401(k) and IRA in Canada: Tax and RRSP Transfers

Does Canada tax my 401(k) or IRA while the money stays in it?

Canada generally does not tax growth inside a traditional IRA each year. An employer 401(k) also commonly avoids current Canadian tax, but its terms and employer contributions matter; a plan with no employer contribution may need separate analysis. The US generally defers tax on traditional IRA earnings until distribution. CRA: Roth IRA folio, paragraphs 1.25–1.28; IRS: Publication 590-A.

The first two rows do not mean a later withdrawal is tax-free. A SEP or SIMPLE IRA needs separate Canadian plan classification. A 401(k) plan with no employer contributions to any employee's account (your own salary deferrals do not count) may need an election, filed the same way and by the same deadline as the Roth election below, to defer Canadian tax on growth. CRA: pension benefits folio, paragraphs 3.43–3.45; CRA: Roth IRA folio, paragraphs 1.24–1.28.

Is my Roth IRA still tax-free in Canada, and how do I file the treaty election?

File a one-time, irrevocable election for each Roth IRA to defer Canadian tax on undistributed growth. Separately, a distribution is exempt in Canada to the extent it would be tax-free for a US resident and that part of the Roth IRA still qualifies as a treaty pension. Without the election, Canada generally taxes income as it accrues; the result depends on the account's legal form. Under US rules, a qualified Roth IRA withdrawal requires five tax years from the first Roth IRA contribution and payment after age 59½, death, disability, or a qualifying first-home purchase. A return of regular contributions can also be tax-free; early earnings may be taxable. CRA: Roth IRA folio, paragraphs 1.3–1.14; IRS: Publication 590-B.

Sign and file an election letter covering each Roth IRA by your Canadian filing-due date for the year you became resident: April 30 of the next year, or June 15 if you or your cohabiting spouse or common-law partner carried on a business that year (Income Tax Act, paragraph 150(1)(d)). One letter may list several accounts. It gives your identifiers, the trustee and account details, the establishment and residency dates, the balance on the later of your residency date and December 31, 2008, the amount and date of any first Canadian contribution, and your election under Article XVIII(7). Mail it to the CRA Competent Authority Services Division at the address in the CRA's election instructions. Keep a copy and the account records. If the deadline passed, contact that division about a late election; acceptance is not automatic. A missed election or Canadian contribution may also change foreign-property reporting.

A contribution while resident, including a conversion from a traditional IRA or 401(k), ends treaty protection for later growth. The balance before that contribution can retain protection. A rollover from another Roth IRA or Roth 401(k) is treated differently. CRA: Roth IRA folio, paragraphs 1.12–1.20.

How are 401(k) and IRA withdrawals taxed in each country?

Canada generally taxes a traditional IRA or pre-tax 401(k) payment when received, to the extent taxable under the applicable Canadian rule and treaty. The US may also tax the US-source payment. A 401(k) can contain pre-tax and designated Roth balances: a qualified Roth 401(k) payment is excluded from US income and exempt in Canada to that extent. Its US qualified-payment test requires five tax years in the plan and payment after age 59½, death, or disability. A traditional IRA can contain nondeductible contributions, and a 401(k) can contain after-tax amounts, so the gross payment may differ from the taxable amount. Keep basis records. CRA: pension benefits folio, paragraph 3.44; IRS: designated Roth accounts.

For a person who is not a US citizen or US tax resident, the US source and tax method depend on the payment. A pension's employer contribution component follows where the related work was done, while its earnings component has separate sourcing. Pension amounts attributable to US services performed after 1986 are effectively connected income to the extent attributable to contributions and can be taxed at graduated rates on a US return, even if no US work is done in the withdrawal year. Other US-source amounts may face withholding on the gross taxable payment. IRS: Publication 519, pensions and effectively connected income; IRS: Publication 515, pension sourcing.

US citizens and people still treated as US residents generally report the distribution on a US return as well as a Canadian return. Their filing and credit rules differ from the nonresident withholding rules below; see Americans living in Canada.

How much US tax is withheld on a withdrawal, and can I get some back?

First check your US tax status: citizens and US tax residents follow US-person rules; other Canadian residents may use nonresident rules. For a US nonresident, ask the payer whether the payment qualifies as periodic under the treaty. A qualifying documented payment can have a US tax cap of 15% of the gross amount; a lump sum cannot. Without treaty relief or another exception, statutory withholding on US-source pension income is 30%. Withholding is a collection method; the final tax can differ. Canada–US treaty, Article XVIII(2); IRS: Publication 515.

If you are a US nonresident and the payment is not effectively connected income, give the payer Form W-8BEN before payment to document foreign status and claim an available treaty rate. For an effectively connected part, ask the payer whether it needs Form W-8ECI. If too much US tax was withheld, a nonresident may file Form 1040-NR for a refund, attaching Form 1042-S as proof. A Canadian foreign tax credit may relieve eligible final US income tax, but it is limited by Canadian tax on the foreign income; withholding alone is not the amount to claim as final tax. IRS: Form W-8BEN instructions; IRS: Form 1040-NR instructions; CRA: foreign tax credit folio. See Foreign income on a Canadian return for the credit calculation.

Will I pay the US early withdrawal tax?

A taxable IRA or 401(k) withdrawal before age 59½ may carry an additional US tax of 10% unless an exception applies. Moving to Canada or depositing the proceeds into an RRSP is not itself an exception. Death and disability are examples of exceptions; others differ between IRAs and employer plans. IRS: early distribution exceptions.

A Roth IRA withdrawal can also trigger this tax on earnings or on taxable conversion and rollover amounts taken within their separate five-year periods, even when that principal is not taxed again as income. IRS: Publication 590-B.

This additional tax is separate from regular US income tax. Do not assume it creates a Canadian foreign tax credit: the CRA's credit requires an income or profits tax, and the treatment of an additional distribution tax needs review. CRA: foreign tax credit folio, paragraphs 1.5–1.7.

Can I transfer my 401(k) or IRA to an RRSP?

Some taxable lump sums can be contributed to your own RRSP and offset by a Canadian deduction under paragraph 60(j), without using ordinary RRSP deduction room. This is generally an indirect transfer: the US plan pays you, then you contribute the eligible amount to an RRSP in the payment year or within 60 days after year-end and designate it on your Canadian return. It does not make the US distribution tax-free. Income Tax Act, paragraph 60(j); CRA: qualifying IRA lump sums.

US withholding and possibly the early withdrawal tax can still apply. If withholding leaves too little cash to make the full RRSP contribution, you need other funds to contribute the gross eligible amount. The RRSP deduction does not reduce the US income used in the Canadian foreign tax credit limit, so eligible final US tax may still reduce Canadian tax on your other income; with little other income, little of it can be used. Check both countries' results before requesting a lump sum. IRS: Publication 515; Income Tax Act, subsection 4(3); CRA: foreign tax credit folio.

What happens if I convert a traditional IRA to a Roth IRA while living in Canada?

A traditional-to-Roth conversion generally brings the US-taxable traditional IRA amount into US income for the conversion year. Canada generally includes that amount even when the money moves directly between accounts. The conversion also counts as a Canadian contribution to the Roth IRA, ending treaty protection for later growth. Contact the CRA about Canadian reporting. IRS: Publication 590-A; CRA: pension benefits folio, paragraph 3.44; CRA: Roth IRA folio, paragraph 1.14.

A properly completed US conversion can avoid the early withdrawal tax on the converted amount, but money withheld or taken out rather than converted can have a different result. Review the proposed conversion and each Roth account's pre-conversion balance first. IRS: Publication 590-A.

Can I keep contributing after I move to Canada?

US wages and qualifying net self-employment earnings can support an IRA contribution; rent, interest, dividends, pensions, and income excluded on the US return generally cannot. Other US eligibility rules still apply. A new Roth IRA contribution while Canadian resident can end treaty protection for later Roth growth, even when US law allows it. US eligibility alone does not make a contribution deductible in Canada. IRS: Publication 590-A; CRA: Roth IRA folio.

Article XVIII(8) and (10) set conditions for relief on continuing US employer-plan contributions, including where the work is performed and whether the plan qualifies. The treaty excludes an individual arrangement without employer involvement from its qualifying-plan definition. Canada–US treaty, Article XVIII(8)–(15).

What if I inherited an IRA or 401(k)?

If you inherit a US IRA or 401(k), taxable payments can still face US and Canadian tax. Distributions after the owner's death generally avoid the US early withdrawal tax, but beneficiary rules may force payments: when the owner died after 2019, many non-spouse beneficiaries must empty the account by the end of the 10th year after the year of death, some with yearly payments before then. A non-spouse beneficiary cannot treat an inherited IRA as their own; a surviving spouse has more choices. IRS: Publication 590-B; IRS: early distribution exceptions.

Do not assume an inherited payment qualifies for the Canadian RRSP transfer deduction. The contribution or work-history tests in section 60 and 60.01 still need to be met, and the beneficiary's rights depend on the plan and relationship to the deceased. Gather the beneficiary designation, date of death, plan documents and any basis records before taking payment. Income Tax Act, section 60; section 60.01.

How do I report a US pension or IRA withdrawal on my Canadian return?

Report gross foreign pension income in Canadian dollars, without subtracting US tax withheld. The CRA generally directs foreign pension income to line 11500, while a lump sum may belong on line 13000; IRA payments and conversions warrant confirmation with the CRA. A treaty-exempt part may be deducted on line 25600. CRA: line 11500.

Use the exchange rate for the payment date, or an appropriate annual average for regular payments, as the CRA instructs. Keep the US Form 1099-R or 1042-S, the payment and withholding records, IRA basis documents, RRSP receipt, and your Canadian residency date. For an eligible paragraph 60(j) transfer, designate the contribution by completing Schedule 7 and entering the transfer on its line 24640 (Part C), then claim the RRSP deduction on line 20800. Foreign tax credit relief is a separate calculation. Quebec residents claiming a provincial foreign tax credit use Form TP-772-V. CRA: line 11500; CRA: line 20800; CRA: Schedule 7; Revenu Québec: TP-772-V.

US Social Security follows a different treaty rule; see Americans living in Canada.

Example

Illustrative only; all amounts are US dollars unless marked otherwise. Assume a Canadian resident who is a US nonresident for tax purposes receives a US$100,000 nonperiodic traditional IRA payment. Assume the full payment is taxable, qualifies for the Canadian RRSP transfer deduction, and is subject to 30% US withholding. The payer withholds US$30,000, so US$70,000 arrives. The person contributes the Canadian-dollar equivalent of US$100,000 to their own RRSP before the applicable deadline, using other cash to replace the withheld amount, and designates the eligible transfer on the Canadian return.

The Canadian deduction can offset the included IRA payment, but it does not refund the US$30,000. Final US tax requires its own calculation. The RRSP deduction does not shrink the US income in the Canadian foreign tax credit limit, so eligible final US tax may offset Canadian tax on the person's other income; with no other income, there is little Canadian tax to offset. If the person is under age 59½, the US early withdrawal tax must also be checked.

Different for you?

• You missed a Roth election or made a contribution after moving: the account's Canadian treatment needs reconstruction from the residency date and transaction history. Get cross-border tax help.
• You plan a lump sum, Roth conversion or inherited-plan withdrawal: check US tax, Canadian eligibility and cash needed before instructing the payer. Get cross-border tax help.
• You are moving to Canada now: see Moving from the US to Canada for the wider arrival checklist.
• You are a US citizen with Canadian registered accounts: see Canadian registered accounts on a US return.
• You are giving up US citizenship or a green card: see US exit tax before choosing a retirement-account transaction.
• You need to calculate the Canadian foreign tax credit: see Foreign income on a Canadian return.