Canadian Resident dilemma - Rollover 401k to IRA or Transfer

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CdnRez
Posts: 3
Joined: Fri Dec 15, 2017 1:26 pm
Location: Canada

Canadian Resident dilemma - Rollover 401k to IRA or Transfer

Post by CdnRez »

I have read many of the postings here. I am still confused about the best approach for my situation:

- I am a Canadian citizen and Canadian resident
- under 59.5
- worked in the US for 2 years and contributed to 401k.
- Recently received a letter that the 401k plan will be terminated next year.

I was initially planning to rollover to an IRA and deal with it after 59.5, but after being told by plan admin that I couldn't open an IRA account unless I had a US address, I checked out the 401k to RRSP transfer option.

After a lot of research, i decided to try the transfer option. But a few hiccups caused me to second guess this approach.

1) Despite receiving my W8-BEN, plan admin insists on 30% withholding instead of treaty rate of 15%. Which means that i will have to file 1040NR to get back 5% (I am assuming 30-(15+10)=5%. But i have read a couple of posts here and on other websites, that have led me to believe that it is not a certainty that a lump sum withdrawal from 401k qualifies for the treaty rate of 15%. So to me, that implies that I may owe 30 and then if I file a 1040NR, the IRS may also require the 10% early withdrawal penalty.

2) I was under the impression that any withholding tax paid + any early withdrawal penalty could be used as a FTC on my Canadian tax return. However, after contacting CRA, they said that they would allow FTC up to 15% treaty rate only and I would have to file with IRS to get back the other 15%.

3) I have since discovered that I can in fact open an IRA with TD Ameritrade with a Canadian address.

So my questions are:

- Given all the uncertainty, am I better off doing a rollover to IRA?
- If I do the rollover, I read on this forum that I have to report on line 130 and take an offsetting deduction on line 236. Is this still true?
- If I keep in IRA, what happens after I turn 59.5?
- or should I just continue with the transfer approach and hope that the IRS will honour the treaty rate?

- also, has anyone gone through the process of depositing the lump sum withdrawal into their Canadian brokerage RSP account? I am curious about:

a) how do you top up the net of withholding amount (ie do you submit two cheques?).

b) how does the brokerage identify the contribution as a "special contribution"? Do you get issued a separate slip?

Thank you for any insights.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Unless you can guarantee the 15% rate (and the treaty only protects PERIDIC withdrawals -- and this would not be considered periodic) then I would simply roll it over. You are pretty much at the mercy of the 401(K) trustee on that. But remember that 4019K) monies are CONNECTED income, so you can also just report them on page 1, and pay graduated rate, which I would think would be less than 30% in any case.

CRA is wrong to limit you to 15%, particularly if the withdrawal is not considered periodic in US. And the 10% penalty would also be creditable on your Cdn return, Typical wrong telephlunkie answer for CRA. You will get whatever your US return says. Trouble is it may be more tax than you can use.

Saying you are "under 59.5" doesn't give much of a clue how long you have to wait to avoid the penalty.


As to what happens in your RRSP, you inform the RRSP trustee that this will be considered a transfer. They will handle the paperwork. To benefit most from this process, you will need to come up with the entire amount of the 401(K), the net from the US firm plus your own money (it needs to to be done in a ntimely fashion, so you will not have the luxury of waiting for IRS refund. Its not a direct transfer, so the US money and your own will be in your Cdn bank, and you will transfer it or write a check for as much as you can.

many IRA/401(K) holder who return to Canada face the issue of the trustee not wanting to hold your money. And it is typically very hard to nail down a concrete answer from any firm, very dependant on what agent you talk to. So this is best done BEFORE leaving US.

Let us know how it goes with TD Ameritrade, since this would be a useful tip for those facing your situation in future.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
CdnRez
Posts: 3
Joined: Fri Dec 15, 2017 1:26 pm
Location: Canada

Post by CdnRez »

Thanks for your reply nelsona. Very helpful information. I think I am leaning towards rolling it over. After that is complete, do I need to do anything to show that a rollover occurred on my 2017 Canadian tax filing?

To clarify, I am 40. I worked in the US when I was in my mid 20's. Since then I have lived/worked in Canada and filed tax returns in Canada.

Also, the 401k plan admin was holding the money for 15 or so years. The issue is that the company I worked for went bankrupt. As part of the wind down of operations, the plan is being terminated.

Totally agree with your comment about getting a concrete answer. On both sides of the border, very few agents have any experience with this type of situation. For example, on the US side, I was told anywhere from 15-58% withholding tax depending on the agent.

I will definitely follow up with a post after all is said and done.

Thanks again.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Well, looks like you had done your homework when you left, since they held it for 15 years. Not much you can do about a bankruptcy.

Nothing to report in Canada regarding a tax-free rollover. Of course, if any of the monies become taxable (ie. if you take some of it instead of transferring) then that is also taxable in Canada.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
CdnRez
Posts: 3
Joined: Fri Dec 15, 2017 1:26 pm
Location: Canada

Post by CdnRez »

Happy new year.
After discussing with CRA helpline agent, I felt comfortable that I could claim the 30% withholding tax as a FTC and no need to file 1040NR. 20% treaty rate + 10% penalty =30%. So I decided to withdraw the 401k and do the transfer to RRSP route instead of IRA rollover.

Noted in your earlier post that this is not a direct transfer. So my new question is this: I've got the USD chq net of 30% withholding tax from 401K admin. Can I deposit it to my non registered USD margin account and leave it there (ie leave it in USD instead of converting to CAD...the exchange rate has gone against me in the last 2 weeks). Then cut a CAD chq from my Canadian chequing account for the gross amount of the withdrawal (the gross USD amount converted to CAD using exchange rate on date of withdrawal) to deposit to my RRSP account? OR does the CDN bank require that the USD chq be deposited to my RRSP?

Thanks in advance.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

The actual source of the money is unimportant. It can come from anywhere.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
JustAGuy
Posts: 5
Joined: Mon Mar 05, 2018 3:55 pm

Post by JustAGuy »

Hi CdnRez - I seem to be in similar situation as yourself. Good info on this thread. I have similar questions. Maybe you have more info -
viewtopic.php?t=12527&highlight=ameritrade

Thanks!
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