Rolling over <$5k once back in Canada

telly1 · Post by **telly1** » Mon Oct 06, 2008 8:36 pm

My husband (Canadian citizen living in Canada) has a small 401k with a former employer when he was commuting to the US a few years back. The account was not originally rolled over to an IRA because it was >$5k. Now that the balance has fallen below $5k, JPMorgan is telling him that he needs to take an immediate distribution or roll it into an IRA. However, they will not open an IRA account as he is a Canadian resident.

What are his options? Does anyone know of a financial institution that will open an IRA for a Canadian resident? Or should he just take the distribution?

nelsona · Post by **nelsona** » Tue Oct 07, 2008 5:04 am

No outfit I know would open an IRA for such a small amount.

Might be simpler to just bite the bullet and simplfiy. It'll cost you, but ...

nelsona · Post by **nelsona** » Tue Oct 07, 2008 5:05 am

Remember that only the company portion and the growth would be txable in canada. The whole thing is subject to 15% tax in US (plus 10% penalty)

nelsona · Post by **nelsona** » Tue Oct 07, 2008 5:09 am

Ironically, he was never a US resident, so their unwillingness to open an account now is laughable.

Maybe the fund will go back up and he can keep it.

telly1 · Post by **telly1** » Tue Oct 07, 2008 7:02 am

Thanks nelsona.

This has happened twice before (threat to close when the balance dropped below $5k) but they kept it open once it passed that threshold again. We should have moved the money to a bond fund once it reached $5k. It'll be tough to get back above $5k in an equity fund in these markets!

telly1 · Post by **telly1** » Tue Oct 07, 2008 7:08 am

With no US income for 2008, will it still be subject to 15% taxes? I realize the 10% penalty is a must...

nelsona · Post by **nelsona** » Tue Oct 07, 2008 9:14 am

As a non-rtesident, it is subject to FLAT tax. It is not reported on the 1040NR tax return 'lines'. It is reported on the 'non-connected income' and taxed at 15%.

telly1 · Post by **telly1** » Tue Oct 07, 2008 12:11 pm

So the taxes paid will be effectively the same as if he were earning a salary in the US? That seems odd.

nelsona · Post by **nelsona** » Tue Oct 07, 2008 12:17 pm

Yes. US non-resident tax is rarely lower than resident tax.

You are free to filla 'normal' 1040 reporting world income is you wish, but I somehow think the complexity of such a return would hardly be worth saving $100. particularly since there is likely Cdn tax to pay as well.

nelsona · Post by **nelsona** » Tue Oct 07, 2008 12:20 pm

Note that the opposite situation, with you living in US witha small RRSP in canada would yield the same result: flat tax (25%) regardless of how much or little other Cdn income you had.

Non-resident tax pre-supposes that you are making other income in your home country, so generally does not allow you any standard deduction

nelsona · Post by **nelsona** » Tue Oct 07, 2008 12:23 pm

Just a note on the penalty: Brian Wruk in one of his books claims that he was able to avoid all but the 15% US tax for some clients by submitting a w8-ben to the broker before taking a withdrawal. The W-8ben would indicate that the tax should be flat 15%. He was able to convince the broker that was the entire tax obligation (no penalty) even though this was a lump sum withdrawal.

I've not seen others have this success.

telly1 · Post by **telly1** » Tue Oct 07, 2008 4:42 pm

Thanks a lot nelsona! I think we'll wait and see and hope the funds reach $5k again in the near future. I guess if they really don't want to hold the money they'll just send us a check (reduced). Not a lot of options here anyway.

I appreciate the reponse(s).

nelsona · Post by **nelsona** » Tue Oct 07, 2008 8:37 pm

I would at least submit a W8-ben to have it on record, otehrwise 40% will be withheld.

Arteeh · Post by **Arteeh** » Mon Oct 13, 2008 6:32 pm

You may check with a couple U.S. insurance companies as some of them will let you open an IRA annuity for as little as $2,000. You would be looking for a fixed, deferred annuity. Not necessarily a great investment, but competitive with many bonds funds.

Fixed annuities are insurance contracts, not securities, so they can be easier to deal with on a cross-border basis (i.e. they are not regulated by SEC or OSC).