401K Withdrawal

[mapleleaf]

What is the name of your state? Ohio

Hi, I am a Canadian and had been working in the US under TN Visa for 6 years. I was recently layoff and are planning to settle back down in Canada. However, I have about $23,000 in 401K and would appreciate some advice of whether I can withdraw as a non resident as the time comes and what will be, the penalty and how should I planned it out. I curently talk to a mutual fund company retirement fund representative, and base on his comment, I will be tax 10% penalty for any amount I take out at any year + 15% flat rate tax deduction (disregarding the current fiscal/tax year income) because of arrangements between the US and Canada government, could anyone verify the acuuracy of this statement.
If so, what will be a good strategy to rollover to and strategy for withdrawal so to have a minimal impact on taxes. Thanks in advance. (There is another post similar but he is a green card holder, and I am not which might significantly affect the whole picture).

Thanks.

 

[Snipes5]

If you've been filing correctly, that is to say a regular 1040 for the last several years, owing to the fact that you appear to have lived in the US this entire time, as well as worked here, your situation would be the same as the other poster.

A person who lives in the US more than 183 days in a given year begins that year to be treated as a resident for tax purposes, as would a green card holder.

You might inquire as to whether your money could be transferred directly into an RRSP, if you have available contributions, or you could transfer it slowly over time.

Snipes

 

[abezon]

1. You will pay a 10% penalty and a 25% flat tax on any withdrawals. The 15% rate applies to regular payments of a fixed amount, not to sporadic/variable payments. Canada will give you a tax credit for this money.

2. To avoid this nonsense, set up a traditional and a Roth IRA now. Roll your 401k into the traditional IRA when you leave your employer. then convert the traditional IRA into a Roth IRA gradually. After a converted amount has been in a Roth IRA for 5 years, you can withdraw the converted amount AND any earnings without paying any tax or penalties on it. Under the US-Canada tax treaty, the money is tax free in Canada as well. If you keep the converted amount in the Roth IRA less than 5 years, you don't pay taxes or penalty on the converted amount, but do pay on the earnings.

If you have a green card or have filed an election to be taxed as a US resident with your spouse, you can keep filing US 1040s until you have converted all the 401k (approx $15,000/year converts tax free) then pull the money out tax free. Neat trick, huh? If you're not married, it takes longer to do this (approx. $3100/year converts tax free).

You'll need to set up a US mailing address/phone/email for your broker to use -- if your broker has ANY idea that you no longer live in OH, s/he has to stop handling your money. Obviously, you need a friend in OH that you can use as a mailing/contact address.

 

[mapleleaf]

Thanks for both of the replies and suggestion. First let me state I am not a green card holder/permanent resident in the US.

My questions to abezon is a) that when you gradually transfer your IRA to Roth IRA, do you need to pay taxes (but perhaps not the 10% penalty) for any amount you transfer out to Roth IRA?
b) Since I am not a US permanent resident, what kind of restriction will I be subject to in filing the taxes to US for the future amount I will distribute (like the number of time I can file my taxes while not a US alien resident anymore)?
c) I have not file any election as when I leave Canada, I clear out my RRSP.
d) You mention that I need to have a US address/phone/email for the broker to use, is that for the whole duration while the IRA is not 100 distrbuted, or only when I open the account (A retirement fund rep told me I need to have a US address to open the IRA account so that the direct rollover can take place, and after the fund is transfered, I could then file for change of address to my canada address with a 15 days hold. He did not mention s/he could not handle my fund once I was out of US.)

Thanks in advance for any suggestion and pointers.

 

[abezon]

You'll need a US address for any rollover. This includes the initial 401k to traditional IRA rollover and the subsequent trad IRA to Roth IRA conversions.

You will have to file a US return any time you pull money out of a US retirement account. Once you leave the US, you file a 1040NR.

You will report the money you convert from a traditional IRA to a Roth IRA on your nonresident tax return every year. However, you can claim a personal exemption amount ($3,100 in 2004) on a 1040NR. (No standard deduction amount, though.) This will allow you to convert the money without paying any US taxes if you convert an amount equal to or less than the personal exemption amount each year.

5 years after your first conversion, you can start pulling money out of the Roth IRa tax free.

This is also a good way to shelter your assets from exchange rate fluctuations, if you believe the Canadian dollar will fall versus the US dollar. Talk to your financial advisor about whether you think the exchange rate will stay as high as it is or drop. (I vote for drop once the US declares victory in Iraq & leaves, since the US won't be paying for a war & Canada will still be paying for the health care system.)