RRSP vs. 401(k): Cross-Border Tax Issues Explained

In Canada, RRSPs allow individuals to contribute pre-tax income, grow investments tax-deferred, and pay tax only when funds are withdrawn. Contributions are deductible for Canadian tax purposes, subject to annual limits.

In the U.S., 401(k) plans operate similarly. Contributions are generally made with pre-tax income, growth is tax-deferred, and withdrawals are taxed as ordinary income in retirement. Employer matching contributions are common and often form a significant portion of retirement savings.

Within their home countries, both plans function smoothly. Problems arise when residency changes

When a Canadian resident with an RRSP moves to the U.S., the RRSP does not lose its Canadian tax-deferred status. Canada continues to treat the RRSP as a registered plan, and no departure tax applies.

From a U.S. perspective, the Canada–U.S. tax treaty generally allows RRSP income to remain tax-deferred until withdrawals are made, provided proper elections and reporting are completed. However, compliance requirements increase, and reporting mistakes are common.

Withdrawals from an RRSP while a U.S. resident are subject to Canadian non-resident withholding tax, often reduced under the treaty, and must also be reported on the U.S. tax return with foreign tax credit coordination.

When a U.S. resident with a 401(k) moves to Canada, the account remains a U.S.-based retirement plan. Canada generally respects the tax-deferred nature of the 401(k), but contributions typically stop once U.S. employment ends.

Withdrawals from a 401(k) while a Canadian resident are usually taxable in Canada and may also be subject to U.S. withholding tax. Treaty provisions help determine which country has primary taxing rights and how credits are applied.

Planning becomes critical to avoid timing withdrawals in a way that creates unnecessary double taxation.

One of the most important differences between RRSPs and 401(k)s in a cross-border context is contribution eligibility.

RRSP contribution room generally requires Canadian tax residency and earned income. Once you leave Canada and become a non-resident, new contributions typically stop.

Similarly, 401(k) contributions usually cease when U.S. employment ends. Cross-border individuals often find themselves with “frozen” retirement accounts on both sides of the border, requiring a shift in savings strategy.

Withdrawals are often the most complex aspect of cross-border retirement planning.

RRSP withdrawals made while living in the U.S. are subject to Canadian withholding and U.S. taxation, with treaty coordination required to avoid double tax.

401(k) withdrawals made while living in Canada are taxable in Canada and may also trigger U.S. withholding, depending on circumstances.

Poorly timed withdrawals, lump-sum distributions, or lack of treaty coordination can significantly increase tax costs.

One major difference between the two systems is the presence of Roth accounts in the U.S. There is no true Canadian equivalent to a Roth 401(k) or Roth IRA.

Roth accounts can create unique planning challenges when moving to Canada, as Canada may not recognize their tax-free nature in all circumstances. This makes pre-move planning particularly important for U.S. residents relocating north.

Even when tax outcomes are manageable, reporting failures can create problems. Cross-border individuals may need to:

• Report foreign retirement accounts
  
  

• Track contributions and withdrawals carefully
  
  

• Coordinate treaty elections
  
  

• Ensure withholding is credited properly
  
  

Many issues arise not from tax owed, but from missed or incorrect reporting.

In limited cases, transfers between plans may be possible, but they are highly technical and rarely straightforward. Most individuals retain separate retirement accounts in each country and plan withdrawals strategically rather than attempting consolidation.

Assuming accounts can be merged often leads to costly mistakes.

Frequent errors include assuming RRSPs and 401(k)s are interchangeable, withdrawing funds without understanding withholding rules, failing to coordinate foreign tax credits, and ignoring how residency changes affect long-term planning.

These mistakes often surface years later, when correction options are limited.

RRSPs and 401(k)s may look similar, but they behave very differently once life crosses the Canada–U.S. border. Retirement planning becomes less about the account itself and more about timing, residency, and treaty coordination.

For individuals with retirement assets in both countries, early planning and ongoing review are essential. With the right approach, cross-border retirement planning can be managed effectively. Without it, even well-funded plans can lose value to unnecessary tax and compliance issues.

When you move to Canada, your 401(k) remains a U.S.-based retirement plan and is not closed or taxed simply because of the move. Canada generally recognizes the plan’s tax-deferred status, but contributions usually stop once U.S. employment ends. Withdrawals made while you are a Canadian resident are typically taxable in Canada and may also be subject to U.S. withholding. 

No. You are not required to close or transfer your 401(k) when you move to Canada. In most cases, individuals keep their 401(k) in the U.S. and plan withdrawals carefully to manage cross-border tax exposure. 

Yes. Withdrawals from a 401(k) are generally taxable in Canada once you are a Canadian tax resident. The Canada–U.S. tax treaty helps coordinate taxation and foreign tax credits to reduce double taxation, but reporting is still required. 

Often, yes. The U.S. may withhold tax on 401(k) distributions paid to Canadian residents. The applicable withholding rate may be reduced under the Canada–U.S. tax treaty, and the tax withheld can usually be claimed as a foreign tax credit on the Canadian return. 

Generally, no. 401(k) contributions usually require U.S. employment. Once you leave U.S. employment and become a Canadian resident, new contributions typically stop, although the account can remain invested. 

Canada generally allows tax deferral on 401(k) growth until withdrawals are made, consistent with treaty provisions. However, proper reporting is essential to maintain this treatment and avoid compliance issues. 

While RRSPs and 401(k)s are both tax-deferred retirement plans, they are governed by different rules and are not interchangeable. Contribution limits, withdrawal taxation, withholding rules, and treaty treatment differ significantly once residency changes. 

In limited and highly technical circumstances, certain transfers may be possible, but they are not automatic and often involve complex planning. Most individuals keep retirement plans in each country and coordinate withdrawals instead of attempting consolidation. 

Roth accounts require special attention. Canada does not automatically recognize the tax-free nature of Roth plans in all cases, and improper handling can result in unexpected Canadian tax. Pre-move planning is critical for Roth accounts. 

Common mistakes include assuming withdrawals are taxed in only one country, failing to coordinate foreign tax credits, misunderstanding treaty rules, and making large lump-sum withdrawals without planning.