Contributions You Can Deduct For 2021
For 2021, you can deduct contributions you made to your or your spouse’s or common-law partner’s RRSP or SPP from January 1, 1991 to March 1, 2022.
You can also deduct contributions you made to your PRPP from January 1, 2013 to March 1, 2022. You can deduct these contributions if you did not deduct them for any other year, and if they are not more than your RRSP deduction limit for 2021. Even if you can no longer contribute to your RRSP in 2021 because of your age, you can deduct your unused RRSP, PRPP and SPP contributions up to your RRSP deduction limit.
The Home Buyer’s Plan and the Lifelong Learning Plan If you participate in the HBP or LLP, you may not be able to deduct, for any year, all or part of the contributions you made to your RRSP during the 89-day period just before you withdrew an amount under either of these plans. To determine the part of the contributions you made to your RRSP that you cannot deduct, go to Home buyers’ Plan or see Guide RC4112, Lifelong Learning Plan , or go to Lifelong Learning Plan , whichever applies.
Can I Transfer My 401 To An International Retirement Plan If I Move Abroad
Thinking about transferring your 401 to an international retirement plan? You might want to hold that thought. When you move abroad, it makes sense to get a job, rent a home, and open a bank account in your new country. While transferring your 401 to an international retirement plan may seem like a good idea, it comes with consequences that may make the cost outweigh the benefits.
Before you make any moves, you should get familiar with how international retirement plans are taxed, and what options you have for your 401 when you no longer live in the U.S.
Transfer Of A 401 To An Ira To An Rrsp
If your 401 plan isnt eligible for a rollover directly to an RRSP , it can be rolled into an IRA that qualifies for a transfer to an RRSP. Subsequent to this, the new IRA can be transferred to an RRSP on a tax-deferred basis provided the conditions required for a transfer from an IRA to an RRSP, as outlined above, are satisfied.
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Rolling Your Funds Over
Another way to lower your tax payment on a 401 withdrawal is to transfer the funds to another tax-advantaged account such as an individual retirement account . When you take a direct rollover from your 401 to an IRA, you will avoid the 10% early withdrawal penalty. To pull this off, youll need to open the IRA first and then fund it with the 401.
Like a 401, if you take a distribution from your IRA before you reach age 59½, “you will still incur a 10% tax penalty, but you have more flexibility in terms of exceptions for avoiding the penalty like unreimbursed medical expenses, first-time homebuyer, disability, etc.,” says Mark Hebner, founder, and president of Index Fund Advisors Inc., Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”
Rollovers From Simple Iras To Traditional Iras
A rollover from a Simple IRA to Traditional IRA occurs when a participant takes a distribution from a Simple IRA and deposits or rolls some or all of the amount distributed into a Traditional or SEP IRA. A rollover to a Traditional or SEP IRA from Simple IRA can only occur after a participant has completed two years of participation in the sponsoring employers Simple IRA plan. The two-year period begins on the date the first Simple IRA contribution is deposited into the participants Simple IRA. The standard IRA to IRA rollover rules regarding timing, same property, etc., that are described above equally apply to rollovers from Simple IRA to Traditional IRA rollovers.
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Similarities Between A Canadian Rrsp And 401k
A Canadian RRSP and a 401 plan are designed to build savings to help plan for retirement. They are government sponsored and have rules and contribution limits. All the money in a RRSP and 401 are pre-tax dollars unless it is a Roth 401 which is after-tax contributions. Holders have the benefit with both plans of tax-deferred growth and only pay tax when they withdraw funds. They both allow a diverse mix of investments such as stocks, bonds, mutual funds and GICs.
Chart 9 Amounts That You Have To Transfer Directly
- If you receive any of the types of amounts listed below , you have to include them in your income for the year you receive them and you cannot transfer them on a taxdeferred basis. Instead, if you want to transfer these amounts to another registered plan or fund and defer the tax, make sure you inform the payer to transfer them directly.
- If you transfer the amount to your RRSP, you must be 71 or younger at the end of the year in which you transfer the funds.
- You do not have to use the forms listed in this chart. The institution that transfers your amounts may use other types of documents to record the transfer. The institution has to provide you with confirmation of the details of the transfer.
| Type of property |
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Chapter 5 Amounts From An Rrsp Or A Rrif
If you have an RRSP or a RRIF, you probably have a certain amount of flexibility on the types of payments you can get from these plans.
Generally, an RRSP must mature by the last day of the year in which you turn 71. On maturity, the funds must be withdrawn, transferred to a RRIF, or used to purchase an annuity. There are no immediate tax implications when amounts are transferred to a RRIF or used to purchase an annuity. However, if you withdraw funds from your RRSP, tax will be withheld and the amount withdrawn has to be included in your income for the year it is withdrawn.
How Do I Rollover My 401k To Rrsp
Are you wondering if you could move your 401k investments in the United States to Canada? The answer is yes. However, you need to know the tax implications on both sides of the border before you make your decision, We are trying to outline here those tax implications.
Notes to Canadian Resident with US income and 401 Contribution
Subject to certain conditions, your contribution to 401 is deductible from your income in the United States and in Canada when you report your US income on your Canadian Tax return in the year in which you have contributed. However, the extent of the 401 deductions you claim on your Canadian tax return will reduce your RRSP contribution limit accordingly. Different rules apply to your IRA contribution and are not deductible on your Canadian tax return.
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Fixing Contribution Errors In Defined Contribution Registered Pension Plans
Budget 2021 proposes to provide more flexibility to plan administrators of DC RPP to correct for both under-contributions and over-contributions. The proposals would permit:
- certain types of errors to be corrected via additional contributions to an employees account under a DC RPP to compensate for an under contribution error made in any of the preceding five years, subject to a dollar limit and
- plan administrators to correct for pension over-contribution errors in respect of an employee for any of the five years prior to the year in which the excess amount is refunded to the employee or employer, as the case may be, who made the contribution
Additional contributions to correct for under-contributions would reduce the employees RRSP contribution room for the taxation year following the year in which the retroactive contribution is made. To the extent this results in negative RRSP room, it would only impact the employees contributions in future years. Refunds of over contributions would generally restore the employees RRSP contribution room for the taxation year in which the refund is made.
This measure would apply in respect of additional contributions made, and amounts of over-contributions refunded, in the 2021 and subsequent taxation years.
How Old Are You
If your client is 59½ or younger, theres typically a 10% early withdrawal penalty for both IRAs and 401s . Fortunately, CRA allows the 10% penalty to be claimed as a FTC on the Canadian return in addition to the 15% withholding. On a $100,000 plan, thats $75,000 net the client would also need to owe at least $25,000 in Canadian tax for the transfer to be tax-neutral.
If your client is 70½ or older, she must start withdrawing from the U.S. plan by April 1 of the year following the year the client reached that age. If youre comfortable with where the money is and how its being invested, its probably better to leave it tax-deferred as long as you can, says Altro. You can even withdraw the IRA at a slower pace than a RRIF the minimums are lower than they are in Canada.
If your client is 71 or older, she must convert her RRSP to a RRIF, and its no longer possible to contribute to the RRIF.
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Getting The Right Advice
Of course, nailing down the right option is a conversation youll need to have with a financial advisor. However, foreign financial advisors often cant do anything with assets back in the United States. Companies specialized in expatriate finances, such as Beacon Financial Education or Black Swan Capital, can point you in the right direction, and put you in contact with a network of advisors who know the United States inside out and have knowledge of the local market. We took a moment to interview Randy Landsman from Beacon:
Think of us as anything U.S., Beacons Randy Landsman told Expat Republic. Whether youre a U.S. taxpayer, a U.S. citizen, or someone with U.S. assets, call us up and see what your options might be. Every day were expanding, from Europe to Singapore to South Africa, so no matter where you are, we have someone local who can help you.
Summary Of Key Points:
- Have a pre-immigration consultation with a Cross-Border Accountant.
- Understand the 401 equivalents in Canada.
It is possible to transfer a rollover IRA into a Canadian RRSP, but this is often not the best solution for U.S. citizens because it likely results in double taxation. In addition, when an individual transfers an IRA to a RRSP, this causes withholding taxes in the US. It also means they have to top up the RRSP with funds from another source to fully offset the IRA income inclusion in Canada. If they dont have other sources to top up the RRSP, this room will be lost forever and the taxpayer will be taxed in Canada on the difference between the amount of the IRA and the amount contributed to the RRSP.
In addition, an IRA may be a superior vehicle because it allows an investor to name multiple non-spouse beneficiaries for tax deferral whereas, with the RRSP/RRIF, one can only name their spouse for tax deferral purposes. This means after the last surviving spouse passes, the RRSP/RRIF goes to the estate, and taxes must be paid by the estate at the deceased taxpayers marginal tax rate. These additional taxes paid in the year of passing on an RRSP/RRIF greatly reduce the funds an individual would leave to their beneficiaries. An IRA enables the beneficiaries to stretch the taxable income over a number of years and exclude the value from the deceaseds terminal tax return.
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How Beacon Financial Education Begin
After decades in the U.S. corporate world, Randy and long-time business partner Robert Rigby-Hall founded Beacon Global Group in 2012, with the mission to bring no-nonsense financial advice to expats and internationals of all stripes.
Theres not much provided from an unbiased standpoint out there, he told us. Most of it comes from newspapers that always report bad stuff, and people who sell products and slant their advice towards their own product line, even though the information may be accurate.
Randy Landsmans team at Beacon Financial Education can point you in the right direction, and put you in contact with advisors in youre country.
Is This Guide For You
Use this guide if you want information about registered pension plans , registered retirement savings plans , registered retirement income funds , specified pension plans , and pooled registered pension plans .
This guide has information which is not in the income tax package and which you may need to fill out your income tax and benefit return.
We have included definitions of some of the terms used in this guide in the Definitions section. You may want to read this section before you start.
La version française de ce guide est intitulée REER et autres régimes enregistrés pour la retraite.
Unless otherwise stated, all legislative references are to the Income Tax Act or, where appropriate, the Income Tax Regulations.
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Transferring Funds From 401 To Rrsp
Question
“I’m a Canadian citizen currently working in the US on a TN visa without residential ties to Canada. I have built up some cash in a 401k. I anticipate moving back to Canada in the middle of next year. I would like to access some of my 401k dollars to help make a downpayment on a house there. Should I transfer the 401k to an RRSP? Does my RRSP Contribution Limit apply? Should I consider borrowing from my 401k but otherwise leaving the money in the US?”
Answer
Thanks for the question. It’s an interesting problem. Let’s look at some of your options.
If you withdraw from your 401 you will pay a 10% penalty tax to the U.S. unless you meet certain conditions, such as being under financial hardship or over 55 and no longer a company employee. You would also face a 20% withholding to help cover additional tax owing for the year. Plus, if your employer made matching contributions to your plan and you leave the plan before becoming vested, you could lose the employer-portion of the value of the plan. All of the above make a straight withdrawal from your 401 unappealing, but you probably know that.
Your plan might have provisions to borrow money for a down payment on a house, which might be the way to go, but you should check with the plan administrator to find out what happens to the loan when you quit your job and move to Canada. I’m afraid I can’t advise you further on this approach as I don’t know enough about your plan.
The Us Government Will Want To Know What Canadian Assets You Own
As mentioned above, in addition to regular 1040 returns you will also be required to complete foreign financial account reporting forms to the US Treasury department. The US government likes to keep tight tabs on the assets of its Citizens. It accomplishes this objective by requiring taxpayers outside of the country to file FBAR forms.
Form 114 requires that a taxpayer disclosure the highest balance in all her foreign financial accounts. Form 114 and related instructions can be viewed here.
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Are You A Us Citizen Or A Us Person For Tax Purposes
If yes, your client will likely have a bigger tax bill from collapsing a retirement plan than someone whos not. But it depends.
While Canadian residents are only taxed 15% on 401 and IRA withdrawals, withdrawals for U.S. persons are taxed as ordinary income at their marginal rate, which is usually higher than 15%. So, a 60-year-old U.S. person in the 33% bracket would only net $67,000 when collapsing a $100,000 IRA. If he transferred his IRA to an RRSP, his FTC would be $33,000 and he would need to owe $33,000 in Canadian tax to be in a tax-neutral position. The larger the FTC, the more unlikely it is that the person has enough Canadian tax owing to offset the entire FTC.
In the Go Public case mentioned earlier, the couples bank overlooked the fact that the husband was a U.S. citizen. Which brings us to
Leave Your Assets Where They Are
If the plan allows, you can leave the assets in your former employers 401 plan, where they can continue to benefit from any tax-advantaged growth. Find out if you must maintain a minimum balance, and understand the plans fees, investment options, and other provisions, especially if you may need to access these funds at a later time.
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Keeping Track Of Your Rrsp Prpp And Spp Contributions Schedule 7
Use Schedule 7, RRSP, PRPP and SPP Unused Contributions, Transfers, and HBP or LLP Activities, to keep track of your RRSP, PRPP and SPP contributions.
If you made contributions to your RRSP, PRPP, or SPP, or your spouses or common law partners RRSP or SPP from March 2, 2021 to March 1, 2022, and you are not deducting the total contributions on your 2021 income tax and benefit return, attach a filled out Schedule 7 to your 2021 income tax and benefit return. If you have already filed your income tax and benefit return, fill out Schedule 7 and send it to your tax centre withyour RRSP, PRPP, or SPP receipts and a note that includes both your name and social insurance number.
Note
Only yourPRPP contributions are deductible on your income tax and benefit return. You cannot deduct any contributions made by your employer. Employer contributions must be reported separately on line 20810 of the income tax and benefit return.
You may not have to fill out Schedule 7. To find out, read the information at the top of the schedule. If you do have to fill it out, you will find information below about lines 1, 2, 3, 7, 8, 15, 18, and 24 to 28.
