I did my homework on this forum and searched for HSA-related topics. If I have missed any that fully addresses my question, I would love to get the link! But I have always heard it being referred to in passing, so I am looking to clarify this niche topic here, as of current understanding.
My situation:
I have an American HSA with a value on the order of a few dozens of thousands of Canadian dollars. I am not over the age of 65. I do not have significant medical expenses and so am not using these funds yet, and would prefer to consolidate these funds into fewer accounts for easier administration (read: make fewer investment decisions, amortize account fees over, etc.) and would prefer to repatriate the funds to Canada where I intend to retire, preferably in my RRSP.
So far, this is what I have learned from this forum:
American HSAs do not need a T1135 in Canada. [1] HSAs are covered by Article XXI.2 [2] which means if they are taxable in the US (for example, in my situation), they would be taxable in Canada as part of my worldwide income.
My question:
1. If I am reading this right, when I request my HSA provider in the US to give me a lump sum distribution, I am going to eat a 20% penalty on the funds withdrawn, plus pay income taxes to the IRS when I do so. Is this correct?
2. Can I deposit the funds into an RRSP account in Canada and claim it as a "transfer" in Schedule 7, line 24640? My understanding is "no," and that if I choose to deposit the balance of funds to an RRSP, I would be using my own contribution room. Is this correct?
3. The HSA does not enjoy the same benefits of a 401k which I am also patriating to Canada, and intend to use Schedule 7, line 24640, is that correct?
Just looking to be doubly sure that I'm not missing something, as the 401k arrangement is very convenient. My research so far seems to suggest I cannot apply the 401k situation to my HSA.
1: viewtopic.php?p=528251#p528251
2: viewtopic.php?p=528250#p528250
Moving HSA from USA to Canada
Moderator: Mark T Serbinski CA CPA
Re: Moving HSA from USA to Canada
Your summary looks correct.
In answer to your questions:
1. Correct. Any funds withdrawn that cannot be covered by an eligible medical expense, will be subject to tax and penalties in US, and tax in canada with credit given for the US tax and penalties.
2 and 3. These funds would NOT be eligible for transfer to an RRSP thus could only be deposited up to your contribution limit.
None of these steps can be done before you move to Canada.
Now, for some opinion: I would question you reasons for wishing to repatriate these funds (both 401(k) and HSA). Fees in Canada are generally higher. You will take a massive tax hit in US on these funds, and unless you have at least as much Cdn income in the year you take the money, you will not recoup sufficient US tax as a credit on your Cdn return. (is some advisor in canada selling you on this idea? Be careful). It is quite normal to keep US retirement plans when you return to Canada.
Once you retire, you will find (since you won't have any medical insurance in Canada) that your medical costs will begin to grow. In the meantime this HSA is acting like a Roth with tax-free growth (UNLIKE any RRSP).
In answer to your questions:
1. Correct. Any funds withdrawn that cannot be covered by an eligible medical expense, will be subject to tax and penalties in US, and tax in canada with credit given for the US tax and penalties.
2 and 3. These funds would NOT be eligible for transfer to an RRSP thus could only be deposited up to your contribution limit.
None of these steps can be done before you move to Canada.
Now, for some opinion: I would question you reasons for wishing to repatriate these funds (both 401(k) and HSA). Fees in Canada are generally higher. You will take a massive tax hit in US on these funds, and unless you have at least as much Cdn income in the year you take the money, you will not recoup sufficient US tax as a credit on your Cdn return. (is some advisor in canada selling you on this idea? Be careful). It is quite normal to keep US retirement plans when you return to Canada.
Once you retire, you will find (since you won't have any medical insurance in Canada) that your medical costs will begin to grow. In the meantime this HSA is acting like a Roth with tax-free growth (UNLIKE any RRSP).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
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iftekhar255
- Posts: 4
- Joined: Tue Nov 07, 2023 4:15 am
Re: Moving HSA from USA to Canada
I spoke with a couple of advisors in Canada, and none of them were really interested in this, which is why I am researching it to do it myself.
I take your point about keeping my HSA. I might reconsider repatriating those funds based on your comment. Tax-free in and tax-free out is hard to beat.
Re: my 401k, I want to simplify my situation and not have accounts scattered. Ultimately, I still have to pay Canadian tax rates, which are always higher than US ones, and multiple accounts just means multiple account fees, which add up over many years and months. There's also a reporting burden, and although the 1040NR isn't overly complicated, I feel like it would be nice to keep things as simple as possible.
I understand that I have to front the difference of what the IRS withholds when I deposit the 401k funds into my RRSP, and as long as my tax burden in Canada is sufficiently high, I can claim the full amount as a foreign tax credit and be made whole again.
Thank you very much for your response, though, this gives me plenty of food for thought.
I take your point about keeping my HSA. I might reconsider repatriating those funds based on your comment. Tax-free in and tax-free out is hard to beat.
Re: my 401k, I want to simplify my situation and not have accounts scattered. Ultimately, I still have to pay Canadian tax rates, which are always higher than US ones, and multiple accounts just means multiple account fees, which add up over many years and months. There's also a reporting burden, and although the 1040NR isn't overly complicated, I feel like it would be nice to keep things as simple as possible.
I understand that I have to front the difference of what the IRS withholds when I deposit the 401k funds into my RRSP, and as long as my tax burden in Canada is sufficiently high, I can claim the full amount as a foreign tax credit and be made whole again.
Thank you very much for your response, though, this gives me plenty of food for thought.
Re: Moving HSA from USA to Canada
I am not aware of any "reporting burden" on US retirement accounts.'
Collapsing your 401(k) and putting it in an RRSP results in being taxed twice in the end.
Have you looked into the more reasonable approach of rolling some or all of your 401(k) into Roth's, since you seem to be willing to take the initial tax hit.
These are protected by the treaty.
Collapsing your 401(k) and putting it in an RRSP results in being taxed twice in the end.
Have you looked into the more reasonable approach of rolling some or all of your 401(k) into Roth's, since you seem to be willing to take the initial tax hit.
These are protected by the treaty.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Re: Moving HSA from USA to Canada
Think of this:
You are planning to collapse your 401(k) when you will have sufficient income to use the US tax as a cedit. This means that you will be in a very high tax bracket that year.
They idea of retirement income is to take it when your income is low, at a lower tax rate.
If we are talking about a $5000 401(k), sure, simplify. But given you said you have an HSA in the neigbourhood of $50K, you must have a 401(k) at least 5-10 times that amount. That;s a hell of a tax burden to pay for questionable simplicity, and a higher management fee schedule.
You are planning to collapse your 401(k) when you will have sufficient income to use the US tax as a cedit. This means that you will be in a very high tax bracket that year.
They idea of retirement income is to take it when your income is low, at a lower tax rate.
If we are talking about a $5000 401(k), sure, simplify. But given you said you have an HSA in the neigbourhood of $50K, you must have a 401(k) at least 5-10 times that amount. That;s a hell of a tax burden to pay for questionable simplicity, and a higher management fee schedule.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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iftekhar255
- Posts: 4
- Joined: Tue Nov 07, 2023 4:15 am
Re: Moving HSA from USA to Canada
By "reporting burden," of course, I meant when I am withdrawing the funds in the US. As I draw down my 401k, I'm going to have to file taxes in the US and in Canada, and claim foreign tax credit. I suppose that's fairly routine once you know how it works, but seems like an easy thing to just sort out by bringing them to one place.
>>> Collapsing your 401(k) and putting it in an RRSP results in being taxed twice in the end.
This, I'm not entirely clear on. Let's say it's a $5K 401k. If I collapse my 401k, the IRS takes a cut, let's say 40%, so $2,000, meaning I receive the balance, which is $3,000.
When I put the funds into the RRSP, I take the cut I received ($3,000), I fork out some of my own money ($2,000) to make up the foreign tax, and the CRA pays me back the $2K as foregin tax credit once my return is processed, right?
If that's the case, I don't see the double-taxation there.
Now, if the 401K is $500,000, yes, that requires an astronomical tax burden in Canada. Is that what you mean by double-taxation, in the case when I don't get the foreign tax credit on all the amounts owed to the IRS?
>>> Collapsing your 401(k) and putting it in an RRSP results in being taxed twice in the end.
This, I'm not entirely clear on. Let's say it's a $5K 401k. If I collapse my 401k, the IRS takes a cut, let's say 40%, so $2,000, meaning I receive the balance, which is $3,000.
When I put the funds into the RRSP, I take the cut I received ($3,000), I fork out some of my own money ($2,000) to make up the foreign tax, and the CRA pays me back the $2K as foregin tax credit once my return is processed, right?
If that's the case, I don't see the double-taxation there.
Now, if the 401K is $500,000, yes, that requires an astronomical tax burden in Canada. Is that what you mean by double-taxation, in the case when I don't get the foreign tax credit on all the amounts owed to the IRS?
Re: Moving HSA from USA to Canada
If you take your 401(k) as a periodic withdrawal, when the time comes, you don't even have to file a US return. Your withholding is sufficient. And the tax slip issued by the broker is sufficient proof. Filing a 1040NR would be optional.
Question:
In how many years are you planning to move to Canada, when will you retire, and will you work in Canada between these two milestones.
Question:
In how many years are you planning to move to Canada, when will you retire, and will you work in Canada between these two milestones.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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iftekhar255
- Posts: 4
- Joined: Tue Nov 07, 2023 4:15 am
Re: Moving HSA from USA to Canada
>>> If you take your 401(k) as a periodic withdrawal, when the time comes, you don't even have to file a US return. Your withholding is sufficient. And the tax slip issued by the broker is sufficient proof. Filing a 1040NR would be optional.
Ah, I didn't know this. Good information.
>>> In how many years are you planning to move to Canada, when will you retire, and will you work in Canada between these two milestones.
I'm sorry, I may not have been sufficiently clear about this in my initial post, my bad: I live in Canada right now, these are both accounts I have left behind after I moved from the United States to Canada a few years ago.
Ah, I didn't know this. Good information.
>>> In how many years are you planning to move to Canada, when will you retire, and will you work in Canada between these two milestones.
I'm sorry, I may not have been sufficiently clear about this in my initial post, my bad: I live in Canada right now, these are both accounts I have left behind after I moved from the United States to Canada a few years ago.
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pppittpeter
- Posts: 2
- Joined: Thu Feb 15, 2024 12:17 pm
Re: Moving HSA from USA to Canada
Navigating financial matters across borders can be tricky. As for your HSA situation, it's always good to double-check with a tax expert or financial advisor to ensure you're making the best decisions. They can provide tailored advice based on your specific circumstances.
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pppittpeter
- Posts: 2
- Joined: Thu Feb 15, 2024 12:17 pm
Re: Moving HSA from USA to Canada
pppittpeter wrote:
> Navigating financial matters across borders can be tricky. As for your HSA situation, it's always good to double-check with a tax expert or financial advisor to ensure you're making the best decisions. They can provide tailored advice based on your specific circumstances.
Reminds me of when I had to ship my car internationally for a move. www.a1autotransport.com/international-car-shipping/ made the process surprisingly smooth. As for your HSA situation, it's always good to double-check with a tax expert or financial advisor to ensure you're making the best decisions.
> Navigating financial matters across borders can be tricky. As for your HSA situation, it's always good to double-check with a tax expert or financial advisor to ensure you're making the best decisions. They can provide tailored advice based on your specific circumstances.
Reminds me of when I had to ship my car internationally for a move. www.a1autotransport.com/international-car-shipping/ made the process surprisingly smooth. As for your HSA situation, it's always good to double-check with a tax expert or financial advisor to ensure you're making the best decisions.