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I might want to move the money in my 401k from US to Canada. I do not work with my previous employer anymore, but now I am self-employed. Can I do this without incurring penalties?

  • this question isn't 100% clear... are you still a citizen of the original country? What country are you in now? What country did you start in? Are you still employed by the same company?... If the answer is yes to that last question, I would ask the relevant department within your company. – zpesk Aug 5 '10 at 2:29
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    The 401k is in US. I am now in Canada. – txwikinger Aug 5 '10 at 13:58
  • are you still with the same employer? – zpesk Aug 5 '10 at 23:12
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    No, I am self-employed at the moment – txwikinger Aug 5 '10 at 23:34
  • @txwikinger It would be great if you could edit your feedback into the original question. Not everyone will read the comments. – Alex B Aug 9 '10 at 18:53
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I doubt that there is an arrangement with any country that would allow you to transfer money out of a 401(k) and roll it over to another country that isn't governed by US Tax Laws without taking a distribution. The US government won't let you pull out like that without taking its cut.

There may be, but I'd be surprised. Check around in the appropriate venues.

If you're making a distribution that incurs penalties, then that's what you're doing. If you can do so without incurring penalties, then great for you, just deposit into the vehicle of your choice in your country.

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Transfers can be made from U.S. pension plans to Canadian RRSPs, if the following conditions are met:

  • You must have been a resident of the U.S. when the contributions to the plan were made;
  • The withdrawal must be a lump sum payment; and
  • The withdrawal must be taxable in the U.S.

Way more details here: http://www.howlandtax.com/answers/05Sept21.htm

And googling 'transfer 401k to rrsp' yields much fruit.

  • That's a very good article link; thanks! I'd make one minor correction to the article - it suggests rolling the 401(k) over to an IRA as an intermediate step. Such rollovers should always be done directly. Most financial companies can handle direct rollovers, which are never subject to the 20% tax withholding. I don't advise 401(k)-to-RRSP transfers in general (see my answer), but if such transfer is to be made, eliminating the 20% withholding will at least save the beneficiary some money. – Burnsstein Jan 2 '11 at 12:19
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There are two significant drawbacks to this type of transfer. They were the reasons why I kept my American 401(k) as-is and started funding my Canadian RRSP from zero balance.

1. Taxes - a large chunk of your 401(k) will be lost to taxes. There is probably no way to transfer the funds without making a 401(k)/IRA withdrawal, which will incur the US federal tax and the 10% early-withdrawal penalty. When the money went into the 401(k), you got a tax deduction in the US and the tax break is supposed be repaid later when you make a withdrawal (that's basically how tax deferral works). It's unlikely that any country will let you take a deduction first and send the payback to a foreign country. The withdrawal amount may also be taxable in Canada (Canadians generally pay taxes on their global income and that includes pensions and distributions from foreign retirement plans). Foreign tax credit will apply of course, to eliminate double taxation, but it's of little help if your marginal Canadian tax rate is higher than your average US tax rate.

2. Expenses. Your RRSP will have to be invested in something and mutual fund management expenses are generally higher in Canada than in the US. For example, my employer-sponsored RRSP has a Standard & Poor's stock index fund that charges 1.5% and that is considered low-cost. It also offers a number of managed funds with expenses in excess of 2% that I simply ignore. You can probably invest your American 401(k)/IRA in mutual funds more efficiently.

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hello – I am a natural born US citizen; I have worked 35+ years in the United States; I have a 401(k), IRA, Social Security benefits. I have researched the ex-patriot possibilities for several years. I've consulted both accountants and tax attorneys.

The long answer is: hire tax consultants/attorneys to try to shelter what assets you can. 401(k), IRA, and Social Security benefits are all taxable worldwide to US citizens. unless you become the citizen of your new country of residence, these taxes are unavoidable. since all of the above assets are considered "pretax" to the US government, they are all taxable on distribution whether slowly or in lump sum.

the short answer is: "Hotel California"… "Relax, said the watchman – we are programmed to receive. You can check out any time, but you can never leave…"

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