A5

David Konning

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If you are a Canadian resident and have spent time working in the United States, you may have accumulated money in a U.S.-based retirement plan such as a 401(k) plan or a traditional Individual Retirement Account (IRA).

If you hold such a plan, it may be possible for you to withdraw part or all of your funds from the U.S. retirement plan and contribute them to an RSP in Canada, without affecting your regular RSP deduction room.

The rules and considerations regarding the transfer of U.S.-based retirement plan assets to an RSP can be fairly complex. It is essential for you to seek the advice of a tax professional who is familiar with the process before taking any action.

There is a provision in the Canadian Income Tax Act that, under certain circumstances, may allow you to contribute to your RSP up to 100% of the amount withdrawn from certain types of U.S.-based pension and retirement plans, without affecting your RSP deduction room.

When proceeding under this provision, it is important to note that the contribution must be made in the same year of the withdrawal, or at the latest, within the 60 days following the end of that calendar year.

In the year in which you turn 69, your RSP contribution must be completed prior to the end of the year since it is not possible to make a contribution to your own RSP beyond that date. Some of the key criteria that must be satisfied to proceed under this provision are as follows:

If the funds are held in a U.S. employer pension plan, the amount that you can transfer must have been earned while you were a non-resident of Canada.

If you were a resident of Canada during some or all of the time that your pension was earned (for example, if you lived near the border and commuted to the U.S. to work on a daily basis), you may first need to roll over the employee pension plan assets to an Individual Retirement Account (IRA) with a U.S. financial institution before withdrawing the funds from the IRA and contributing them to an RSP.

If the funds to be transferred are held in an IRA, you can transfer only contributions that were made by you, your spouse, or your former spouse.

Although most IRAs are funded solely by the plan holder, certain company sponsored IRAs include contributions made directly to the plan by an employer. In such cases, employer contributions to an IRA are not eligible to be contributed to your RSP under these provisions (with the exception noted above involving amounts that originated from an employer pension plan).

In addition, an IRA inherited from a family member other than a spouse cannot be contributed to an RSP as outlined above.

In all cases, to be eligible for the special RSP contribution and deduction under this strategy, the amount to be withdrawn from the U.S. plan must be classified and reported as taxable income in Canada as outlined in the following section

Next week we will look at the basic process for completing the transfer.

Note: The above information is based on the current and proposed tax law in effect as of the date of this column. The column is for information purposes only and should not be construed as

offering tax advice. Individuals should consult with a qualified tax and legal advisor before taking any action based upon the information contained in this article.

* David Konning is an investment and retirement planner at Royal Bank. If you would like to reach him, please e-mail him at David.Konning@rbc.com or phone 856-0406. Financial planning services and investment advice are provided by Royal Mutual Funds Inc., a member company under RBC Investments. Royal Mutual Funds Inc., Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated.