I am moving to Canada from the USA. What should I do with my 401(k), 403(b), or other employer retirement plan?

For new Canadian residents, 401(k)’s can be tricky. But if you haven’t moved there yet, don’t panic! Just plan ahead. If you have already moved, keep reading, and pay special attention to the end of this article.

Let us help you with five steps to consider with your 401(k) to ensure a smooth transition to Canada.

Step 1: Consider the potential tax consequences of a full distribution of your 401(k).

Here’s the deal: You can’t bring your 401(k) with you to Canada. While the option does exist to transfer your 401(k) to a Canadian retirement account, called an RRSP, this can have heavy tax consequences and should only be considered after thorough consultation with a tax professional.

Though it may seem tempting to cash out your 401(k) and take the money, you run the risk of increasing your taxable income and putting yourself into a much higher tax bracket. There is also a possible 10% tax penalty to consider when taking withdrawals before age 59 ½.

So, before you “take the money and run” keep reading and speak with a dual licensed USA/Canada cross border financial advisor like us.

Step 2: Check with your 401(k) plan administrator on keeping your plan as a Canadian Resident.

If you leave your 401(k) “as-is” when you move to Canada, you may run into a not-so-pleasant situation where your previous company informs you that you are no longer able to hold your 401(k) with them. They may force you to roll it into an IRA, take away your online access, and/or not allow any investment changes to be made.

Therefore, it’s important to contact them before you move.

If they tell you that you can keep it, that may be a good option, but best to consult with a cross border financial advisor first so you know the pluses and minuses. **Bonus question: If you have a small balance in your 401(k), you’ll want to ask your plan admin if you can keep your 401(k) open when you leave the company. Many employers will force you to roll over or distribute your 401(k) if less than a certain amount (ie. $5,000).

If your company tells you that you can’t keep your plan (either because of your move to Canada, or because of a small balance), then keep reading so you have some more options other than a distribution.

Step 3: Consider rolling your 401(k) into an IRA.

If your employer won’t let you keep your plan when you move to Canada, one good option is a rollover to an IRA. However, keep in mind that many investment companies will also not let you keep your IRA when you move to Canada.

Therefore, consider opening an IRA with a dual Licensed USA/Canada cross border financial advisor, like us. A dual licensed advisor can hold and manage both your USA and Canadian retirement accounts.

Also, rolling your 401(k) to an IRA will generally provide you with more investment options and allow your advisor to manage your investments. But before you start that rollover, there are two more important considerations.

Step 4: Take into account if part of your 401(k) are Roth assets.

In recent years, companies have begun offering both a “Traditional” and “Roth” aspect to their 401(k) plans. Many employees don’t consider this when they take distributions or roll assets over to IRA’s. In fact, you may not even realize that some of your 401(k) assets are under the Roth umbrella.

This is an extremely important part of your financial plan and decision making when moving to Canada. Along with the other considerations that we have detailed above, it is vital that you take into consideration the tax treatment (and potential tax consequences) of your Roth assets within your employer plan when moving to Canada. Please read our article entitled, “I am moving to Canada from the USA. What should I do with my Roth IRA?” for more information.

Step 5: Consider liquidating employer stock prior to a rollover.

If you hold employer stock in your 401(k), you will want to take that into account prior to moving to Canada. If you roll your 401(k) into an IRA, and part of the balance consists of employer stock, the growth of that stock becomes ordinary income for US tax purposes. You lose what is called “net unrealized appreciation” (NUA) capital gains treatment on employer stock in that case. That is why you may want to consider withdrawing that stock before moving to Canada.

Be sure to reach out to us so that we can consult with a tax advisor on that one.

*What if I’ve already moved to Canada and I have Roth assets in my 401(k) or I have not access to my 401(k)?

Call us today and we can walk through your situation. We can also speak with one of our tax professionals. There may be an option to petition the Canada Revenue Agency for tax relief with regard to your Roth. But don’t wait to call. We would love to help!

The information above is from sources believed to be reliable, however, we cannot represent that it is accurate or complete and it should not be considered personal tax advice. We are not tax advisors and clients must seek independent advice from a competent professional advisor on tax-related matters before withdrawing from their U.S. retirement plan.

Disclosure: This material has been prepared by Dean Huston and expresses the opinions of the authors and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This newsletter is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a Member-Canadian Investor Protection Fund.

Raymond James (USA) Ltd. advisors may only conduct business with residents of the states and/or jurisdictions in which they are properly registered. Raymond James (USA) Ltd. is a member of FINRA/SIPC.