QUESTION:
I will be moving back to Canada in about a month.. Please excuse my lack of
knowledge regarding financial matters. My goal is simple... I would like to
somehow use the money in my 401k as a down payment for a home in Ottawa. I
will also require money from the 401 for living expenses while I get set up
in Canada. I have about 30K US in my 401 K. Is it advisable to withdraw the
money from my 401k when I leave my employer (before coming home & take the
penalties) and use that cash once I am in canada for a downpayment. My
understanding is that there a number of better ways of doing this if I did
not require the cash but I am required to move back to canada (asap) -
family issues - and do not otherwise have a way of supporting myself until I
find a job. I guess the bottom line is could you help me determine what my
best option is from a list of likely bad ideas? The least "bad" option if
you will...
Thank you so much.
JXXXXXXXXX XXXX
--------------------------------------------------------
david ingram replies:
The usual method is to roll the 401(K) into an IRA. Then you can remove the
money from the IRA piecemeal.
It will all be taxable on your US return and if you take it out after coming
to Canada ends up taxable on your Canadian return even though I do not think
it should be.
My best advice is to roll it into the IRA and take it out this year BEFORE
you cross the border back to Canada. Have them withhold 25% which means
that you should have a small refund or small payment at the end and will not
have any big surprize next April.
You can take $10,000 US and use it to buy your house and that amount will be
exempt from the IRS 10% early withdrawal penalty. The money will be added
to your short year's earnings in the US and taxed at the top rate you will
pay but you will avoid the Canadian tax.
Canada will NOT allow you credit for the 10% early withdrawal penalty.
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