401k rollover to Canada

Canadabound · Post by **Canadabound** » Mon Feb 28, 2011 4:39 pm

Hello:
I moved back to Canada last year from the US (I am dual-citizen). In February of this year, my US 401k provider sent me a check for my balance of my 401k, less 20% witholding (the witholding was around 100K), due to my new residency outside of Canada. I have now found a new qualified plan provider that can deal with me in Ontario. We will be depositing the whole amount of the distribution (including the 20%) in to my new IRA (I have 60 days to do so). I understand that the tax laws allow me to include the 20% witheld as a tax credit as income taxes paid. The problem is that I have zero earned income this year, but will have $30,000 in investment income. I do have some appreciated assets (unrealized gains). Can you see how I might get some of that tax credit back? Is that a US tax credit only? Can I apply it up here, now that I am a Canadian taxpayer? Thanks for any help.

nelsona · Post by **nelsona** » Mon Feb 28, 2011 5:32 pm

Since you will be depositing all of the 401(k) into your new IRA, you will owe no tax in US on that, so there will be no US tax to use as a credit. You will be getting all of the withheld money back from IRS next year.

The best thing to do is to make the transfer directly, not have them cut you a check. Luckily for you, you has a "spare" $100K lying around to cover the period that IRS will be holding that money.

But becuase you are replacing the withholding with your own funds, this becomes a non-event in both US and Canada tax-wise. No income to report and no tax to pay in either country.

nelsona · Post by **nelsona** » Mon Feb 28, 2011 5:37 pm

If, on the other hand, you decided NOT to flesh up the IRA, you would have $100K of income to declare on both returns, plus the 10% early withdrawal penalty in US (i'll assume you are young).

Now you would determine your US tax, and be able to use that portion (but not the penalty) towards the whopping Cdn tax bill you would have incurred.

This would all be in the 2011 tax year, not 2010.

You were extremely luck to be able to find an IRA that would take you.

Please tell us what A-holes closed your account, and what firm now took you on.

Both need to be publicized!

Canadabound · Post by **Canadabound** » Mon Feb 28, 2011 9:24 pm

Thank you very much, Nelsona for your quick response. Great West Life was the company that gave me the "suspect" guidance on taking the check as my only option. I had a lot of difficulty finding someone, but actually found Darrell Thompson at Macquarie (from this site, no less!) who can handle my account. His advice was as yours on the tax, but better safe than sorry, I always say. Thanks again!

nelsona · Post by **nelsona** » Mon Feb 28, 2011 9:26 pm

Yup. A $500K IRA is right up their alley.