What to do with your 401K once you move from the US to Canada?

One of the things which was a concern was that we had money in our 401K when we moved from US to Canada. This is one of the topics that isn't widely discussed. If you are under 59.5 years old, you cannot have penalty free withdrawals. Should you decide to withdraw from a 401K prior to turning 59.5 years old, note that along with the 10% penalty, you will also have to pay taxes, resulting in a significant drop in amount.

Fact - You cannot transfer 401K outside US to any of the Canadian retirement accounts.

Complete Disclaimer - We are not financial advisors or tax planners. But we found that there is not much information about this online or even a lot of planners didn't know about this situation. The hope is for you to be able to learn from our experience and inform you of your options so that you can have a good discussion with your advisor. We called up the institution holding our 401K to get first hand advice on this topic! The biggest challenge was that the US financial firm just knew about 401Ks and the Canadian financial firm knew about RRSPs. Ultimately we had to understand both sides to make an informed decision.

If you don't need the money immediately

Keep the 401k as is

1. If you are decades away from retirement, you can consider keeping it and benefit from the compounding. If you have a good portfolio and you keep monitoring it along the way, you can withdraw from it after you are 59.5 years old. You would be in a lower tax bracket thein and so withdrawal will not have a significant penalty.
2. You can no longer get a loan on your 401K. 
3. You are limited to the investment changes you can do to your 401K.
4. File W8 ben form to let the US government know that you are no longer a resident.  
5. You have tax implications only when you transact i.e. buy or sell securities in your 401K. If you keep your 401K as is and not withdraw anything until retirement,  then you will fall in a lower tax bracket because of age as well as because of the fact that you fall in a lower tax bracket.
6. The bright side of the rigid restriction to not be able to withdraw until you are 59.5 years is that you are doing yourself a favor and holding off the urge to spend. 

Rollover the 401k to iras

1. IRA is a personal retirement account. When you contribute to a traditional IRA, the money is locked until you are 59.5 years old. Remember that you will pay taxes on withdrawal of money from your IRA.

2. If you withdraw from IRA before you are 59.5 years old, you would be penalized. Same concept as 401K.

3. You cannot contribute further to your IRA because you don't have income in US.

If you need the money immediately

Liquidate your 401K

1. You would be penalized for early withdrawal if you are under 59.5 years old.

2. If the amount isn't significant i.e. less than say 5000 USD then you can possibly reinvest the remainder in Canada. 

What is the final say?

Unless you really need the money, it is not worth liquidating your 401K. Rolling over to IRA might not be worth the effort because ultimately you don't get the flexibility to adjust your portfolio and you cannot contribute to IRA. We recommend keeping your 401K as is, especially if you have over 10K USD and have 2-3 decades until retirement.  The money is likely to grow especially if you have invested in index funds.  It will be a nice present for your family. Let the time value of money work it's magic!