When transferring pension assets, cross-border clients need to 'take deep breaths'

Advisor walks through complexities in transferring 401(k) and IRA assets into RRSPs

When transferring pension assets, cross-border clients need to 'take deep breaths'

For the average Canadian, how to transfer pension assets from the US to Canada probably isn’t high up on their list of retirement-planning questions. That’s probably why at one cross-border specialist advisor’s practice, it’s a significant source of client stress.

“We have quite a few clients who’ve been Canadian citizens, and then got an incredible job down in the US for a period of five years and maybe longer,” says Tanya Wilson, a senior wealth advisor and founder of the Gold Seal Group at Wellington-Altus Private Wealth. “But they have alternate plans to come back to Canada, or maybe they’re just excited to retire here.”

Under pressure to move pension assets

At Wilson’s practice, conversations around moving assets out of 401(k) or IRA plans commonly start on a note of panic. One common scenario occurs with clients who update their residence at the US-based institution they worked with and are then advised to move their assets out immediately.

“The client starts getting these aggressive letters and phone calls,” Wilson says. “Some clients come to us asking what they should do. It’s also common for them to mention it to their bank, who’ll often say it’s a simple matter of transferring those assets into their RRSP in Canada.”

Many clients opt for the straightforward 401(k) or IRA asset transfer into an RRSP, Wilson says, only to later find out that it’s anything but. The decision to make that transfer, she explains, can be fraught with complications and tax considerations.

“When we meet with people in that situation, they’re maybe feeling under pressure from the US institution on one side, and want to jump at the solution offered up by the Canadian institution on the other,” Wilson says. “At that point, we can say ‘Stop everything. Let’s take some deep breaths and see what we’re able to do.’”

To give people some much-needed breathing room, Wilson offers clients the option to roll over their 401(k) or IRA assets into an IRA with their firm’s affiliate Wellington-Altus USA, which can provide advisory services in the US. From there, her team of trusted advisors can confer with the client’s cross-border accountant to assess the situation and determine whether it makes more sense to transfer those assets into their RRSP in Canada, delay or keep it down in the US through a cross-border advisor, or to never transfer it out.

The IRA-RRSP tax rollover: just the tip of the iceberg

To illustrate the potential complexity in moving retirement assets cross-border, Wilson explained the process for transferring assets from an IRA in the US into a Canadian RRSP.

The process starts with liquidating the IRA, resulting in a withholding tax generally amounting to 20%, though that can vary depending on the client’s situation; that may be counted under foreign tax credits in Canada, which means it’s recoverable for tax purposes. For a client who’s under 59 and a half years old at the time they withdraw those retirement assets, there’s an extra 10% penalty withheld that’s usually not recoverable.

“You’re essentially selling your IRA and transferring the money you get from that process into your RRSP in Canada,” she says. “To get the full offset in the income inclusion between Canada in the US, you need to put the gross amount into your RRSP. You’ll need to put together an amount equivalent to the 20% to 30% tax withheld, and put that in your RRSP at your Canadian institution. … If you're not going to have any income in Canada, then you'll have no way to use that foreign tax credit.”

To avoid incurring an additional tax liability in Canada once they start withdrawing from their RRSP, Wilson says qualified clients have to go through a special process that would count the assets coming in from the foreign pension as income but enable the client to fully deduct the foreign pension assets as they transfer them into their RRSP.

To be eligible for this RRSP tax rollover process, which is defined under Paragraph 60(j) of the Canadian Income Tax Act, the client must fulfill certain requirements. According to Canadian tax lawyer David Rottfleisch with Rotfleisch & Samulovitch P.C.:

“Paragraph 60(j) effectively allows a Canadian tax resident to cash out a foreign pension and transfer the proceeds to an RRSP on a tax-deferred basis. The taxpayer still reports the foreign pension as income, but, if the taxpayer satisfies the conditions of subparagraphs 60(j)(i), 60(j)(iii), and 60(j)(iv), the taxpayer may fully deduct the foreign pension by transferring it to a registered retirement savings plan.”

As Rottfleisch explains, the deduction under Paragraph 60(j) doesn’t depend on a taxpayer’s RRSP contribution room, and it doesn’t affect the client’s deduction limit for RRSP contributions in the same or future tax years. That means the foreign-pension proceeds are essentially rolled into the RRSP on a tax-neutral basis.

“All these nuances come into play, which is why I generally advise stopping the process and moving the assets to Wellington-Altus USA,” Wilson says. “It’s not as if transferring retirement assets from the US to Canada is a bad thing necessarily, but every situation is unique and complex.

“I believe in making calm and informed financial decisions. And when you’re put in a situation that’s confusing and feels like there’s a deadline attached to it, that’s when decisions are made in haste,” Wilson says. “That’s why it’s so important to have a team of financial professionals who are always there to understand your situation, work with you, and help you make the right decision.”