401k to RRSP Transfer Questions

[Bjammin16]

Hello Folks,

I'm in the process of transferring my 401(k) into my RRSP and I'm hoping to get some advice from the tax gurus out there. Here's a summary of my situation:

- Canadian citizen and resident
- Already withdrew entire 401k as a lump sum and paid 30% withholding tax. Perhaps, I should have waited until I was older than 59 1/2 or looked into rolling over to an IRA, but this is where I am now!
- I've hired a cross-border tax specialist to file a US 1040NR with form 8833 to request a 15% withholding tax rate PLUS 10% early-withdrawal penalty for a net tax of 25% (30% - 15% + 10%) and therefore a return of 5% (since I've already paid 30%)
- I would like to file my Canadian tax return myself
- I plan to perform an RRSP transfer potentially up to the gross lump sum value (per the US/Canada tax treaty) to receive a tax refund that helps offset my US withholding taxes
- My TFSA is maxed-out, so any funds not transferred into my RRSP will not be tax sheltered or differed

I have a few question about filing the 2024 Canadian tax return and the optimizing the RRSP transfer amount:

1) Canadian Tax Interpretation T.I. 2011-0398741I7 states that the 10% early withdrawal penalty/fee is considered a non-business income tax for Foreign Tax Credit (FTC) calculations. Therefore, am I correct in using 25% (15% withholding tax + 10% early withdrawal penalty) in my FTC calculations?

2) I'm wondering how to determine the optimal amount to "transfer" into my RRSP, which will count as a deduction. I've modelled a few scenarios and I see that there's diminishing returns with increased RRSP transfer because with each additional dollar "transferred" into my RRSP, my Foreign Tax Credits decrease. If I were to "gross-up" and transfer my full 401k lump sum value, my final dollars would only generate a 18% tax refund, which is less than my likely retirement tax rate. Would I be correct in this case in not transferring my full grossed-up amount into my RRSP and perhaps only transfer to the point where I"m getting around 25% refund? I'd love to hear some thoughts on this!

Thanks in advance!

[ND]

Watch for the T1 excess RRSP contribution penalty if you are not claiming the full transfer. CRA will demand a T1_OVP https://www.canada.ca/en/revenue-agency ... 1-ovp.html

factor in FX and any other income.

[Bjammin16]

Thanks ND for the reply.

Just so I'm perfectly clear about your suggestion, are warning that if I deposit more funds into my RRSP than I claim as an "rrsp transfer", then I could inadvertently trigger an over contribution penalty? If so, that definitely makes sense and I appreciate your warning.

I'm planning on only depositing what I intend to "transfer", so I don't believe I'll be at risk of an over contribution. Does this make sense?