In the U.S., 401(k) pension plans are a popular way to save for retirement, but what about north of the border? Is there a 401(k) equivalent in Canada, and if so, does it differ in any way?
Below, we tell you all about transferring a 401(k) in Canada, and we review the differences and similarities between the Canadian RRSP vs the 401(k).
Keep reading on!
What Is the Equivalent of a 401(k) in Canada?
A 401(k) plan is a type of company-sponsored retirement plan funded by U.S. employer and employee contributions in which income grows tax-free until withdrawn in retirement.
On the other hand, the Canadian 401(k) is the Registered Retirement Savings Plan (RRSP), which is also a tax-sheltered contribution plan. However, while it offers a tax-deferred growth until withdrawal, RRSP members may be required to deposit after-tax money in their accounts.
Are There Any Rules?
When contributing to Canadian Registered Retirement Savings Plans, private citizens can deposit up to a certain limit (based on their previous year’s earnings).
Also, banks and financial institutions that provide RRSP accounts typically take a small percentage of your account for the transactions they make on your behalf.
However, RRSPs overcome one of the 401(k) limitations: you can control how your funds are invested and choose bonds, stocks, and other financial assets with low management costs.
You can also take a back seat if you prefer and let your provider choose a target investment plan so you can forget about your savings until you need them during your Canadian retirement.
401(k) vs RRSPs: Differences & Similarities
While the RRSP and the 401(k) retirement plan are similar tax-advantaged retirement savings vehicles, they do come with certain key differences, and we compare them below:
When sponsored and managed by Canadian employers as part of a group scheme, RRSPs are known as Group Retirement Savings Plans (GRSPs).
While similar in almost every respect, some employers match their employee’s contributions in GRSP schemes. So, in essence, you get free money on top of your investment.
Note: You can have both a GRSP and an RRSP plan as long as your combined contributions do not exceed the allowed annual limit.
Transferring a 401(k) Plan to a Canadian RRSP
If you are wondering if you can transfer your 401(k) to an RRSP in Canada, the answer is yes. Moreover, you can do it in a few simple steps and on a tax-deferred basis to boot!
Meeting the Applicable Requirements
To rollover your 401(k) pension plan to Canada, you have to meet certain pre-conditions with respect to the amount being paid to your RRSP:
- You must provide a lump-sum payment;
- The funds must be connected to services you have personally rendered while employed in the U.S.;
- The amount must be included in your yearly taxable income and covered by the Canadian tax law;
- The funds being transferred must be designated as a Schedule 7 transfer;
- You may have to pay a withholding tax on the money you transfer;
- You may be penalized for an early 401(k) withdrawal if you are younger than 60.
Note: Since additional requirements might apply under your specific circumstances, talk to a financial advisor to review all potential prerequisites before initiating the transfer process.
Finalizing the Transfer Procedure
To complete the 401(k) to RRSP rollover, you must first make a lump-sum withdrawal from your 401(k), which might be subject to certain taxes.
Then, you have to convert your lump sum from U.S. to Canadian dollars before depositing it to an RRSP of your choice up to the available contribution room.
Along the way, you’ll be asked to fill out certain application forms that contain the investment instructions and information about the type of account you are transferring.
Finally, you have to report the lump-sum payment as income on your Canadian income tax return (T1), along with the offsetting deductible RRSP contribution.
Opening an RRSP in Canada
Before initiating the transfer process, however, you have to open an RRSP account in Canada:
- Shop around for the best fees—learn about the best RRSP plans, and contact various financial institutions to find the lowest account fees;
- Decide where to invest your savings—choose a bank that offers you the best terms and handles 401(k) rollovers;
- Choose hot to invest your savings—you can browse through various financial products, such as funds, trusts, stocks, bonds, and more;
- Complete the RRSP application—fill out the corresponding application forms, provide the necessary identification, and make a contribution to open your account.
Once you control your own RRSP account and transfer over your 401(k) earnings, you can start managing your old-age security plan as any other private citizen in Canada.
If you plan to retire in Canada after working in the U.S., you can easily transfer your 401(k) plan to an RRSP. Hopefully, this article has made that process a little bit easier. If you have any other questions, you can always contact a financial advisor for a more personalized approach.
While many financial planners say the ideal age to retire is 67, your circumstances, such as your health, income, and current savings, should inform that decision.
The equivalent to a 401(k) in Canada is the Registered Retirement Savings Plan (RRSP), and just like a 401(k), it allows Canadians to save for retirement in tax-deferred savings accounts.