What Are My Options for my 401(k), 403(b), or 457 when moving to Canada?

Moving to Canada involves a lot of planning, and your hard-earned retirement savings shouldn’t be left behind. This guide breaks down what you can do with your U.S. employer-sponsored retirement plans (401(k), 403(b), and 457) to make the most of them, before you settle into your new home in Canada.

Understanding Your 401(k), 403(b), or 457 Plans

• 401(k): Offered by for-profit companies, this plan allows employees to contribute pre-tax income, which grows tax-deferred until withdrawal. Somewhat like a Group RRSP in Canada, it is typically the most popular retirement savings plan for most individuals employed in the U.S.
• 403(b): Like a 401(k), this plan is for employees of non-profit organizations and public schools.  If you are or were a teacher, professor, nurse or physician with a school, university or hospital, this is the type of employer-sponsored plan that you likely participated in.
• 457: This plan is for employees of state and local governments and certain non-profit entities, such as hospitals or charities.  It is also often known as a deferred compensation plan.

Options for Your 401(k), 403(b), or 457 Plans:

1.  Keep it as is
   • Pros:
     • This option is simple as it requires no immediate action. Your investments will continue to benefit from tax-deferred growth in the U.S., and you may remain eligible for continued employer contributions if you’re moving to Canada for work on behalf of the same employer in the U.S. and continue to be on a U.S. payroll.
   • Cons:
     • Compared to a self-directed or managed IRA, you would have limited investment options if you chose to leave the plans with your previous employer’s plan sponsor. If you are now living in Canada, you might have difficulty managing your U.S. retirement account from Canada.  Securities regulatory restrictions may be imposed on your account since you are no longer physically a resident of the U.S. – or if you become a U.S. non-resident for income tax purposes. This option also offers less flexibility for tax and estate planning integration.

2. Roll it to an IRA
   • Pros:
     • An IRA can provide a broader range of investment options, and you’ll have more control over your investment choices. Continuing to have your retirement account managed by qualified cross-border advisors licensed and registered in Canada and the U.S. can add significant value as part of your financial planning and retirement goals. They understand the financial, tax, and estate planning issues of both countries and how to help you successfully navigate them, regardless of whether you retire in Canada or the United States.
   • Cons:
     • The rollover must be verified with the custodian. If you continue to be employed by your original U.S. employer, you may miss out on future employer contributions.

3. Take a Lump Sum Payment
   • Pros:
     • Flexibility to invest or use the after-tax money as you wish.
   • Cons:
     • This option has significant tax implications, including immediate taxation on the entire amount in both the U.S. and Canada.  If you are under age 59 ½, you could also have a 10% early withdrawal penalty. You will additionally lose out on future tax-deferred growth. However, moving these funds to a Roth IRA might be worth reviewing as a strategy before you leave the U.S., particularly if you are considering a move to Canada.

4. Convert your 401(k), 403(b), or 457 Plan to a Roth IRA
   • Pros:
     • Roth IRAs offer tax-free growth and tax-free withdrawals in retirement, which can be a significant advantage in Canada’s higher tax environment. By converting before you leave the U.S., you effectively pre-pay taxes at potentially lower U.S. rates. The flexibility of no required minimum distributions (RMDs) allows for continued flexibility and tax-free growth. The financial advisors at Cardinal Point can provide the appropriate analysis to determine if this option would make sense for you.
   • Cons:
     • Like taking a lump sum distribution from your retirement plan, conversions trigger an immediate tax bill on the converted amount. Furthermore, if you’re under age 59 ½, you’ll need to wait five years before withdrawing any earnings from the Roth IRA without incurring penalties. And unlike the 401(k) and 457, to be eligible for a 403(b) conversion, you must have either left your employer or reached age 59 ½.

We went into more depth on the Roth IRA conversion in a previous blog post that you will find here.

Expert Guidance for Informed Decisions

Navigating the complexities of cross-border retirement planning requires careful consideration. A qualified financial advisor with cross-border expertise can help you evaluate your options and make the most suitable choices based on your unique circumstances and personal goals. They can also assist with managing your U.S. retirement accounts while you reside in Canada.

Comprehensive Cross-Border Financial Planning

Beyond your 401(k), 403(b), 457 or any other cross-border retirement plan, take advantage of the chance to integrate your U.S. and Canadian assets, such as IRAs, Social Security, CPP, and OAS. That way you can create a seamless retirement income strategy.

A knowledgeable tax and financial advisor experienced in cross-border planning can help you optimize your tax efficiency, manage distributions effectively, and navigate the complexities of both U.S. and Canadian tax regulations.

Disclosure

This article is for informational purposes only. Please do not use it as financial or tax advice, as your particular situation could necessitate different advice. But whatever your situation, it is essential to remember to consult with a qualified cross-border professional before making any decisions regarding your retirement.

Ready to take the next step?
Contact Cardinal Point Wealth Management today to discuss your cross-border financial needs.