RRSP and 401(k) Compared: Contribution Rules, Treaty Treatment, and What Each Becomes When You Cross the Border

Both accounts defer tax on retirement savings; almost everything else about them differs, and the differences drive every decision a mover makes about them. Contribution rules: the RRSP is an individual account with a personal contribution limit (18% of the prior year's earned income to an indexed annual maximum, plus unused room carried forward indefinitely), deductible against any income, fundable by the individual with or without an employer (group RRSPs are the employer-facilitated variant), and open until the end of the year the holder turns 71, when it must convert to a RRIF or annuity or be collapsed; the 401(k) is an employer-sponsored plan — the individual contributes through payroll deferral up to an indexed annual elective limit (with catch-up contributions from age 50), the employer may match, total contributions are capped at a higher combined limit, unused room does not carry forward, and the account exists only through an employer's plan (the IRA is the individual-account counterpart, with its own far lower limit). Investment and administration: the RRSP holder chooses the institution and the investments (self-directed accounts hold almost anything); the 401(k) participant chooses among the employer plan's menu, with the option to roll to an IRA on leaving the employer. Withdrawals: RRSP withdrawals are fully taxable as income at any age, with withholding at graduated Canadian rates on lump sums and no early-withdrawal penalty (the tax itself is the deterrent), while the Home Buyers' Plan and Lifelong Learning Plan allow temporary tax-free withdrawals for those purposes; 401(k) withdrawals before age 59½ carry a 10% additional tax on top of ordinary income tax (with exceptions), required minimum distributions begin at the applicable age (73, rising to 75 for later cohorts), and the Roth 401(k) variant offers after-tax contributions with tax-free growth. Treaty treatment — the part that matters when the holder moves. An RRSP held by a US resident: the treaty allows the holder to defer US tax on the plan's growth until distribution (automatic under the IRS's 2014 procedure, as the RRSP-deferral guide covers), the plan is reported on the FBAR and Form 8938, and distributions are taxed by the US as pension income with a foreign tax credit for Canadian withholding (25%, or 15% on periodic RRIF payments within the treaty's limits) and with basis recovery for contributions that were not deductible for US purposes — while Canada taxes the non-resident's withdrawals only through the withholding, with the section 217 election available to file a Canadian return at graduated rates where that produces less tax. A 401(k) held by a Canadian resident: the treaty allows the Canadian resident to defer Canadian tax on the plan's growth (the pension provisions cover US qualified plans), distributions are taxed by Canada as pension income when received (with a foreign tax credit for US withholding, which for a nonresident alien is 30% on lump sums or 15% on periodic pension payments under the treaty), the plan is reported on the T1135 (as specified foreign property — a 401(k) is not exempt the way certain employer pensions are, so the value enters the reporting), and the transfer of the 401(k) into an RRSP under paragraph 60(j) is available with the mechanics and the withholding trap the 60(j) guide describes. What each becomes after a move: the Canadian who moves to the US keeps the RRSP (collapsing it triggers 25% Canadian withholding on the full balance plus US tax on the growth since arrival — almost never optimal), stops contributing (contributions from US-source income create US-side complications and no US deduction), and plans the eventual RRIF conversion and withdrawals against the treaty's 15% periodic rate and the US taxation of the distributions; the American who moves to Canada keeps the 401(k) (or rolls it to an IRA for investment flexibility — the IRA has the same treaty treatment), stops contributing (no US earned income, and Canadian earned income doesn't count), and either leaves it to grow with Canadian deferral or evaluates the 60(j) transfer to an RRSP. The contribution-room mismatch is the planning wrinkle movers miss: a Canadian's unused RRSP room survives the move and can be used later (deducted against Canadian-source income if any, or preserved for a return), while a 401(k) offers nothing to a non-employee; and the American in Canada who wants to contribute to a retirement account contributes to an RRSP — with US-side implications the RRSP-contributions guide covers — because the 401(k) door closed with the US job.

Key takeaways

• Structure: RRSP — individual account, 18% of earned income to an indexed cap, room carries forward, deductible against any income, converts at 71; 401(k) — employer plan, payroll deferral to an elective cap plus employer match, no carryforward, exists only through an employer, RMDs from 73-75.
• Withdrawals: RRSP — fully taxable at any age, graduated withholding, no early penalty; 401(k) — 10% additional tax before 59½ plus income tax, RMDs, and a Roth variant.
• RRSP in the US: growth deferred automatically under the treaty, FBAR and 8938 reporting, distributions as pension income with credits and basis recovery, Canadian withholding at 25% or 15% periodic, the section 217 election available.
• 401(k) in Canada: growth deferred under the treaty's pension provisions, T1135 reporting, distributions as Canadian pension income with credit for US withholding (30% lump, 15% periodic), and the 60(j) transfer to an RRSP as an option.
• After the move, keep and stop contributing: collapsing either account on moving is almost never optimal; contributions from the new country's income create mismatches; RRSP room survives for later, 401(k) access ends with the US job.
• The mover's planning items: the RRIF conversion and periodic-payment structure for the Canadian in the US; the 401(k)-to-IRA roll and the 60(j) evaluation for the American in Canada; and the account each will use for new contributions in the new country.

The mover's account decision

For each account: keep (default), collapse (rarely — model the withholding and the second country's tax on growth), or transfer (the 60(j) route for a 401(k) into an RRSP; no equivalent for an RRSP into US plans). Then the go-forward: new contributions go to the new country's account (RRSP in Canada, 401(k) or IRA in the US), with the old account frozen and reported annually (FBAR and 8938, or T1135). Then the distribution plan: periodic payments within the treaty's 15% rate where the source country's withholding matters; the section 217 election modeled for Canadian-source pension income to a US resident; basis recovery tracked for RRSP distributions to a US resident. Two accounts, one decision per account, and a distribution plan drafted a decade before it's needed.

Worked example

A couple moves from Toronto to Denver: he has a C$420,000 RRSP with C$30,000 of unused room; she has spent four years in Canada after a US career and holds a US$310,000 401(k) from her former US employer. His RRSP: kept (collapsing would cost 25% Canadian withholding — C$105,000 — plus US tax on future growth from a basis of the arrival value); reported on their FBAR and Form 8938 from year one; US deferral automatic; contributions stop; his unused room is noted for a possible return to Canada; the RRIF conversion at 71 and the periodic-payment structure at the treaty's 15% are planned now. Her 401(k): kept, rolled to an IRA for investment control; before the move she was a Canadian resident holding a 401(k) — it was on her T1135 and its growth was Canada-deferred under the treaty; now as a US resident it is simply her IRA again; the 60(j) transfer she'd considered during her Canadian years is moot after the move. Their new contributions: 401(k)s through their Denver employers, with his RRSP room dormant. Their contrasting mistake, avoided: a friend who collapsed her RRSP on moving south to "simplify" paid C$60,000 of withholding on a C$240,000 balance, then discovered the section 217 election would have cut it and that keeping the plan would have cost nothing but two forms a year.

Official sources

The CRA explains the rules for RRSP contributions, deduction limits, and the types of registered plans, including group RRSPs and locked-in plans. — Canada Revenue Agency, Registered Retirement Savings Plan (RRSP), https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/registered-retirement-savings-plan-rrsp.html

"A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts." Elective salary deferrals "are excluded from the employee's taxable income" until distributed. — Internal Revenue Service, 401(k) Plans, https://www.irs.gov/retirement-plans/401k-plans

Practitioner note

The RRSP and the 401(k) look alike until someone crosses the border with one, and then every difference — contribution mechanics, withdrawal penalties, treaty deferral, reporting forms — decides a keep-collapse-transfer question the mover usually answers by instinct. Our answer is almost always keep and stop contributing, with the distribution plan drafted early: the RRIF's periodic structure at 15% for Canadians in the US, and the 60(j) evaluation or the IRA roll for Americans in Canada.

See also: Browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the retirement-account move review — per-account keep/collapse/transfer analysis, treaty deferral confirmation and reporting setup in the new country, contribution redirection, and the long-range distribution plan with periodic-payment structuring and basis tracking. See cross-border pricing or book a call.