I'm moving to Canada with a 401(k) — leave it, cash out, or roll it into an RRSP?
All three are possible, and the tax bills differ enormously. Leaving it alone is usually cheapest if you're under 59½. Cashing out triggers 30% US withholding (15% with a treaty claim via W-8BEN) plus a 10% early-withdrawal penalty if you're under 59½ — and the penalty is never creditable. A lump-sum transfer to an RRSP can work under strict conditions in ITA 60(j), but the conditions are genuinely strict.
The three options compared
| Leave it in the US | Cash out | Lump-sum transfer to RRSP | |
|---|---|---|---|
| US tax | Deferred until withdrawal | 30% withholding (15% treaty rate with W-8BEN); 10% penalty if under 59½ | 15% treaty withholding on the lump sum |
| Canadian tax | Growth may be taxable annually in Canada — get advice; withdrawals taxable in Canada | Full amount taxable in Canada in the year received | Included in income, then deducted under 60(j) if conditions met |
| Best for | Under 59½, long horizon | Need the cash now (expensive) | Large balances + high Canadian income in the arrival year |
The 60(j) transfer — the strict version
A lump-sum payment from a foreign pension plan can be transferred directly to your RRSP and deducted, but all of this must hold: you are a Canadian resident, the amount is a qualifying lump sum from the foreign plan, it is transferred directly (not via your hands), it is included in your Canadian income first, and you need enough Canadian income to absorb the deduction. Miss one condition and the deduction fails while the income stays taxable. This is professional-advice territory.
The withholding mechanics
File W-8BEN with the plan administrator to claim the 15% treaty rate instead of 30%. The 10% early-withdrawal penalty (under 59½, with limited exceptions like separation at 55+) is a US additional tax — Canada won't give you a foreign tax credit for it.
Frequently asked questions
I'm 45 with $200,000 in a 401(k). What's the cheapest path?
Almost always: leave it. Cashing out at 45 means ~15% withholding + 10% penalty + full Canadian taxation — roughly a third gone before you start.
Can I roll it into an IRA first, then move it?
The IRA-to-RRSP path faces the same 60(j) conditions. The analysis doesn't change much; the paperwork does.
What about a Roth 401(k)?
Different rules — see the Roth IRA articles. Don't commingle the analysis.
Sources
- https://bbs.fcgvisa.com/t/401k-rrsp/52700
- https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions (IRS, 10% penalty)
- Income Tax Act, s. 60(j); Canada-US Treaty, Article XVIII