Retirement Plan Benefits between US and Canada -

Subject:        Retirement Plan Benefits between US and Canada
Expert:         taxman at centa.com
Date:           Tuesday January 16, 2007
Time:           12:30 PM -0500
QUESTION:
I have always lived and worked in Canada.  For 8 years, I worked for a
company in Toronto that reported to it's US Headquarters in Meriden, CT.
The Human Resourses department was out of this head office and we, as
Canadian citizens and residents, were included in their US Pension Plan.  I
am fully vested in this plan, but have since left the company.  They have
sent to me a form "Benefit Options for Terminated Vested Participants".
Included in my options are:
A)  Deferred Vested Benefit (payable upon retirement age of 65) - I am
currently 41 years of age.
B)  Life Annuity Payable immediately
C)  Joint and Survivor Option
D) Lump Sum Payment - with 20% tax holdback
E)  Lump Sum Payment Option - Direct Rollover (check made payable to my
chosen Depository - either the institution in which I have established an
Individual Retirement Account (IRA)or the Turstee of my new Qualified
Retirement Plan).  No tax would be withheld in this case.
We have also been advised that my ex-employer is considering chaning their
plan provider (I don't know if this would have any effect on me).
Primarily, I am trying to find the best way to transfer the funds to Canada
to an RRSP or something similar to avoid the least possible tax
implications.  I have been advised that if I request the "Lump Sum Payment
Option", 20% tax will be withheld for Federal Income Tax purposes in the
U.S.
I am worried about trying to collect the pension plan (if it even exists
anymore) cross-border by the time I'm age 65.  I feel that I would have more
control over the funds if they were in Canada.  Can you offer some advice?
Kind regards,
Ontario Resident
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david ingram replies:
If you roll it into a IRA, you can then cash in the IRA, pay the tax and 10%
penalty and then put an equivalent amount into an RRSP as a rollover.
The amount coming to you is taxable on your Canadian return and the amount
rolled over is taxable so they are a wash.  You get credit for the tax paid
to the US by putting the amounts on lines 431 and 433 of your Federal return
and the excess on the equivalent 428 form for the province.
This only works if you have significant income in Canada.
You DO NOT get credit for the 10% penalty that you have to pay for early
withdrawal.  If, and I say IF, you can get the US fund holder to consider it
a rollover to the Canadian plan (I have seen it done 10 or twelve times in
40 years), then you would not have the 10% penalty.
The problem is that Canada has legislation allowing the rollover to the
Canadian RRSP but the US legislation is not clear although sometimes the
plan administrator will look at Article XVIII of the US Canada Income Tax
convention and be comfortable with the concept.
However, if I were you, I would just leave the money in the US account and
call it a balance rather than take a chance on getting hit with the 10%
penalty.
Why?  Well the  10% penalty left in the account and compounded for another
24 years will be enough to pay a lot, if not most of the tax you will owe at
age 65.
Remember that most others you might talk to have a vested interest in having
you move the money
to Canada.  Move $30,000 to Canada and your advisor could be making as much
as $5,000 "managing your money" over the next 25 years.
Here are a couple of other answers you might get something out of.
QUESTION:
worked in CA for 4 yrs. returned to BC in Apr.'04.  Need to transfer my
retirement fund but having difficulties with bank and credit union.  US
specifies that I must roll it over to IRA account (Individual retirement
account.  I do not want to be subject to the 20% withholding fee for IRS.
What would be the best way to get the funds to me here in Canada.
=======================================
david ingram replies:
1.  move it to an IRA and leave it there in one of the world's strongest
economies.  Most financial advisors are trying to get "more" of their
clients' money into US funds.
2.    If you just have to have it in Canada, you have to cash it in in the
US and pay your tax to the US.  take what is left, add the amount (even if
borrowed) of the tax you paid to the US and buy your Canadian RRSP.  That
will give you a tax deduction which should be larger than the tax you paid
to the US.
When you get the refund, pay back the loan.  You will have transferred the
money quite handily.
The amount you took out is also taxable on your Canadian return.  Pay that
tax with the tax you paid to the US as a foreign tax credit.
You will likely need help.
Fred Snyder at (604) 731-8900 who is with Dundee Wealth management can help
you with the process.
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