Moving your 401(k) to Canada

Can you move your 401(k) to Canada when you move?

  • Kinda, sorta

Should you move your 401(k)?

  • It depends 😬

What about HSA, FSA?

  • Unfortunately no, these cannot be moved. But the options are not so bad!

… and Stocks, Bonds?

  • Yes, these are easy to move but there’s one thing to keep in mind. Read below.

If you don’t have a lot of money invested in these instruments, and this is definitely subjective but let’s say < $100k, you probably won’t go wrong whether you decide to move all of these with you to Canada or keep them in the U.S. The ultimate decision might come down to whether you value having all of your investments in once place and the peace of mind for a little hit or not.

If you do have a good chuck of your money invested, say, $100k+, the fundamental question you should ask yourself first is whether you would consider moving back to the U.S. in the future or need that flexibility. If yes, it’s probably much better to leave your 401(k), HSA, FSA at a brokerage in the U.S. and manage it from Canada. If your current broker doesn’t support this, Vanguard lets you do this.

Let’s say you’re gone for the good or prefer to take everything with you to Canada, then here’s your action plan for 401(k):

  • Withdraw all of your 401(k) and take the hit, in most cases 10% penalty and up to 30% tax

  • In Canada, open a RRSP account. If your employer in Canada offers one, open it through them. Do NOT open a separate one from the bank

    • RRSP is Canadian equivalent of 401(k)

    • Canada considers 401(k) as a pension plan as part of the treaty

    • As a pension plan from outside Canada, you’re allowed to deposit your entire 401(k) distribution in RRSP without any penalty or taxes

  • Deposit 100% your 401(k) distribution into your RRSP. *VERY important*

    • So if your 401(k) was worth $100k, when you withdraw, let’s say you net $60k after taxes and penalty.

    • Even though you net $60k, you should deposit the full $100k in your RRSP. You’ll need to come up with that shortfall with your own money

    • The reason this is important is end of the year when filing your tax returns, you can claim the $40k you paid to uncle Sam as tax credits in your Canadian return and deduct all of it from your regular income tax

      • Of course this means that you’ll need to have an adequate income in Canada the first year to warrant a tax withholding equal to your tax deduction for your 401(k)

  • If you don’t cover the shortfall or have enough income to claim as tax credit, you’ll lose that portion of the money when doing this transfer. Here are some scenarios:

    • Example 1

      • 401(k): $100k

      • Net distribution: $60k

      • RRSP deposit: $60k (let’s say you don’t have any money to cover the shortfall)

      • You’ll lose $40k in this rollover scenario

    • Example 2

      • 401(k): $100k

      • Net distribution: $60k

      • RRSP deposit: $100k (you covered the $40k with your own money)

      • Your taxes in Canada the year you did this rollover: $30k

      • You’ll claim all of the $30k as tax credits but that means lose out $40k-$30k = $10k in this scenario

    • Example 3

      • 401(k): $100k

      • Net distribution: $60k

      • RRSP deposit: $100k (you covered the $40k with your own money)

      • Your taxes in Canada the year you did this rollover: $50k

      • You’ll claim all of the $40k out of your $50k as tax credits and won’t lose anything in this scenario

What about HSA and FSA?

  • Bad news, not much can be done with these since these are not considered pension plans or have any other tax free treatment recognition by the U.S <> Canada treaty

  • So you take the penalty + taxes hit and just move these over to Canada. You can deposit them directly to your bank account in Canada

Finally, what about publicly vested stocks and bonds?

  • These can be liquidated and moved over easily however, you might be better off holding them before you establish your residence in Canada

  • If you sell your U.S. stocks after establishing your residence in Canada, the FMV of your stocks will be the FMV on the day of your move, not when you originally bought/owned these stocks. This means your gains (short term or capital gains) will likely be smaller!

  • Also only 50% of your capital gains are taxed in Canada but taxed at your regular income bracket

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