Dual citizen becoming Candian resident: 401k vs. IRA

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dualblues
Posts: 23
Joined: Tue Mar 16, 2021 1:50 am

Dual citizen becoming Candian resident: 401k vs. IRA

Post by dualblues »

Dual citizen, residing in US for many years, returning to Canada. I have IRA, Roth IRA, 401K and Roth 401K. "Prevailing wisdom" suggests folks in my
scenario should transfer 401k/Roth 401k assets to an IRA/Roth IRA.

I wanted to understand the rationale behind this advice, in order to make an educated decision. Below is my understanding:

Reasons to transfer to IRA/Roth IRA
i) avoid limited investment options of 401k and/or high fees;
ii) 401k administrator may freeze your account when you update address;
iii) you can manage an IRA from Canada;
iv) lower with-holding on IRAs: 10% vs 20%

Reasons to keep my 401k/Roth 401k
a) access to great institutional funds with low fees (in my plan);
b) plan administrator said that they support foreign addresses. Updating to a Canadian in address would preclude me from making future contributions. Also, tax with-holding would be higher on distributions. However, they said the account would NOT be frozen. That is, I could continue investing the existing funds in the account (buying and selling, including mutual funds).
c) 401k plans are "customers" of financial institutions and not you as participant. Thus, they are less likely to kick you off their platform than an
IRA account holder. (source: https://moneymattersforglobetrotters.co ... -overseas/)
d) Some IRA custodians have closed IRAs belonging to foreign residents in the past.
e) You can always roll-over to IRA/Roth IRA (in future) to realize lower with-holding.

Miscellaneous:
1) Vanguard is my 401k administrator. They are often cited as being unfriendly to US persons abroad. (I wonder if that is due to their treatment of IRAs and brokerage accounts rather than 401k accounts?)

2) If I keep my 401k/Roth 401k with Vanguard, I will also have an IRA/Roth IRA account with Fidelity or Schwab. This could provide some flexibility if I needed to do a roll-over in the future.

Is there anything missing in my analysis? I would appreciate any thoughts, insights or experiences you could share.

Cheers
nelsona
Posts: 16947
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Dual citizen becoming Candian resident: 401k vs. IRA

Post by nelsona »

First, you may have a problem keeping your accounts with Vanguard once you move, so you need to check that out BEFORE leaving US, which it seems you did. My spouse could not keep her plans, but they were, as you say individual rather than institutional, which apparently made a difference(good y=to know). If you have to move it, it can only be to an IRA or a Roth IRA.

Personally, I have no problem either way, except that if you are married, you cannot pension-split IRA with CRA, you can only pension split 401(k)

I have left my 401(K)/Roth401(k) with Fidelity for this reason.

The withholding is meaningless (I don't believe there is a difference, in fact, you will not pay penalty on 401(k) withdrawals after 55, but IRAS are penalized until 59.5), since you must file a US tax return in any event, and if you take it as a true pension, you will not pay anywhere close to 10% on those funds in US, and you will pay a lot more in canada.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
dualblues
Posts: 23
Joined: Tue Mar 16, 2021 1:50 am

Re: Dual citizen becoming Candian resident: 401k vs. IRA

Post by dualblues »

Thanks for all your help nelsona!

It is nice to hear others have kept 401ks when returning to Canada (so few articles recommended this approach that I wondered if I was missing something!).

Wow - I didn't realize you could pension split with 401ks. That's something that will come in handy. The ability to tap the 401k at 55 may provide some additional flexibility. Definitely want to keep the 401k. However, I think I will keep an IRA and Roth IRA too. Then, if my 401k's policy changes, I have some place to move the money (without trying to open a new account from Canada, which has been difficult for some).

Enjoy your break!
nelsona
Posts: 16947
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Dual citizen becoming Candian resident: 401k vs. IRA

Post by nelsona »

You don't have much choice about keeping your other plans, in some form, since collapsing them would create tax issues.
You may consider rolling over your IRA to a Roth, paying the tax now before entering Canada, and making those account tax-free forever.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
dualblues
Posts: 23
Joined: Tue Mar 16, 2021 1:50 am

Re: Dual citizen becoming Candian resident: 401k vs. IRA

Post by dualblues »

Thanks for your thoughts nelsona,

I am lucky to have about 30% of my registered accounts in Roths. It would be wonderful to convert some more!

With California state taxes, and the effect of the conversion, the conversion amount would be taxed at approximately 34 to 39%. This makes it very hard to justify the conversion since most reasonable assumptions render it a losing proposition (Fidelity has a neat tool that I used to compare different scenarios). Note: I assumed I would be able to control the withdrawals to limit taxes to 20%. But, even with 30% taxes at the time of withdrawal, the non-Roth IRA wins the day!

Cheers
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