Moving a 401(k) or IRA into an RRSP: what transfers, what doesn't, and when it pays

What the rules actually allow

Canada's Income Tax Act lets a Canadian resident move US retirement money into an RRSP as a designated transfer: paragraph 60(j)(i) covers lump sums from employer plans like a 401(k) or 403(b), and paragraph 60(j)(ii) covers traditional IRAs. Two features make the mechanism attractive on paper. The contribution is over and above your RRSP room — no contribution limit is used — and when the math works, the money lands in the RRSP still tax-deferred, now in one country instead of two.

Conditions apply: the amount must come out as a lump sum, not periodic payments, and a 401(k) balance generally must be attributable to services you performed while not resident in Canada. We confirm eligibility before anything moves, because a failed transfer is just a taxable withdrawal.

The mechanics, step by step

The transfer is not a direct rollover — it runs through your tax returns.

• You withdraw the full balance. The US withholds 30 percent as non-resident withholding on a lump sum, plus a 10 percent early-distribution tax if you are under 59 and a half.
• The gross amount — including the tax that was withheld — is included in income on your Canadian T1.
• You contribute that same gross amount to your RRSP within the allowed window and claim the offsetting 60(j) deduction, netting the Canadian inclusion to zero.
• The US tax withheld is claimed as a foreign tax credit on the Canadian return.

Notice the cash-flow gap in the middle: the US kept 30 percent, but the deduction only offsets what you actually put into the RRSP. To transfer the full balance you must top up the withheld portion from other savings and wait for the credit to come back — if it comes back.

Why the foreign tax credit makes it situational

Here is the honest part. A foreign tax credit is only worth something if there is Canadian tax for it to offset, and the credit for US tax on this income is limited by the Canadian tax you actually pay in the same year. The 60(j) deduction — the very thing that makes the transfer tax-free in Canada — also means the transfer itself generates little Canadian tax to absorb the credit. So the strategy leans on your other income in the transfer year, and unused credits of this kind do not carry forward. A large transfer in a low-income retirement year can strand tens of thousands of dollars of US withholding as a permanent cost; the same transfer in a high-income year, or staged across several years, can come out clean. Under 59 and a half, the extra 10 percent makes absorption harder still, which is why most plans wait. This is a run-the-numbers decision, not a rule of thumb — we model it against your actual bracket before recommending it.

Roth accounts don't transfer — and shouldn't move

There is no RRSP transfer for a Roth IRA or Roth 401(k). Paragraph 60(j) does not recognize them, so no offsetting deduction exists. The treaty offers something better: file a one-time election with the CRA for your first year as a Canadian resident and the Roth keeps its tax-free character in Canada — provided you make no contributions to it while resident here. Collapsing a Roth to fund an RRSP would convert permanently tax-free money into future taxable RRIF withdrawals, the one move that is wrong in nearly every case. Leave Roth money where it is.

The strong default: leave it in place

The treaty already gives a Canadian resident tax deferral inside a 401(k) or IRA, and periodic pension payments drawn later face 15 percent US withholding that credits cleanly against Canadian tax on the same income. For many clients the better plan is no transfer at all: consolidate US accounts with a custodian that accepts Canadian-resident clients (not all do), and draw the account down as retirement income. The transfer earns its complexity when your US ties are truly ending, the credit math works, or managing a US account from Canada has become impractical.

Either way, coordinate the drawdown

Whether the money moves or stays, the two systems have to be drawn down as one plan. RRSPs convert to RRIFs with minimum withdrawals starting after the end of the year you turn 71; US accounts carry their own required minimum distributions beginning in your early seventies (the age has moved in recent US legislation — confirm the current rule). Sequencing which account funds which years drives your bracket, your OAS clawback, and the exchange rate you realize. We build the withdrawal order across both countries, not one at a time.

Source: CRA — Transferring to your RRSP and other registered plans.