For Canadian residents who commute across the border for work and contribute to a retirement plan with the employer in the United Sates, the form RC268: Employee contributions to a United States retirement plan – cross-border commuters can be used to deduct some of the retirement contributions (e.g., 401k plan).
You can deduct your contributions to your U.S. retirement plan on your Canadian income tax and benefit return if all of the following conditions are met:
1) the remuneration you received for the services you performed as an employee in the U.S. is taxable in the U.S.;
2) your employer is a resident of the U.S. or has a permanent establishment in the U.S.;
3) the contributions are attributable to the services you performed as an employee in the U.S., for which you received U.S. taxable remuneration and are made during the period you performed those services
The amount you can deduct can be no more than the amount of tax relief available in the U.S., and no more than your Canadian RRSP deduction room remaining after you deduct any RRSP contributions for the year.
A 401k plan is a benefit commonly offered by U.S. employers to ensure employees have dedicated retirement funds.
There are two types of 401(k) plans: traditional and Roth.
- Contributions to a traditional 401(k) (indicated by code D in Box 12 of the W-2) are tax-deferred and can be deducted on your Canadian tax return.
- The code AA shown in Box 12 of your W-2 indicates a contribution to a Roth 401(k). Unlike Traditional 401(k) contributions (which are pre-tax), Roth 401(k) contributions are included in income and are not tax deductible.
When deducting 401(k) plan on your Canadian tax return, the 401(k) plan has to added back to the U.S. income first and then can be deducted on the form RC268.
- Line 10400 on Canadian T1 = Foreign Exchange Rate*(W-2 Box 1 + W-2 Box 12 D)
- Line 20700 on Canadian T1 = Calculated on form RC268, W-2 Box 12 D, up to RRSP deduction room
Q & A
Question: I would like to know how to transfer 401k into RRSP.
Canadian ITA contains special provisions allowing Canadian residents to transfer 401k plan to an RRSP, without requiring RRSP contribution room.
To qualify for the transfer, certain conditions need to be met:
- The amount is transferred as a lump sum;
- The amount relates to services rendered by you, your spouse, or your former spouse during the period in which you were a non-resident of Canada,
- The transferor is a Canadian resident for Canadian income tax purposes when the transfer to the RRSP is made;
- The amount is fully taxable in Canada for the year of transfer, with an offsetting deduction for the amount transferred to the RRSP;
Please be noticed that, the transfer can only be contributed to your RRSP and not to a spousal RRSP. Contributions to the 401(k) were for services rendered while the employee was a resident of Canada, transfers to an RRSP aren’t normally allowed, and transfers to RRIFs aren’t allowed as well.
You can follow the steps below to transfer the 401k plan to an RRSP:
- Make a lump-sum withdrawal from your U.S. 401k plan. The withdrawal would normally be considered U.S.-source income, subject to a mandatory withholding tax of at least 15 per cent (and perhaps as high as 30 per cent). If you are under the age of 59½ at the time of the withdrawal, the funds may be subject to a further 10 per cent early withdrawal tax.
- Contribute the Canadian-dollar equivalent of the gross U.S.-dollar lump-sum withdrawal (before withholding taxes and any penalties are applied) to the RRSP. This contribution must be made by the end of the normal RRSP contribution deadline.
- Report the Canadian-dollar equivalent of the withdrawal as income on your Canadian tax return, as well as the offsetting deductible RRSP contribution. Meanwhile, report the withdrawal as a “transfer” on Schedule 7 of your return, so as not to require contribution room. You can offset your overall Canadian tax liability for the year by claiming a foreign tax credit in respect of U.S. tax paid, including the early withdrawal penalty, if incurred.