401k options after leaving the USA

[shaela]

Thanks in advance for any advice you can give

I worked for 18 months in my employer's US office, on a J-1. While there, my employer paid me in the US, so they were not making CPP contribution - and since I was J-1, there were no Social Security contributions either. My Canadian financial advisor recommended that I sign onto the employer's 401(k) plan to take advantage of the 25% contribution they make once the employee reaches five years of service. The "never give up free money" principle.

In 2008, I moved back to the Canadian branch, and left my 401(k) behind as I had not yet reached the five year mark. I was recently let go from the company, just after reaching my five year service mark.

Now, I am puzzled regarding what to do with the investment. It's only about $2000 - not enough to keep in the plan, according to the plan administrator. My options for putting it into an RRSP in Canada seem to be to roll it over first into an IRA (apparently the best approach, but difficult since I am no longer in the US), or simply cash it out and suffer the consequences. Most posts I've seen here refer to a large amount of money. Since I am dealing with so little money, does that alter anything? Will I still have to file US taxes if I withdraw in 2009, even though I did not work in the US during 2009?

Thanks, I appreciate your advice!

[Steven]

You can just leave it where it is, provided whomever is holding the 401(k) is okay with that, you have to declare it with the CRA though. You have to phone them up to declare it, so they can explain the legalities of it to you at that point.

Given that it's such a small amount though you may be better off just taking it out and paying the income tax.

[skoper]

Can all of the funds in the IRA account be transferred into an RRSP regardless of RRSP contribution room at the time of departure?

[Steven]

They don't have to be transferred, by treaty the US recognizes RRSPs and Canada recognizes IRAs, but you must declare them to the relevant agency. 8891 is used in the US, the CRA doesn't appear to have an equivalent form, they have some cryptic information about phoning them in the T1 general guide.

[agnelson]

Any procedure to transfer 401(K)/IRA to RRSP involves the payemnt of tax to IRS at the time of transfer. There is an elaborate way of getting credit for that tax on your Cdn return, but as steven says there is no need to do this.

In fact, the best way of handling 401(K)/IRA now that Roth rules are clear in the new treaty is to roll everything into ROTH before leaving, paying the one-time US tax, and then having tax-free roth forever.

Once you've left however, the best is to just leave 401(k)/IRA it until you retire.

There is no reporting mechanism to CRA for any pension in US. The only requirement to notify CRA is if you transfer funds from IRA to a Roth while resident in canada, as this is a taxable event in both countries.

[skoper]

Hi, I'm still a bit confused.
"paying the one-time US tax, and then having tax-free roth forever"
Are you saying I still maintain a roth in the US, even after I return to Canada? Even though I have moved back to Canada, does the pre-59 1/2 age withdrawal still apply to me?
"Once you've left however, the best is to just leave 401(k)/IRA it until you retire"
Again, this is possible still when I return to Canada and no longer have any connection to the US?

Ultimately, I am looking to simplify my finances upon my return to Canada. Ideally, I would not want to maintain any accounts in the US; I was hoping to somehow "transfer" the 401K/IRA accounts to Canada. I am 30 years old and will be mid 30's when I return to Canada. I do not want to hold funds in US accounts for another 20-25 years waiting for retirement. However, my main objective is tax efficiency. Perhaps I should forego the whole 401k, as my employer is not currently matching any contributions.

[agnelson]

Yes, you can keep your US reirement funds in US after you leave. (after all, don't most of ud have RRSPs although we've left canada?)

Any withdrawal (a transfer to canada is a withdrawal for irs) will at a minimum cost you the 10% penalty, and you need to have sufficient other Cdn income for the whole ammount of the 401(k) to take credit for any US tax you pay, so its best to leave it alone once you've left US.

BEFORE you leave US, or whie you are still there, the focus should be on Roth and Roth 401(K), and on finding a US brokerage who will keep you accounts.

But having no roth and no 401(k) is no tax efficiency at all.

[Steven]

There is no reporting mechanism to CRA for any pension in US. The only requirement to notify CRA is if you transfer funds from IRA to a Roth while resident in canada, as this is a taxable event in both countries.

The T1 guide contains this vague bit of information:

United States individual retirement account (IRA) –
If, during 2008, you received amounts from an IRA or
converted the IRA to a “Roth” IRA, contact us.