Considering a 401(k) to IRA Rollover as a Canadian resident? Understanding the Key Trade-Offs
- Andrea Thompson
- 6 days ago
- 8 min read
For Canadians who have worked in the United States, navigating the decision of what to do with a former employer’s 401(k) can be complex. While rolling a 401(k) into an IRA is often seen as the default option in the U.S., the analysis changes significantly once you become a Canadian tax resident.
For Canadians, this decision focuses less on investment preferences and more on understanding tax treatment, legal protections, and the implications for long-term planning—factors that are crucial and can be easily overlooked.
This article highlights the key trade-offs to consider when thinking about a 401(k) to IRA rollover as a Canadian resident. Always conduct thorough research and consult with your advisor, CPA, or other professional before making a decision. Every situation is unique!
Why this decision matters
Once someone becomes a Canadian tax resident, certain actions involving U.S. retirement accounts can have long-lasting or irreversible consequences. While both 401(k)s and IRAs are recognized under the Canada–U.S. tax treaty, they are not treated identically under Canadian tax rules or U.S. legal frameworks.
As a result, choices that appear neutral from a U.S. perspective can meaningfully affect future tax flexibility in Canada.
Option 1: Leaving the 401(k) where it is
Common reasons
Tax treaty recognition: 401(k) plans are explicitly recognized under the Canada–U.S. tax treaty. Investment growth generally continues on a tax-deferred basis in both countries.
ERISA creditor protection: Most 401(k) plans are governed by the Employee Retirement Income Security Act (ERISA). ERISA provides robust creditor protection under U.S. federal law, often stronger and more uniform than what applies to IRAs.
For individuals with ongoing U.S. connections, larger account balances, or asset-protection concerns, this distinction can be meaningful.
For Canadians that aren't familiar with ERISA, it provides:
Strong creditor protection, meaning assets held in a 401(k) are generally shielded from claims and lawsuits under U.S. law;
Protection that applies consistently at the federal level, rather than relying on individual U.S. state rules;
Oversight and fiduciary obligations on plan administrators, including requirements around governance, disclosures, and acting in participants’ best interests.
While ERISA is a U.S. statute, these protections can still be relevant for Canadians who retain U.S. retirement plans, particularly where there are ongoing U.S. ties or a desire for robust asset protection.
Access to the Rule of 55: Another feature unique to 401(k) plans is the Rule of 55. Under U.S. tax law, individuals who separate from service with an employer in or after the year they turn 55 may be able to withdraw funds from that employer’s 401(k) without the 10% U.S. early withdrawal penalty.
This rule applies only to the most recent employer’s 401(k) and does not apply to IRAs, including rollover IRAs. Choosing the rule of 55 is lost once a 401(k) is rolled into an IRA. Therefore, for Canadian residents who leave U.S. employment in their mid- to late-50s, the Rule of 55 can provide earlier, penalty-free access to retirement funds under U.S. rules. Canadian tax still applies to withdrawals, but the U.S. early withdrawal penalty may be avoided.
Conversely....
Deferring Required Minimum Distributions: Some employer-sponsored 401(k) plans allow participants to defer required minimum distributions (RMDs) if they continue working beyond the normal RMD start age. Under U.S. tax rules:
Many 401(k) plans permit RMDs to be deferred while the individual remains employed by that employer, provided the individual does not own more than 5% of the company
This feature is plan-specific and applies only to the current employer’s 401(k).
IRAs do not offer this flexibility — RMDs must begin regardless of employment status.
Ability to continue contributing while working for a U.S. employer: In some cross-border employment situations, a Canadian resident who continues working for a U.S.-based employer may still be eligible to participate in that employer’s 401(k) plan.
This can depend on factors such as:
The nature of the employment relationship
How compensation is treated for plan purposes
The employer’s plan rules
By contrast, IRAs are not employer-sponsored, and depending on the person’s U.S. taxpayer status, earned income, and the brokerage’s residency policies, Canadian residents may be unable to make new IRA contributions or may find it difficult to do so operationally.
Administrative simplicity: Employer-sponsored plans offer several advantages: they involve fewer cross-border compliance issues, provide clearer guidance under Canadian tax rules, and reduce the risk of administrative errors that could impact tax deferral.
Potential limitations
Plan rules vary by employer: 401(k)s are governed by individual plan documents. As a result, withdrawal options, timing, and flexibility can vary. Some plans restrict partial withdrawals or limit distribution frequency and rules around rollovers, beneficiary options, and payout methods are not standardized.
This means two individuals with 401(k)s may have very different experiences depending on their former or current employer.
Limited control over investment changes: Even where a plan offers a reasonable investment menu, rebalancing options may be limited or investment changes may only be allowed at certain times. Some plans restrict access to low-cost or specialized investment options.
For Canadian residents managing assets remotely, these constraints can feel more pronounced.
Employer-driven administrative changes: Because the employer sponsors the plan, recordkeepers and custodians can change, investment menus may be updated or replaced and communication can be inconsistent once someone is no longer an active employee.
While 401(k)s offer strong legal and structural protections, they also come with plan-specific rules and administrative constraints that can be more noticeable for Canadian residents.
Option 2: Rolling the 401(k) into an IRA
Rolling a 401(k) into an IRA can offer more flexibility and is often touted by clients to be a more attractive option (especially for DIY investors), but it also introduces additional considerations for Canadian residents.
Common Reasons
Having access to a wider range of investment opportunities beyond what is usually offered by 401(k) providers allows individuals to diversify their portfolios more effectively. This enables them to potentially include additional products or securities that align more closely with their asset allocation or investment strategy. Additionally, this can be motivated by the desire to lower costs, such as management expenses or MERs, compared to the fees associated with the options available in a 401(k) plan.
Integrating different plans from former employers simplifies the management of retirement assets, as it consolidates multiple accounts into a single plan, making it easier for individuals to track their investments, understand RMD requirements and simplify administration.
Key trade-offs for Canadians
Loss of ERISA protection: IRA accounts are not covered by ERISA. Creditor protection instead depends on U.S. state law, which varies by jurisdiction and may be more limited.
What protection do IRAs have, then? While IRAs lack ERISA protection, they are not unprotected:
Under U.S. federal bankruptcy law, Traditional, Rollover and Roth IRAs are protected up to a statutory cap (indexed for inflation). Rollover amounts originating from ERISA plans (like a 401(k)) may receive broader bankruptcy protection in some cases, especially if kept clearly traceable. Inherited IRAs generally do not receive the same federal bankruptcy protection.
For the period from April 1, 2025 through March 31, 2028, the federal bankruptcy exemption cap for IRAs is approximately $1,711,975 for the combined total of all Traditional and Roth IRAs owned by a single person.
Some U.S. states provide additional protection beyond federal limits.
Protection levels vary depending on where a claim is brought.
For Canadian residents, this means IRA protection can be less predictable than the federally uniform protection that applies to ERISA-covered 401(k)s.
Greater reliance on proper administration: While IRAs are also treaty-recognized, maintaining Canadian tax deferral depends on careful handling. Errors related to contributions, rollovers, or distributions/withdrawals can create unintended Canadian tax consequences.
Canadian pension income splitting: an important distinction
One of the most overlooked differences between 401(k)s and IRAs relates to Canadian pension income splitting.
From a Canadian tax perspective:
Pension income splitting generally becomes relevant once U.S. required minimum distributions (RMDs) begin for Canadian retirees;
401(k) RMDs are commonly treated as eligible pension income;
IRA RMDs, however, are much less consistently accepted in practice. This can be problematic if one spouse has accrued the majority of retirement assets in their name, and limits the potential to reduce the overall family tax burden as that spouse cannot split IRA income with their spouse.
This distinction arises because a 401(k) clearly originates from an employer-sponsored pension arrangement, whereas an IRA is typically viewed as an individually established retirement account, even if funded from a 401(k) plan.
As a result, rolling a 401(k) into an IRA may reduce future household-level tax planning flexibility in retirement.
Managing an IRA as a Canadian resident: practical considerations
Even where an IRA rollover is permitted, the operational realities matter. Logistics!
Who can manage the account
Many, if not most U.S. brokerages will not allow Canadian residents to open new IRA accounts.
Dually licensed securities advisors based in Canada are able to manage existing IRAs for Canadian residents. This requires appropriate U.S. and Canadian registration, as well as a custodian willing to service Canadian residents. Most advisors in Canada do not have this registration, nor work for a firm that has a registered US RIA to hold the IRA account.
Rolling into an existing rollover IRA
If an individual already has a U.S. rollover IRA, a 401(k) may be rolled into that account. However, this depends on the following:
The original employer plan rules;
The receiving brokerage’s policies;
Residency-based restrictions.
In some cases, custodians accept the rollover but impose limitations on trading activity, available investments, or self-directed access.
Trading rules and withholding mechanics
Canadian residents holding IRAs may encounter restrictions on self-directed trading, limits on certain securities or differences in how periodic versus lump-sum withdrawals are treated for tax purposes.
For Canadian-resident non-U.S. persons, U.S. withholding on retirement distributions (RMDs) is often 15% when the treaty rate is properly applied, but withholding can be higher (commonly 30%) if treaty documentation isn’t on file or the distribution is treated differently by the payer.
Different withholding tax rates apply for US citizens living in Canada as they must file a 1040 return with the IRS.
U.S. withholding tax for U.S. citizens living in Canada
Distributions are subject to U.S. tax withholding at source, even when the account holder lives in Canada. The applicable withholding rate depends on citizenship, residency, and how the distribution is classified.
General rule for U.S. citizens
For U.S. citizens, withholding is governed by U.S. domestic rules. Periodic payments generally follow Form W-4P elections and IRS withholding tables. If an eligible rollover distribution is paid to the individual (instead of a direct rollover), mandatory withholding generally applies (often 20%)
This is different from the treatment of Canadian residents who are not U.S. citizens as discussed above.
Trading limitations for self-directed IRAs held by Canadian residents
When a Canadian resident holds a U.S. IRA, the ability to manage the account on a self-directed basis is often more limited than many expect. These limitations are not driven by tax rules, but by securities regulation and brokerage compliance policies.
Residency-based brokerage restrictions
Many U.S. brokerages impose restrictions once an account holder becomes a Canadian resident. Common limitations include:
Inability to place trades online without advisor involvement;
Restrictions on opening new positions, while allowing liquidation only;
Limits on certain asset classes or securities.
In some cases, accounts may remain open but functionally constrained.
Securities law considerations
Because Canadian residents fall under Canadian securities regulation, some U.S. brokerages are not permitted to offer full trading functionality to Canadian residents unless properly registered in Canada. As a result, self-directed trading may be limited or prohibited in which case an individual may not be able to adjust their investment strategy... possibly ever.
This is one reason why some IRAs for Canadian residents are managed through cross-border, dually licensed advisors, rather than directly by the account holder.
Bringing it together
For Canadian residents, rolling over a 401(k) into an IRA involves strategic financial planning, balancing tax treatment, legal protections, administrative details, and long-term goals. Keeping a 401(k) offers simplicity and tax benefits, while an IRA rollover requires careful coordination and understanding of cross-border regulations. Weighing these options is crucial for a secure and optimized financial future.
Have questions? Book a complimentary consultation or a Q&A session with a Modern Cents planner today!
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