As to mitigating a 'blip', the way to do that woudl be to transfer trhe funds you wanted to take out to a cash fund. even a 401(a) has a cash fund.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
mikem
Posts: 48
Joined: Sun May 20, 2007 12:42 pm

Post by mikem »

Thank you for the feedback. Just to make sure I have everything clear -- if I were to roll over the 401a to a Roth IRA, I would be taxed during the rollover correct? The more reading I do, the more I wish I had of done that before moving back to Canadia.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Yes, if you rolled the 401(a)/401(k)/IRA into a ROTH IRA, you would be taxed in both US and canada on the entire amount. Plus, any amount that you did not put into the Roth (for example, you hold some back to pay for the taxes) that amount would be subject to 10% penalty if you are not yet 59.5 yrs old.

The tax you would pay in US would be creditable on your Cdn return, but not the penalty. Likely you would owe a little more to canada in the end.

PLUS, the Roth would get no tax-deferral in Canada, since it was done as a Cdn resident.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
mikem
Posts: 48
Joined: Sun May 20, 2007 12:42 pm

Post by mikem »

Gotcha... thanks again, this helps immensely!
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