Expert: Shirley McAllister, CPP, PHR - 4/12/2011

Question
QUESTION: I recently took a job with a firm based in Canada. I live on the east coast of the USA, doing technical sales for the company based out of my home. I receive regular payroll checks from the company through ADP. However, they are having difficulty setting up a 401(k) account for me, as I'm the only USA employee. I do have two other 401(k) accounts still open from past employers that I have not rolled over. Can I contribute to those account pre-tax? What other pre-tax options are available to me? What else can my company do for me? I do not think that I can participate in the company's RRSP, beiing a US citizen living and working the the US. Correct?  Thank you.

ANSWER: Ask them if they can set up a Canadian RRSP at the Royal Bank of Canada for you. You will have to contact this bank and fill out paperwork to open the account.

The RRSP is Canada's equivalent to the US 401K. It can be matched the same as the 401K the difference is that the matched amount is taxable income in Canada.

Your RRSP contribution would not be taxable up to the annual limit, but any money matched by the company would be taxable.

Shirley



---------- FOLLOW-UP ----------

QUESTION: Thank you for answering my question. As a follow-up question: Being a US citizen working in a US location, would my Canadian RRSP funds be taxed any when I withdraw money during retirement any differently than a 401(k) account? Will I need to pay Canadian taxes at time of withdrawal along with US taxes?
Thank you.

Answer
When you reach the age of 69 and the time has come to either collapse or convert your RRSP, you are faced with a few choices.

the funds can be withdrawn and declared as income; or
the money can be rolled into a Registered Retirement Income Fund (RRIF); or
an annuity can be purchased with the accumulated funds
Withdrawing the funds and declaring them as income may not always be the best choice since you have to pay income tax on the whole amount.

Rolling the funds into an RRIF or using the money to purchase an annuity are more popular choices since both of them involve withdrawing the money in smaller increments over a period of time.

A RRIF is similar to an RRSP except that you do not make any contributions to it. There is a minimum amount that you must withdraw each year, determined by the CCRA (formerly Revenue Canada), but there is no maximum withdrawal amount. This means that you are able to withdraw the whole amount at one time, if you wish. However, any withdrawals must be declared as income for that year and you will be required to pay any applicable withholding taxes.

Purchasing an annuity from an insurance company is another viable option. With an annuity you provide the insurance company with an amount of money and in return, they agree to provide you with a monthly income for the duration of your life. The amount of the monthly payments depend on your age, the prevailing interest rates at the time of the annuity purchase and the length of any guaranteed payment periods in the event of your earlier demise. Annuities however, do not have the same level of flexibility as a RRIF since you are generally locked in to the payment terms that you choose.

Before collapsing or converting your RRSP, talk to your Fiscal Agents Advisor to discuss your particular situation.

Shirley