American residents moving to Canada may have already contributed to one or more US retirement accounts, including a Traditional Individual Retirement Arrangement (“IRA”), a Roth IRA, a 401(k), a 403(b), and/or a 457(b).
Each of these retirement accounts comes with its own set of benefits for US residents. But do these accounts have the same benefits for Canadian residents? Often, Americans moving to Canada want to know whether they should retain these accounts after their move. The answer varies with each unique situation.
IRAs and 401(k), 403(b), and 457(b) accounts all receive tax-deferral treatment in the US; fortunately, Americans who move to Canada continue to enjoy tax-deferral on their IRA, 401(k), 403(b), and 457(b) accounts – as long as they file the proper election with the CRA.
Keeping your retirement accounts open post-move is generally the simplest method of handling them. However, when withdrawals are made down the line, they will be subject to higher Canadian tax rates as both the CRA and IRS will tax this income. Foreign tax credits are available from the CRA, but they may not fully offset the cost of US tax.
To avoid paying Canadian tax rates on IRA, 401(k), 403(b) and 457(b) withdrawals as a retiree in Canada, it may be advantageous to convert these accounts to Roth IRAs prior to moving north of the border.
Another tax-planning option for non-US persons is to convert retirement accounts to a Registered Retirement Savings Plan (“RRSP”) after arriving in Canada. RRSPs are pre-tax, tax-deferred savings accounts for Canadians. Converting US retirement accounts to an RRSP does not work well for US citizens or Green Card holders who retain their US residency status post-move, however; also, this strategy can be complex to execute.
Note that RRSP withdrawals are taxed more favourably for US residents than Canadian ones. Therefore, American residents who own RRSPs from previously living in Canada may want to withdraw their RRSPs as American residents, prior to returning to Canada.
Ultimately, determining how to handle your US retirement accounts when moving to Canada is a complex process that involves analyzing one’s total financial picture.