Dividing an RRSP, IRA or 401(k) in a Cross-Border Divorce

How do we split an RRSP or RRIF without tax in Canada?

An eligible direct transfer moves retirement assets into the receiving spouse's or common-law partner's Canadian registered plan without current Canadian income tax.

For an RRSP that has not matured, the transfer must go directly to an RRSP or RRIF in the name of your current or former spouse or common-law partner. You must be living separate and apart when the transfer is made, and the transfer must follow a court decree, order or judgment, or a written separation agreement dividing property because the relationship broke down. No divorce is needed. The amount is neither income nor deductible solely because of the transfer. Income Tax Act, subsection 146(16).

A qualifying RRIF division also requires a direct transfer to the receiving spouse's RRSP or RRIF under the property-division order or agreement. Subsection 146.3(14). The T2220 instructions apply the living-separate-and-apart condition to a RRIF too.

Form T2220 tells the two institutions to move the money directly. You sign Section 1; the receiving institution and your ex sign Section 2; the sending institution completes Section 3; the receiving institution confirms receipt in Section 4. Use one form for each plan. A receiving RRSP requires the recipient to be 71 or younger at year-end; otherwise consider the permitted RRIF destination. CRA Chart 10.

A qualifying transfer needs no unused RRSP room; Chart 10 says not to claim a deduction for it or report it on your return. A transfer not made under a decree, order, judgment or written separation agreement can leave both spouses owing tax (T2220 instructions).

This answers Canada only. For a US citizen or US resident, the US treatment of an RRSP or RRIF division is not settled; see "Who is taxed on what, in which country?" below.

How do we split a 401(k), and what is a QDRO?

A 401(k) or similar qualified US employer plan generally needs a qualified domestic relations order, or QDRO, to pay an award to a former spouse. A private settlement agreement alone does not establish that the plan can make the requested payment.

A QDRO identifies the participant, the recipient, and the benefits assigned. The recipient is called the alternate payee. The order cannot require a benefit the plan does not offer. A spouse or former spouse may roll an eligible QDRO distribution into an IRA or another eligible US retirement plan. Amounts kept as cash are generally taxable to that spouse, subject to any allocation of after-tax contributions. IRS QDRO rules.

The plan administrator determines whether the order qualifies. Request the plan's procedures and benefit information before the order is drafted, then obtain the administrator's determination before payment. Department of Labor QDRO guidance, questions 1-13 and 2-1 to 2-7.

While it decides, the plan sets aside what the order would pay. If the order is not found qualified within 18 months of the first payment date it requires, that money goes to whoever would have received it without the order, and a later approval applies only to later payments. Internal Revenue Code section 414(p)(7).

A QDRO must be made under a US state's or tribe's domestic relations law. A Canadian court order is not, so it does not meet that test by itself. For a Canadian divorce, ask the administrator what US order it will accept. Internal Revenue Code section 414(p), Publication 504.

How do we split an IRA without tax or an early-withdrawal penalty?

An IRA uses a transfer incident to divorce, rather than the employer-plan QDRO route. The transfer must be under a divorce or separate-maintenance decree, or a written instrument connected to that decree. A written separation agreement without a decree does not fit that wording, even though Canada's RRSP rule accepts one. Internal Revenue Code section 408(d)(6).

For a traditional IRA, the custodian can transfer the awarded assets directly into a traditional IRA in the receiving spouse's name. If the entire account changes ownership, changing the account's name is another permitted method. The transferred interest becomes the recipient's IRA from the transfer date. Publication 590-A, Transfers Incident to Divorce.

An IRA withdrawal paid into your own account and then sent to an ex is an ordinary withdrawal, not a divorce transfer, and can incur the additional 10% tax. IRS early-distribution rules.

Does the early-withdrawal tax apply to a payment to my ex?

It depends on how the money reaches your ex. A payment from an employer plan under a QDRO can avoid the additional 10% tax, and an IRA transfer incident to divorce is not a withdrawal. Cash you withdraw yourself and then hand over is an ordinary withdrawal, and the QDRO exception does not cover IRAs. The additional tax generally applies to taxable withdrawals before age 59½ unless an exception fits. IRS exceptions table.

After an award reaches an IRA, a later withdrawal is an IRA distribution and does not keep the employer-plan QDRO exception. Other exceptions need their own qualifying facts.

Can an RRSP move to an IRA, or a 401(k) to an RRSP, without tax?

The divorce transfer rules do not create a general tax-free bridge between Canadian and US retirement accounts. The receiving account must qualify under the particular rule being used.

If each spouse holds an account in their own country, one option is to leave both in place and balance the split with other property, such as a home, which has its own tax: see transferring property to family.

For a Canadian-resident recipient, how Canada treats a QDRO rollover or an IRA divorce transfer is not settled by the sources reviewed. The treaty exempts from Canadian tax a US pension amount that the US would exclude from income if the recipient lived there (Article XVIII(1)), but the CRA's foreign-pension page says to contact the CRA if you received amounts from an IRA, and does not address a divorce transfer (CRA line 11500). Confirm the Canadian treatment before the transfer.

Moving your own US retirement money to an RRSP involves separate conditions covered in US retirement accounts in Canada.

What is withheld if my ex lives in the other country?

Withholding depends on who receives the money, their tax status, and whether it moves by qualifying transfer or taxable payout. A US citizen or green card holder living in Canada is still a US person here; a nonresident alien is neither a US citizen nor a US tax resident.

The treaty's 15% cap covers only periodic pension payments, so a divorce lump sum to a nonresident alien is generally withheld at the 30% rate, and Canada then generally taxes the gross amount too. Article XVIII(2)(a).

A nonresident alien gives the US payer Form W-8BEN to document foreign status and any treaty claim; a US citizen living in Canada gives Form W-9. Neither form makes a taxable lump sum tax-free. A move to the US before payment makes a W-8BEN incorrect: tell the payer within 30 days. W-8BEN instructions.

A US citizen, green card holder or other US tax resident is outside the nonresident rules. A retirement-plan payment made to that recipient is generally subject to mandatory 20% withholding, even if the recipient plans to roll it over later. A direct rollover (the recipient asks the plan to send the money straight to the receiving account) does not, and neither does a trustee-to-trustee transfer from an IRA. If the plan pays the recipient instead, the recipient has 60 days to roll the money over and must replace the withheld amount from other funds to roll over all of it. IRS rollover guidance.

For a direct transfer involving a non-resident of Canada, the CRA says Form NRTA1, Authorization for Non-Resident Tax Exemption, must be filled out to waive non-resident withholding on the transfers it lists, but its pages do not say whether a divorce transfer under T2220 is one of them. Ask the issuer before the transfer whether it requires NRTA1 and will withhold. CRA T4040, Chapter 6, CRA transfer instructions.

If Canada withheld tax from a payment to someone abroad, see the non-resident return for pension and RRSP income. If a US payer withheld from a Canadian resident, see US tax withheld on payments to Canadians.

Our agreement says pay cash out of the RRSP: what does that cost?

An ordinary RRSP withdrawal is taxable retirement income even when the settlement requires the money to be paid to an ex. A qualifying direct transfer keeps the award inside the registered-plan system instead.

For a Canadian resident, the institution withholds tax from an RRSP cash withdrawal: outside Quebec, 10% up to C$5,000, 20% over that up to C$15,000, and 30% above that. Quebec's federal rates are lower, and Quebec also withholds provincial tax. Withholding is a payment toward the final tax bill, which depends on total taxable income and province or territory. CRA withdrawal guidance.

Before signing, distinguish an award of retirement assets from a promise to deliver net cash. Ask whether the agreement can use a qualifying direct transfer and who will bear any withdrawal tax. A direct transfer defers taxation; the receiving spouse is taxed on later withdrawals.

If cash has already been withdrawn, Chart 10 says cash received must be included in income and cannot be transferred tax-free. Keep the payment dates, slips and agreement together and review the options with a tax professional before filing.

Who is taxed on what, in which country?

A transfer that meets its own country's rule is not taxed in that country when it happens. When money is paid out as cash, the person who receives it is taxed on it. A spouse receiving taxable QDRO benefits generally reports them, not the employee (Publication 504); an IRA owner who withdraws cash to pay an ex reports their own withdrawal (26 U.S.C. 408(d)(1)).

Each country that can tax the recipient then applies its own rules. The US taxes citizens and resident aliens on worldwide income wherever they live (IRS guidance). How a Canadian resident reports a US pension is in US retirement accounts in Canada.

Unsettled: an RRSP-to-RRSP divorce transfer for a US citizen or resident. Revenue Procedure 2014-55 sets out how the US treats RRSP growth, withdrawals and reporting. It does not mention divorce transfers, so it does not show that such a transfer is tax-free in the US. The usual US rule for property moved between spouses has an exception when the spouse is a nonresident alien (Publication 504), so it does not settle the question either. Get a US review before signing. Revenue Procedure 2014-55, sections 4 to 6.

Foreign tax credits can reduce double tax but are limited. See foreign income on a Canadian return and foreign income on a US return.

What does each of us report after the division?

A transfer with no current income tax can still leave reporting duties for each spouse.

The T2220 instructions say not to send the form to the CRA unless it asks to see it. Canadian issuers can report a direct division on a T4RSP or T4RIF, the slips for RRSP and RRIF payments, without issuing a contribution receipt. CRA transfer reporting.

Revenue Procedure 2014-55 keeps the FBAR and Form 8938 duties for a Canadian retirement account (section 5); the other Canadian-plan forms are in Canadian registered accounts on a US return. A US person who transferred an account away may still need to consider the interest held earlier in the calendar year. FinCEN reporting rules.

For reporting thresholds and filing rules, use foreign account reporting.

In what order should the agreement, approval and transfer happen?

A typical order follows; each plan or institution sets its own procedure. The order or agreement establishes the award; the institution then executes the permitted transfer.

1. Identify each account. Gather statements, account types, after-tax contribution records, and each spouse's residence, citizenship and US tax status.
2. Settle the intended result. Whether the award stays in retirement accounts or becomes spendable cash decides the tax route in both countries. Have both countries' treatment checked before signing.
3. Get the institution's requirements. Request US plan QDRO procedures or IRA transfer requirements; confirm the Canadian receiving plan and T2220 process.
4. Complete the legal documents. Name the account, receiving spouse, amount or formula, and transfer route. An IRA transfer needs a decree or an instrument incident to one; an RRSP transfer can use a written separation agreement. Have counsel obtain any US order a plan requires.
5. Obtain acceptance before execution. For an employer plan, obtain the QDRO determination. Complete custodian forms and withholding documentation.
6. Transfer directly and reconcile. Keep confirmations, slips, basis records and currency conversions; check both returns and foreign-account reporting.

State family law and provincial property-division requirements need separate legal advice.

Example

These are illustrative amounts in US dollars, not a tax estimate. A former spouse aged 45 receives a US$40,000 award from a traditional 401(k), with no after-tax contributions.

If the plan pays US$40,000 directly to that spouse under a valid QDRO, the payment is generally taxable in the US, the QDRO exception can remove the 10% additional early-distribution tax, and a US citizen or resident has 20% (US$8,000) withheld as a prepayment. If the award is instead directly rolled into a traditional IRA, current US income tax can be deferred. A later US$10,000 withdrawal from that IRA no longer has the QDRO exception, so without another exception the additional tax would generally be US$1,000, plus ordinary income tax.

If the former spouse lives in Canada and is not a US citizen or green card holder, a cash payment is generally withheld at 30% (US$12,000), because the treaty's 15% cap covers only periodic payments, and Canada also generally taxes the gross amount in Canadian dollars. How Canada treats a direct rollover into an IRA is not settled by the sources reviewed.

Different for you?

• One spouse lives abroad, has US citizenship, or will receive an RRSP division under a US order: arrange cross-border tax review before signing. Bring the draft agreement, statements, residence and citizenship history, and proposed transfer instructions.
• You are common-law partners, or separated but not divorced: Canada's transfer rule covers both. The US IRA and QDRO rules speak of a spouse or former spouse and a decree, and the IRS treats a relationship not called a marriage under state or foreign law as unmarried (Publication 504), so do not assume them. Ask for cross-border tax review before moving a US account.
• You hold a US green card and live in Canada: you may be a resident of both countries. The treaty's tie-breaker (Article IV(2)) picks one, starting with permanent home, and the US treats a person who claims Canadian residence under it as a nonresident alien (W-8BEN instructions). Ask for cross-border tax review before choosing Form W-9 or W-8BEN.
• You hold, or will receive, a US retirement account while living in Canada: see US retirement accounts in Canada.
• You need the ongoing US treatment of Canadian registered accounts: see Canadian registered accounts on a US return.
• You are a US citizen living in Canada: see Americans living in Canada.
• The agreement includes spousal or child support: those payments have separate rules in support across the border.
• Your spouse is a US nonresident and you are considering a joint return: see married to a nonresident.