Transfer 401k to RRSP questions

sjantzi · Post by **sjantzi** » Thu Mar 09, 2017 1:25 pm

I have a few questions about the process.

1) I live in Canada and commute to Michigan for work, I file with 1040NR. Would the flat rate of 15% tax still apply or would distribution be added to my employment income and taxed at marginal rates?

2) I understand that a special RRSP contribution room would become available for the transfer but do I need to deposit all of it into the RRSP or can I add some of it to my TFSA and pay the tax on it?

3) Would I owe Michigan tax on the distribution?

sjantzi · Post by **sjantzi** » Thu Mar 09, 2017 10:38 pm

After more reading I believe would use Schedule NEC with 1040NR to state the distribution and it would NOT be added onto my employment income and would NOT be taxable in michigan. Am I correct in this understanding?

I also read elsewhere that you do not have to add all the 401k distribution to the RRSP but you then be taxed on the amount excluded. Can anyone confirm this?

nelsona · Post by **nelsona** » Wed Mar 15, 2017 11:35 am

Since you are non-resident, the tax on a lump-sum withdrawal of 401(k) (done after leaving that company of course) would incur a 30% tax, not 15%, and would also incur 10% early withdrawal penalty if you are not 55. You have the option of including it to yourother US income on page 1 instead.

What you do with it in Canada id up to you, but the entire withdrawal would be taxable in Canada. What you transfer to your RRSP would be a deduction on your Cdn return. Anything you held back would in essence be taxed in Canada as well.

sjantzi · Post by **sjantzi** » Wed Mar 15, 2017 4:32 pm

Sorry I'm confused. I thought the treaty capped tax at 15%. I understand this is for periodic withdraws but I thought most brokers see even lump sum withdraws to fall under this definition.

I'm considering doing this before leaving my job. If I still had USA employment income how would the tax on that income be effected in the USA?

nelsona · Post by **nelsona** » Wed Mar 15, 2017 4:43 pm

You cannot move your 401(k) while working for that firm.

More firms are correctly withholding 30%.

sjantzi · Post by **sjantzi** » Wed Mar 15, 2017 4:46 pm

I'm not looking at moving the 401k but withdrawing all of it. I'm not aware of anything preventing me from doing that.

nelsona · Post by **nelsona** » Wed Mar 15, 2017 5:22 pm

Very few allow this, but you can ask your firm's 401(k) manager.

This would be known as an "in-service, non-hardship withdrawal". usually there a re strict requirements for thiss, including age and years of service. They aslo typically do not allow the entire amount to be withdrawn.

and for your plan to work from a tax point of view, you need about the same amount of other Cdn-sourced income in the same year. Otherwise you are paying the Cdn tax rate on this withdrawal. better to get a loan if you are that strapped, than pay a 40% tax on the money.

nelsona · Post by **nelsona** » Wed Mar 15, 2017 5:24 pm

Those who do this typically roll it over to an IRA so as not to pay any tax. Yo uare not planning to do this. Even if you are eligible, and you do roll it to an IRA for a short time, your plan involves collapsing that money and paying US and Cdn tax on it.

sjantzi · Post by **sjantzi** » Fri Mar 17, 2017 3:20 pm

Thank you for the reply's.

I was completely wrong in what I thought I could do with a 401k.

I plan on retiring before age 55. So if I'm understanding correctly now I have to wait until I leave my job then rollover into an IRA. If I then setup automatic annual withdraws the tax rate should be 15% + 10% penalty. Please correct me if I'm wrong.

This may be a dumb question but I cant seem to find any discussion on it. The USA refers to the 10% penalty as a tax, even Canada recognizes that so they allow you to use it as a foreign tax credit. If its a tax why would it not be reduced by the treaty?

nelsona · Post by **nelsona** » Fri Mar 17, 2017 5:11 pm

If you take withdrawals from a 401(k) after 55, generally you are not subject to penalty (as opposed to IRA which is 59 1/2). But remember that periodic withdrawals from 401(k) or IRA are NOT eligible for the transfer maneuver to RRSP, only lump-sums withdrawals. I would forget about this idea.

If you make the payment periodic you should be exempt from the 10% penalty in any event by IRS SEPP rules, but you rais a good point. Remember that 401kpayments can either be flat taxed on NEC of 1040NR or gradual taxed on page 1. If you do NEC you can TRY to avoid the 10% on lump sums, but if you use page 1, you will have the 10% upto 55 yrs old..