I’m a Canadian with $12,500 in a 401K and I’m wondering what I should do with it.
Both my wife and I are now students in the US. I expect to be in the US going to school for the next three to four years after which I expect to move to Canada. My wife will graduate sooner than I and may return to Canada sooner.
We don't have immediate reason to access the funds in the 401K but my wife has a large Canadian student loan she will have to start paying off when she graduates.
Some questions…
1. Are there any advantages to rolling it over into an IRA even if I don’t expect to make any further contributions?
2. What are the tax implications if I am living in Canada when I am 60 and I withdraw from a 401K or IRA?
3. I will likely buy a house in Canada in the next five years. What are the tax implications if I want to use my 401K or IRA as part of the down payment?
4. When I do return to Canada can/should I move my 401K or IRA into my RRSP?
5. If, based on my current situation, it would be best to eventually cash out of my 401K then when would be the optimal time to do it?
Thanks in advance for your help.
Canadian wondering what to do with 401K
Moderator: Mark T Serbinski CA CPA
1. The only advantage to rolling it over is that it allows you greater flexibility in terms of investment options. Most 401(k)s have a limited range of investments. If you are happy with that range, then keep the 401(k). There are certain qualified withdrawals that are available from an IRA that are not available form a 401(k). You'd have to check the list if you are contemplating one of those.
2. You will pay IRS tax on the entire amount of the withdrawal, at non-resident rates, plus including the entire withdraal on Cdn/Prov tax, with Canada and then province giving you foreign tax credit for what you paid to IRS. You will end up paying your Cdn/Prov tax rate on your 401/IRA income.
3. There is no tax break for using your IRA/401(K) to buy a house: You will be taxed in US on the entire ammount, and if it does not qualify as your 'first home' you will be penalized 10% as well. You will also have to include the income on Cdn tax as well as I outlined above. The 'first-home' penalty exemption applies only to IRA, not to 401(k).
4. This has been discussed in detail on another thread. It is not a true transfer, as US tax would have to be paid, and then you would be resonsible for 'meshing' the Cdn tax credit for a zero sum -- not always easy.
So, Generally, NO, unless you can't trade in your IRA/401(K) or if you have specific expenses that acould allow you to withdraw RRSP tax-free but not 401(k). I would not be transferring IRA just to take advantage of HBP.
5. The only consideration for cashing out your IRA would be under the following conditons:
(a) You are still US resident
(b) you are not making mush other income in that year.
(c) you are contemplating returning to Canada within that year.
(d) you are nowhere near 60 years old.
and/or
(e) you can use the income towards a qualifying expense (like school), thus avoiding the penalty and getting an equivalent deduction. You would again have to make sure whether such expenses qualify the withdrawl from 401(k) and/or IRA.
<i>nelsona non grata</i>
2. You will pay IRS tax on the entire amount of the withdrawal, at non-resident rates, plus including the entire withdraal on Cdn/Prov tax, with Canada and then province giving you foreign tax credit for what you paid to IRS. You will end up paying your Cdn/Prov tax rate on your 401/IRA income.
3. There is no tax break for using your IRA/401(K) to buy a house: You will be taxed in US on the entire ammount, and if it does not qualify as your 'first home' you will be penalized 10% as well. You will also have to include the income on Cdn tax as well as I outlined above. The 'first-home' penalty exemption applies only to IRA, not to 401(k).
4. This has been discussed in detail on another thread. It is not a true transfer, as US tax would have to be paid, and then you would be resonsible for 'meshing' the Cdn tax credit for a zero sum -- not always easy.
So, Generally, NO, unless you can't trade in your IRA/401(K) or if you have specific expenses that acould allow you to withdraw RRSP tax-free but not 401(k). I would not be transferring IRA just to take advantage of HBP.
5. The only consideration for cashing out your IRA would be under the following conditons:
(a) You are still US resident
(b) you are not making mush other income in that year.
(c) you are contemplating returning to Canada within that year.
(d) you are nowhere near 60 years old.
and/or
(e) you can use the income towards a qualifying expense (like school), thus avoiding the penalty and getting an equivalent deduction. You would again have to make sure whether such expenses qualify the withdrawl from 401(k) and/or IRA.
<i>nelsona non grata</i>
Thanks for the response. I wasn't happy with my investment options with my 401K so I am going to roll it over.
I have a couple of follow-up questions about your response to my question "5. If, based on my current situation, it would be best to eventually cash out of my 401K then when would be the optimal time to do it?"...
Regarding your point..
"(c) you are contemplating returning to Canada within that year.",
5.1 Can you explain why that is an important factor when considering cashing out?
Regarding your point...
"(e) you can use the income towards a qualifying expense (like school), thus avoiding the penalty and getting an equivalent deduction. You would again have to make sure whether such expenses qualify the withdrawl from 401(k) and/or IRA."
5.2 Can you recommend a link to a webpage that explains the rules for withdrawl from a 401K without being penalized as they apply to Canadians?
Overall I think that if I can withdraw from the 401K/IRA soon without getting penalized then I will try to do so since I'm 30 years away from retirement and have some more immidiate financial demands (school, buying a house, wife's student debt).
Thanks again for your help.
I have a couple of follow-up questions about your response to my question "5. If, based on my current situation, it would be best to eventually cash out of my 401K then when would be the optimal time to do it?"...
Regarding your point..
"(c) you are contemplating returning to Canada within that year.",
5.1 Can you explain why that is an important factor when considering cashing out?
Regarding your point...
"(e) you can use the income towards a qualifying expense (like school), thus avoiding the penalty and getting an equivalent deduction. You would again have to make sure whether such expenses qualify the withdrawl from 401(k) and/or IRA."
5.2 Can you recommend a link to a webpage that explains the rules for withdrawl from a 401K without being penalized as they apply to Canadians?
Overall I think that if I can withdraw from the 401K/IRA soon without getting penalized then I will try to do so since I'm 30 years away from retirement and have some more immidiate financial demands (school, buying a house, wife's student debt).
Thanks again for your help.
5.1 As I said in answer (2), once you return to Canada, you will have to include any withdrawals from 401(k) in your income and pay Cdn tax. It might be better to withdraw it before returning. Also in a year when you are leaving US, you will likely make little other money, so your US tax will be low on the 401(K) withdrawal, and you *may* be able to avoid state tax if timed correctly.
5.2 The IRS website has detailed information on what types of withdrawals can be used to exepmt the penalty. Like I said the rules are different for 401(k) and IRAs (generally more choices for IRA, which is your plan anyways).
www.irs.gov
There is no special rules for Cdns with regards to 401(K) while living in US. There are some twists for those returning to Canada and wishing to transfer their IRA, but these won't save any taxes. I am prevented from pointing you to those sites by site admin, but don't worry about it.
<i>nelsona non grata</i>
5.2 The IRS website has detailed information on what types of withdrawals can be used to exepmt the penalty. Like I said the rules are different for 401(k) and IRAs (generally more choices for IRA, which is your plan anyways).
www.irs.gov
There is no special rules for Cdns with regards to 401(K) while living in US. There are some twists for those returning to Canada and wishing to transfer their IRA, but these won't save any taxes. I am prevented from pointing you to those sites by site admin, but don't worry about it.
<i>nelsona non grata</i>