Canadian Resident with a US 401K Withdrawal

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bullue
Posts: 2
Joined: Mon Dec 20, 2004 1:50 pm

Canadian Resident with a US 401K Withdrawal

Post by bullue »

Hello,
Thanks in advance for trying to help me out with this question.
I lived in the US from 1993 to 2002 on an H-1 visa, and had a 401K
plan with my employer there. In 2002, I left the US, and moved to
Canada as a PR in 2003. In March 2004, I withdrew all my 401K
savings in order to buy a house in Canada, about US$35000. There was
a source deduction of 15%, and the rest was credited to my US Bank
account. I have been living in Canada since coming here and have not visited the US.
What are the tax implications of the 401K transaction?
1. Do I need to file US tax returns? I have been living in Canada
since 2003 and have not visited the US since. I filed my Canadian
tax returns for 2003, and will be doing so for 2004.
2. Will I get a credit on my Canadian tax returns for the 15% US tax
deducted at source?
3. Do I need to show my 401K withdrawal on my Canadian tax returns?
3a. Will it count as ordinary income?
4. Is there anything specific I can do with the money to get tax
benefits - like buying a primary residence, moving to an RRSP, or
anything like that?
4a. If moving the 401K funds to RRSP can help defer taxes, till what date can I do this? Like I said, I got the funds into my US Bank account in Mar 2004 - did I need to something special at that point to roll-over directly to a Canadian RRSP, or can I still do that?
4b. Since I withdrew the funds to buy my first house, till what date can I do this (and what tax benefits would there be)?

Thanks,
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Didn't you just ask this question on another tax board?

1. You do need to file a tax return, as it appears that incorrect withholding was made on your withdrawal, plus you have to pay a penalty on the excess of first $10,000 that you used to buy a house (this exemption is ONLY if you didn't have ahouse in US in the past few years. You probably still owe some tax to IRS.

By the way, it means nothing where you are keeping the money, ie. in US or Canada.

2. You will get credit for whatever US tax (including the penalty) you pay.

3. Yes, the entire GROSS ammount of the withdrawal -- before tax.
3a. Yes

4. Only putting the funds in an RRSP will reduce your Cdn tax bill. By theway, ifyo put the entire 35K into an RRSP, you get the deduction and STILL get the tax credit. (This is clearly outlined in a CRA letter at garrygauvin.com.

But of course, if you took it out of 401(k) simply to put it back in RRSP, there was not much point.

The HBP program would only apply to $20,000 and you would still need to put it into an RRSP first.

4. You can fund the RRSP until March 1, 2005.

<i>nelsona non grata</i>
bullue
Posts: 2
Joined: Mon Dec 20, 2004 1:50 pm

Post by bullue »


I just saw your answer on the other board as well. Thank you very much for your detailed response.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

No.

Transfers to RRSP (such as from IRA, or from eligible severance pay, or as saresult of disolution of marriage) DO NOT count against the contribution room generated by earned income.

By the way Serbinski seems to be censoring the url of the one accountant who is at the forefront of the IRA/RRSP issue.

Strange.



<i>nelsona non grata</i>
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Foreign tax credits CANNOT be carried forward or backwards in Canada, except for BUSINESS related income, so this does NOT apply here.

As to the deductibility of transfers, the example I gave of severance pay is more apt than RRSP transfers, since the severance is included in income and what is put in RRSP is deducted.

As I have said, the re-patriation of 401(k)/IRA to Canada <b>gives NO tax savings</b>, it merely simplifies one's life (possibly), and avoids the problem of not being able to manage ones IRA when in Canada. the best one can hope for is a break-even situation.

DO NOT think that this saves taxes whatsoever.

I plan to leave my retirement account in US, as I could not hope to make sufficient Cdn income to make the transfer stragtegy break even, except over 10-15 years.

<i>nelsona non grata</i>
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Yup.

Other than the mangement issue, the only other possible reasons to transfer it up to Canada would be:

(a) estate tax issues: An RRSP would not be subjet to US estate tax, an IRA would. Additionally if one is married RRSP is completely transferable to spouse without immediate tax. This <i>might </i> not be the case for an IRA transfered to a non-US spouse.

(b) If you wanted to use HBP: This would be for really small IRAs

(c) If you moved to a 3rd country. The Cdn NR tax may be less than the US NR tax, especially if making an early withdrawal.

<i>nelsona non grata</i>
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